Median vs. Mean in Health Care Expenditures

During the Supreme Court's oral arguments back in March regarding the constitutionality of health care reform's “individual mandate," our interest was piqued by one exchange in particular, distinct from the many quotes that pundits and political commentators seized upon. The comment was relavent regardless of the final ruling, and we thought it worth reviewing today.

In response to Solicitor General Donald Verrilli, Supreme Court Justice Samuel Alito stated:

“You can correct me if these figures are wrong, but it appears to me that the CBO has estimated that the average premium for a single insurance policy in the non-group market would be roughly $5,800 in—in 2016. Respondents—the economists have supported—the Respondents estimate that a young, healthy individual targeted by the mandate on average consumes about $854 in health services each year.”

Justice Alito indicated the “average” health care expenditure as “about $854.” Most things we see in ACA are based on the average—penalties, actuarial value, etc. But, in the case of health care expenditures, this “average” isn’t as average as it seems.
For the purposes of health care expenditure, the median expense tends to be a more useful indicator, as the majority of health care expenses are incurred by a small minority of the population. Specifically, as you can see from the chart included here, in 2009, the top 5% of health care spenders accounted for almost 50% of all health care spending.

The average person’s health care expense would probably be closer to the median than the mean. Medical Expenditure Panel Survey (MEPS) data from 2009 for individuals age 18-44 indicated a median expense of $932 and a mean expense of $3,285. So, while Justice Alito stated the $854 dollars was an average (or mean) value, if he was talking about the group ages 18-44, it appears it was more likely a median value.

While the distinction between median and mean health care expenditures is important in understanding health care overall, it is of particular importance to plan sponsors. When determining plan design, plan sponsors should carefully consider how their population is affected both in aggregate and at the granular level. Certain plan design aspects affect the 5% high utilizers more heavily than the rest of the population. Should the overall compensation strategy around health insurance benefits be tailored to benefit the 5% or the 95%? Both could be viable strategies, but be sure, with your clients, that it is an intentional strategy.

This article was first featured in the April 3rd edition of our e-newsletter, Directions. If you'd like to receive that weekly email, contact directions@continuoushealth.com. (Your email will never be shared, sold, or otherwise distributed, and you will receive only the type of content for which you sign up.)

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