I Pay, You Pay, Variable Co-Pay
The Next Generation of Health Insurance Design
About This Event

One tool to mitigate health-care spending is increased cost sharing, which requires that patients pay a larger portion of the cost of a physician office visit, a hospitalization, or a prescription. According to the Kaiser Family Foundation, consumer co-pays for physician visits and prescription drugs have been rising rapidly. While Listen to Audio


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making out-of-pocket payments for substantive health services may both reduce the likelihood of unnecessary health services and save money, it may also increase the chance that a patient chooses not to fill an important prescription.

Is there a better approach than across-the-board increases in cost sharing? Can plans be designed effectively with cost-sharing structures that vary based on medical evidence of cost-effectiveness? Would such a change lead to better outcomes, lower costs, both, or neither? What can public health programs learn from the private-sector health insurance experience with cost sharing?

A. Mark Fendrick, M.D., co-director of the Center for Value-Based Insurance Design at the University of Michigan, and Mark Cullen, M.D., professor at Yale University School of Medicine and medical director for Alcoa, will each present recent research on the effects of variable or differential cost sharing. Mark V. Pauly, an economist at the University of Pennsylvania, and AEI visiting fellow Bill Thomas, former chairman of the House Ways and Means Committee will discuss this research from economic and political perspectives. Alex Brill, a research fellow at AEI, will moderate. The conference will begin with opening remarks by Peter R. Orszag, director of the Congressional Budget Office, who will discuss evidence on comparative effectiveness of medical treatment.

Agenda
9:15 a.m.
Registration and Breakfast
9:30
Opening Remarks:
Peter R. Orszag, Congressional Budget Office
Speakers:
A. Mark Fendrick, M.D., University of Michigan
Mark Cullen, M.D., Yale University School of Medicine
Discussants:
Mark V. Pauly, University of Pennsylvania
Bill Thomas, AEI
Moderator:
Alex Brill, AEI
Noon
Adjournment
Event Summary

July 2007

I Pay, You Pay, Variable Co-Pay: The Next Generation of Health Insurance Design

One tool to mitigate health-care spending is increased cost sharing, which requires that patients pay a larger portion of the cost of a physician office visit, a hospitalization, or a prescription. According to the Kaiser Family Foundation, consumer co-pays for physician visits and prescription drugs have been rising rapidly. While making out-of-pocket payments for substantive health services may both reduce the likelihood of unnecessary health services and save money, it may also increase the chance that a patient chooses not to fill an important prescription.

Is there a better approach than across-the-board increases in cost sharing? Can plans be designed effectively with cost-sharing structures that vary based on medical evidence of cost-effectiveness? Would such a change lead to better outcomes, lower costs, both, or neither? What can public health programs learn from the private-sector health insurance experience with cost sharing?

A. Mark Fendrick, M.D., co-director of the Center for Value-Based Insurance Design at the University of Michigan, and Mark Cullen, M.D., professor at Yale University School of Medicine and medical director for Alcoa, presented recent research on the effects of variable or differential cost sharing. Mark V. Pauly, an economist at the University of Pennsylvania, and AEI visiting fellow Bill Thomas, former chairman of the House Ways and Means Committee discussed this research from economic and political perspectives. Alex Brill, a research fellow at AEI, moderated. The conference will begin with opening remarks by Peter R. Orszag, director of the Congressional Budget Office, who will discuss evidence on comparative effectiveness of medical treatment.

Peter R. Orszag
Congressional Budget Office

The rapid growth of health-care costs in coming decades will serve as the nation's most pressing fiscal challenge. Not enough research, however, is being done on the problem compared with the resources being put toward studying the nation's demographic concerns. Furthermore, there are significant systemic effects of changing funding for Medicare and Medicaid. Medicare and Medicaid costs cannot be reduced without an overall reduction in the cost of health care. However, the extreme variation in health-care costs across the country offers some hope that the costs of health care can be brought down significantly. Another factor driving up health-care costs is that over long periods of time, the share of health-care costs paid for out-of-pocket has decreased from one-third in 1975 to 15 percent today. Giving patients more of a stake in paying for their health care could help bring down costs.

A. Mark Fendrick, M.D.
University of Michigan

The answer to arresting America's rising health-care costs is not necessarily to decrease funding. It is important that preventive expenditures continue to be paid, as they increase length and quality of life—and might even save money in the long run. Although some health-care jobs warrant less pay, many physicians should be paid more, because they should be compensated for value. Making beneficiaries pay more should also constrain health-care costs. As copays increase for all constituencies, people spend less. Increasing copays also decreases consumption of high-value essential drugs, which is not a positive societal outcome. The most valuable drugs should cost less. A better system is to make patients pay for drugs and medical services on a value basis.

Mark Cullen, M.D.
Yale University School of Medicine

There is difference between different types of "cost-shifting" that must be highlighted. One way to cost-shift is to make workers pay out of pocket, which is essentially a wage reduction. The other is to increase the marginal cost of purchasing drugs and medical services. The former will just save money for corporations, while the latter has the potential to decrease overall health-care costs. There are two main concerns about implementing the second type of "cost-shifting" plans: the problem of risk selection and the fact that individuals who are likely to be very high spenders will opt for the plans with the lowest marginal costs. As such, when Alcoa began to offer high-deductible insurance plans, the workers who took them tended to be young, well-educated professionals who were not paying much for insurance to begin with. Additionally, when Alcoa raised copays for essential drugs, it found that use rates decreased.

Mark V. Pauly
Wharton School, University of Pennsylvania
AEI

Ideal targeted copays should be based on evidence of marginal cost-effectiveness, cost-sharing, and demand elasticity. The purpose of cost-sharing is not to hold down premiums but to protect against likely, low-cost risks and cut administrative costs. In theory, ideal copays repel moral hazard. Insurers cannot easily distinguish the sick from healthy. In order to solve this dilemma, services for which demand is price-responsive should have high levels of cost-sharing and vice versa. The most difficult--and most common--case is when there is care that can improve health but has a positive net cost. Services with positive net costs that yield health benefits about which the public has not been appropriately informed might be underused. To solve this problem, there are really two options: educating the consumer about the true benefits of undergoing a given treatment or altering consumer behavior by adjusting copay costs, which is the superior solution.

Bill Thomas
AEI

One problem we face is that society has not confronted the problem of the balance between quantity and quality of life. People have a tendency to want both, but they always choose quality when other people's money is involved. It is important to initiate a program that stimulates behavioral changes by health-care consumers, and it is worrisome that people have not focused on the marketing of health-care products. Marketing is critical. The difficulty is that employers see no significant reason to invest in health care. The best types of reform create incentives to sway consumers toward focusing more effective treatments. There may be no savings involved, but overall quality of life could be substantially improved.

AEI interns Amy Kaufman and John Nelson prepared this summary.

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