Patient Cost Sharing: How Much is Too Much? | HSChange | HSChange

Originally published by the Center for Studying Health System Change (HSC), a nonpartisan policy research organization that operated with principal funding from the Robert Wood Johnson Foundation.

Issue Brief No. 72 -- December 2003

Author: Sally Trude

After several consecutive years of double-digit premium increases, employers were restructuring health benefits to curb the growth of company costs by giving patients a larger financial stake in their care. An HSC study used actuarial models to estimate how increased cost sharing through higher deductibles, copayments, and coinsurance would raise patients' out-of-pocket expenses. The analysis found that greater cost sharing created significantly heavier financial burdens for people who were seriously ill or had low incomes, and these concerns about hardship could limit how far employers could go in using cost sharing to slow premium growth.

From Managed Care to Patient Financial Responsibility

The tightly managed care model of the 1990s had offered generous benefit structures -- typically no deductibles, low copayments, and expanded preventive coverage -- paired with administrative controls on utilization and restricted provider choice. The backlash from patients and physicians against those restrictions led to broader provider networks and fewer constraints on care, which in turn contributed to the rapid rise in health spending and insurance costs that began in the late 1990s.

Facing premium increases they could not absorb, employers started shifting more health costs to workers. They had two main levers: increasing workers' share of the premium itself, or raising out-of-pocket costs when patients actually used services through higher deductibles, copayments, and coinsurance. Most employers chose the latter approach. Benefit managers interviewed during HSC site visits to 12 communities explained that managed care's generous first-dollar coverage had encouraged overuse of services because patients had no financial stake in their decisions. Expecting that higher out-of-pocket costs would moderate utilization, employers raised deductibles, added copayments for more services, replaced fixed copayments with percentage-based coinsurance, and adopted tiered prescription drug benefits. Nationally, employers were estimated to have used increased patient cost sharing to reduce average premiums by 2-3 percent in 2002 and an additional 3 percent in 2003.

Modeling the Financial Impact of Different Benefit Designs

HSC used actuarial models to estimate average annual out-of-pocket costs for single coverage under six different benefit structures. The baseline (Option 1) featured $10 copayments for physician visits and no deductible, producing average annual out-of-pocket costs of about $52, with only 1 percent of people exceeding $500 per year. Option 2, which doubled physician visit copayments and added a $150 ED copayment and $250/day hospital copayment, raised average costs to $236, with 14 percent exceeding $500 and 6 percent exceeding $1,000. Moving from Option 1 to Option 2 let the employer buy down the premium by 9.5 percent -- reducing the worker's annual premium payment by $68 (assuming a 20 percent premium share) while cutting the employer's per-employee contribution by $271.

At higher deductible levels, the financial exposure grew sharply. Under a $1,000 deductible with 20 percent coinsurance (Option 5), average out-of-pocket costs reached $763 and 36 percent of enrollees exceeded $1,000 per year. Under the most aggressive scenario -- a $2,500 deductible with 30 percent in-network coinsurance (Option 6) -- average costs hit $1,051 and 26 percent of people exceeded $1,500. The premium buy-down at this level was 54 percent relative to the baseline.

Who Bears the Heaviest Burden

Increased cost sharing hit people with chronic conditions, those in poor health, and anyone requiring hospitalization far harder than the average worker. Under Option 2, people in poor health paid an average of $862 per year, while those with at least one hospital stay paid $1,066. Under the $2,500 deductible scenario, people in poor health faced average annual costs of $2,942, and hospitalized patients paid $3,768. More than 90 percent of hospitalized patients under the $2,500 deductible plan would pay over $1,500 out of pocket.

Whether high out-of-pocket costs created genuine hardship depended heavily on a person's income. Under the baseline scenario, only 1 percent of people had costs exceeding 10 percent of their annual income. Under the $2,500 deductible plan, 13 percent of all enrollees exceeded that threshold, but the numbers were much worse for vulnerable groups: 22 percent of the chronically ill, 53 percent of those in poor health, and 66 percent of hospitalized patients would have out-of-pocket costs surpassing 10 percent of income. Although maximum out-of-pocket caps limited total exposure for the sickest patients, the caps had to be set high enough that employers could capture meaningful premium savings from the increased cost sharing.

Policy Implications

The study highlighted a fundamental tension in using patient cost sharing as a cost-control tool. Employers needed higher cost sharing to bring premiums down, but the strategy effectively transferred financial risk from healthy workers who used few services to sick workers who used many. For low-income workers -- who were already less likely to have employer coverage -- high-deductible plans could create financial barriers to necessary care. These distributional effects raised questions about how far the trend toward patient cost sharing could go before the hardships for vulnerable populations became politically or ethically unsustainable.

Sources and Further Reading

AHRQ -- Federal health care quality research agency.

Health Affairs -- Peer-reviewed health policy research.

Robert Wood Johnson Foundation -- Health policy research and funding.

Commonwealth Fund -- Research on health care costs, coverage, and access.