Patient Cost Sharing: Promises and Pitfalls

Originally published by the Center for Studying Health System Change (HSC). HSC was a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

HSC Conference Proceedings — December 3, 2003

In December 2003, HSC convened a conference in Washington, D.C. to examine the rapid growth of patient cost sharing in employer-sponsored health insurance. The event brought together health economists, insurance executives, physician leaders, consumer advocates, and quality experts to assess both the potential benefits and the dangers of shifting more health care costs onto patients. What follows is a summary of the conference proceedings and the major themes that emerged.

HSC President Paul B. Ginsburg opened the conference by placing the cost-sharing trend in context. Health insurance premiums were growing far faster than wages, making coverage increasingly unaffordable. At the same time, the public backlash against managed care restrictions in the 1990s had led insurers to loosen utilization controls and expand provider networks. With the traditional managed care toolkit largely abandoned, employers turned to the remaining lever available to them: requiring workers and their families to shoulder a greater share of health care expenses through higher deductibles, copayments, and coinsurance.

Ginsburg noted that the recently enacted Medicare legislation included a provision creating health savings accounts, which was expected to accelerate the adoption of high-deductible plans in both employer-sponsored and individual coverage. The conference, he emphasized, was not about whether cost sharing was desirable or not. It was happening regardless, and the real question was how it could be designed more thoughtfully to control costs and perhaps even improve quality without imposing undue financial hardship on the people who needed care the most.

Joy Grossman, HSC Associate Director, outlined the main mechanisms employers were using to increase patients' financial exposure. The Kaiser Family Foundation Employer Survey documented roughly a 60 percent rise in PPO deductibles over the preceding several years. Flat-dollar copayments were being replaced in some plans by percentage-based coinsurance, which exposed patients to higher costs for expensive services such as inpatient hospitalizations. Prescription drug cost sharing was expanding through the addition of third and fourth formulary tiers, with some plans applying coinsurance rather than fixed copays to specialty medications.

Grossman pointed out that cost sharing lowers premiums through two channels: by transferring expenses to patients who actually use services, and by discouraging utilization. The challenge, well documented by the RAND Health Insurance Experiment, is that patients facing higher out-of-pocket costs tend to cut back on both necessary and discretionary care indiscriminately. Higher drug copays, for instance, are just as likely to discourage a diabetic patient from filling an essential prescription as they are to reduce antibiotic overuse. Low-income individuals and those with chronic conditions are especially vulnerable to foregoing needed treatment because of cost.

Financial Impact on Patients

Sally Trude, HSC Senior Health Researcher, presented new findings on how escalating cost sharing affected different population groups. Using actuarial models developed by the Actuarial Research Corporation with 1997 Medical Expenditure Panel Survey data inflated to 2003 values, Trude examined a range of cost-sharing scenarios from low copayments through high-deductible plans with deductibles as high as $2,500.

Average annual out-of-pocket costs ranged from about $50 under the lowest-cost-sharing scenario to more than $1,000 under a $2,500 deductible plan. But the averages masked severe burdens for sicker patients. Among those who were hospitalized during the year, over 90 percent would exceed $1,500 in annual out-of-pocket spending under the highest-deductible options. For individuals in poor health or who had been hospitalized, one in four would spend more than 10 percent of their income on out-of-pocket costs. Among low-income workers earning between 125 and 200 percent of the federal poverty level ($11,000 to $18,000 annually for a single person), 16 percent would spend more than a tenth of their income on out-of-pocket costs under a $1,000 deductible, rising to 23 percent under a $2,500 deductible.

Industry Perspective: Innovations from Insurers

John Bertko, vice president and chief actuary at Humana, Inc., described the evolving cost-sharing landscape from an insurer's vantage point. The goals, as Bertko laid them out, were to make the costs of health care services more visible to consumers, to channel patients toward the most efficient providers and appropriate care settings, to curb inappropriate use of expensive technologies such as MRI and CT imaging, and to create positive incentives for participation in disease management and medication compliance programs.

Bertko noted that most consumer research showed people believed an office visit cost $10 when the actual cost was $50 to $75 or more. Among the innovations being rolled out were tiered provider networks with different copayment levels for primary care versus specialist visits and for preferred versus non-preferred providers; site-specific deductibles designed to steer patients away from emergency departments (at $500 to $700 per visit) toward physician offices ($10 to $20 copay); higher cost sharing for advanced imaging to discourage unnecessary MRIs and CT scans; and health reimbursement accounts paired with large deductibles in the emerging consumer-directed health plan market, though enrollment remained limited to an estimated one to two million people out of 160 million insured Americans.

When asked about small employer receptivity, Bertko was blunt: the three most important considerations for small employers and their brokers were price, price, and price. If a new cost-sharing design reduced premiums without excessive complexity, small employers would buy it. Selling on quality improvement alone was a non-starter.

Large Employer Strategy: The Calibrators

Arnold Milstein, Medical Director of the Pacific Business Group on Health and health care thought leader at Mercer Human Resource Consulting, shifted the conversation to how large, self-insured employers were thinking about cost sharing on a three- to five-year horizon. The Business Roundtable's annual poll of Fortune 500 CEOs had identified health benefits cost as the number one corporate expense problem, outpacing government regulation, unions, and litigation by 20 percentage points.

Milstein described three employer archetypes. The "restorers" simply wanted to reverse decades of declining cost sharing and hollow out benefit coverage. The "skin grafters" sought to maintain equivalent actuarial value while restructuring benefits around higher deductibles offset by portable spending accounts, based on the economic theory that people spending their own money make more careful purchasing decisions. The "calibrators," the most sophisticated group, aimed to tie cost sharing to specific inefficient choices by patients, imposing higher costs on those who selected brand-name drugs when generics were available, chose less efficient providers, or declined participation in disease management programs.

Milstein predicted that the restorer approach would dominate in the short term because of its simplicity. In the intermediate term, health savings accounts might give the skin graft approach a boost. But over the longer term, the calibration approach was most likely to prevail, because it avoided the blunt negative consequences of across-the-board cost increases while directing patients toward higher-value care. He also noted that forward-thinking employers were beginning to income-tier their out-of-pocket maximums, citing Rockwell Automation as an example, to avoid what he called the "20/20 ogre test" — the risk of being profiled on national television for a benefits design that denied needed care to a low-income worker.

Reactor Panel: Consumer, Employer, and Quality Perspectives

Karen Davis, president of the Commonwealth Fund, offered an economist's perspective on cost sharing. She argued that if employer health benefit costs are ultimately borne by workers through lower wages, then the framing of the discussion should change: employers should be acting as agents for employees, finding the combination of wages and benefits that workers prefer. Davis predicted that tight labor markets would return as baby boomer retirements accelerated, and that employee satisfaction with benefits would once again become a competitive issue. She cautioned that higher cost sharing, if poorly designed, falls disproportionately on the sick and the poor.

Robert A. Berenson of The Urban Institute raised concerns about the physician's role. Doctors generally had little awareness of their patients' cost-sharing obligations and rarely discussed costs during clinical encounters. If cost sharing was going to steer patients toward better decisions, the physician-patient relationship would need to change significantly. Helen Darling of the Washington Business Group on Health represented the employer perspective, noting that employers wanted better value but were skeptical that any single tool, including cost sharing, could solve the underlying problem of health care cost growth. Mark Chassin of the Mount Sinai School of Medicine warned that cost sharing could undermine quality improvement efforts if patients cut back on evidence-based treatments to save money.

Unresolved Questions

The conference highlighted several open questions that remained unresolved. Was there sufficient clinical evidence to design condition-specific or treatment-specific cost sharing that would reliably direct patients toward the most cost-effective options? Could patients be given tools and information adequate to navigate increasingly complex benefit designs? Would physicians engage with cost-sharing information and integrate cost discussions into clinical decision-making? Were value-based cost-sharing designs administratively feasible, particularly for smaller employers? And could the system's reliance on cost sharing avoid exacerbating disparities in access to care for low-income and chronically ill populations? These questions would continue to shape health benefits policy for years to come.

Conference Participants

Moderator: Paul B. Ginsburg, Ph.D., HSC President. Presenters: Joy Grossman, Ph.D., HSC Associate Director; Sally Trude, Ph.D., HSC Senior Health Researcher; John Bertko, F.S.A., M.A.A.A., Humana Inc.; Arnold Milstein, M.D., M.P.H., Mercer Human Resource Consulting and PBGH. Reactors: Karen Davis, Ph.D., The Commonwealth Fund; Robert A. Berenson, M.D., F.A.C.P., The Urban Institute; Helen Darling, Washington Business Group on Health; Mark R. Chassin, M.D., Mount Sinai School of Medicine.

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.

Commonwealth Fund — Research on health care quality.