Patient Cost-Sharing Innovations: Promises and Pitfalls

Health plans and employers were expected to refine patient cost sharing over the coming decade to steer workers toward more cost-effective care, according to a panel of market and health policy experts convened at a Center for Studying Health System Change (HSC) conference. Rather than relying on a single large deductible, employers and plans would likely tie cost sharing to the patient's choice of provider, the site of care, and the type of service -- so that patients opting for less effective options paid more out of pocket. Employers also planned to cushion the impact on lower-income workers by, for instance, adjusting cost sharing based on income levels. But major barriers could undermine these emerging approaches, including limited information on care quality and resistance from providers.

Patient Cost-Sharing Trends

To slow the pace of health insurance premium growth, employers in recent years had ratcheted up patient cost sharing through higher deductibles, copayments, and coinsurance. Nationally, increased cost sharing was estimated to have trimmed average health insurance premiums by 2 to 3 percent in 2002 and another 3 percent in 2003. Panelist Arnold Milstein, M.D., of Mercer Human Resource Consulting, attributed employers' interest in cost sharing to two goals: restoring out-of-pocket spending to pre-managed-care levels, or giving workers a bigger financial stake in their health care decisions.

The shift from flat copayments to coinsurance, where patients pay a percentage of total costs, quickly gained patients' attention. Robert Berenson, M.D., of The Urban Institute, noted that he only grasped prescription drug prices when he moved from copays to coinsurance. Helen Darling of the National Business Group on Health warned that without cost sharing to contain spending, coverage itself would be at risk: 'We will have vastly more people with no coverage because employers can't afford to provide coverage without cost sharing.' The pace and extent of cost-sharing increases would depend on economic conditions and health care cost trajectories -- employers would push harder during economic downturns with rapidly rising costs but ease off when labor markets tightened.

Refinements in Cost-Sharing Design

Higher patient cost sharing served as a powerful but blunt instrument for raising awareness of actual care costs. As this trend continued, employers and plans would need to develop more nuanced approaches. Without refinement, patients faced with steeper out-of-pocket expenses tended to cut back on both necessary and discretionary care, risking financial and medical hardships for the seriously ill and lower-income workers. A more targeted approach -- where patients received incentives to choose more cost-effective and higher-quality options -- was expected to dominate in the longer term because it avoided many of the unintended consequences of blunt cost increases.

Still recovering from the managed care backlash, most employers were likely to expand cost sharing while preserving broad patient choices. Plan designs would grow more complex, placing more responsibility on consumers to evaluate cost-choice trade-offs. Milstein predicted the greatest returns would come from varying cost sharing by provider choice, disease management and wellness program participation, and the site and type of care received. HSC President Paul Ginsburg observed that these were the same efficiency gains managed care had been expected to deliver -- but now pursued through incentives and patient choice rather than plan restrictions.

Emerging Cost-Sharing Innovations

Looking ahead, employers were likely to adopt layered arrangements of deductibles, copayments, and coinsurance rather than offering plans with a single high deductible. Patient cost sharing would be calibrated to the provider selected, the care setting, and the service type. This included cost-sharing tiers encouraging use of the most efficient hospital and physician networks; lower out-of-pocket costs for physician office visits compared with emergency department visits; and service-specific adjustments, such as higher cost sharing for imaging to curb inappropriate use of new technology.

Unlike previous approaches that depended on workers' annual plan selection, new cost-sharing models emphasized decisions at the point of care without requiring yearlong commitments. Patients could try a lower-cost option first and switch if dissatisfied. Health plans were developing more sophisticated cost and quality metrics to rank providers by efficiency -- their ability to deliver quality care at lower cost -- using measures that reflected average service provision per patient over longer periods or full episodes of illness.

Plans were also building consumer tools, including websites allowing patients to identify providers by location and access hospital quality data such as surgical complication rates and hospital-acquired infection rates. Because contractual arrangements prevented plans from posting specific prices, they provided broad rankings comparable to restaurant dollar-sign ratings to give consumers a sense of cost differences. Humana described a program that scanned prescription claims databases and used automated calls to alert patients about lower-cost drug alternatives, finding that 19 percent of such calls prompted patients to switch to less expensive medications.

Income-Based Cost Sharing

When employees chose less cost-effective care, employers expected to pass on most of the additional expense. To address concerns that lower-paid workers would bear disproportionate burdens, employers could adjust cost sharing by income -- for example, by setting maximum annual out-of-pocket limits tied to earnings. Before managed care minimized cost sharing, employers routinely maintained different cost-sharing schedules for hourly and salaried workers; as out-of-pocket costs rose again, companies were likely to reintroduce earnings-based differentials.

Implementing such differentials posed practical challenges. For dual-income households, family income would be a more meaningful benchmark than employee earnings alone, but employers typically lacked this information. Small employers were unlikely to adopt income-based cost sharing because the business owner setting the benefit would face the highest out-of-pocket costs, and small firms generally lacked the payroll systems to administer such options. Karen Davis of The Commonwealth Fund suggested that income-related tax credits could replace the existing tax deduction for medical expenses exceeding 7.5 percent of adjusted gross income, proposing credits of 75 to 90 percent of expenses above 10 percent of income for low earners.

Patient Education and Provider Alignment

Panelists agreed that the infrastructure for supporting patient decision making was still immature. Quality measures for comparing individual physicians remained, in Milstein's words, 'at an extremely rudimentary state of development.' Small claims volumes per physician could prevent reliable profiling in markets where a health plan lacked substantial market share. Giving plans access to Medicare physician-level claims data, which had been unavailable to the private sector since 1984, would go a long way toward solving sample-size problems in physician profiling.

Some panelists worried that asking patients to make cost-choice trade-offs when they were ill would always be problematic. Mark Chassin, M.D., of Mount Sinai School of Medicine observed that a patient might know they had heart disease but not realize that different providers excelled in treating different cardiac conditions. Milstein countered that education could happen earlier for at-risk patients -- at the time of initial diagnosis rather than during acute illness -- giving them time to learn about efficiency and quality differences among hospitals before needing hospitalization.

Providers would play a central role in making cost-sharing innovations work. As out-of-pocket costs increased and plan designs grew more complex, patients would turn to their clinicians for guidance on cost-effective decisions. Berenson noted that while cost sharing had worked well for prescription drugs, applying it in the doctor's office was more complicated -- collecting coinsurance required physicians to know up front what a health plan would pay for a given service. Meanwhile, the return to fee-for-service payment arrangements created financial incentives for providers to deliver more services, potentially undermining cost-sharing goals. Chassin argued that providers had 'enormous economic disincentives' to reduce overuse and that employers and plans needed to align cost-sharing innovations with pay-for-performance programs rewarding providers for meeting quality standards.

Sources and Further Reading

Strunk, Bradley C., and Paul B. Ginsburg. "Tracking Health Care Costs: Trends Stabilize But Remain High In 2002." Health Affairs, Web exclusive (June 11, 2003).

Newhouse, Joseph P. Free for All? Lessons from the RAND Health Insurance Experiment. Harvard University Press, Cambridge, Mass. (1993).

Trude, Sally. "Patient Cost Sharing: How Much is Too Much?" Issue Brief No. 72. Center for Studying Health System Change, Washington, D.C. (December 2003).

Based on HSC conference, Patient Cost Sharing: Promises and Pitfalls, held December 3, 2003, in Washington, D.C.