Progressive Cost Sharing: Patients must have at least a little skin in the game
Much has been made about the supposed failure of the free markets to equitably distribute health care in America, as if our system truly represented a free market. Regrettably, America’s health care has a lot less in common with Adam Smith’s “Invisible Hand”[i] than with the “Tragedy of the Commons”[ii].
Adam Smith’s world, where individuals and businesses make mutually beneficial transactions based on cost and value, simply does not apply to modern medical economics. Medical transactions are made between the patient and provider, but nearly all the cost is borne by someone else.
More apropos to American healthcare is Garrett Hardin’s “Tragedy of the Commons”. Hardin tells the story of a community of herders who all were entitled to the use of a common grazing area. Each herder found it to his benefit to add ever more animals to his own herd so as to enhance his personal gain, while the adverse consequences of overgrazing the common area was shared by all the others, eventually destroying everyones’ livelihood.
In our current system, much like the “Tragedy of the Commons”, the individual patient and provider garner all the advantage of a medical transaction, while the cost of care is shared broadly by all insurance premium payers and taxpayers. This has been a guaranteed formula for the perennial rise in aggregate American medical costs at a multiple of the inflation rate, spurring talk of rationing and death panels.
The public debate in this area has inexplicably focused primarily upon reform and regulation of the “Commons”, that is, the insurance companies and Federal agencies responsible for the purchase of health care. However, there has been virtually no attention paid to the source of medical costs, namely, the interactions between those who provide care and the patients who consume it.
In the not so distant past, the typical insured patient paid a straight 20% of most medical costs out of pocket, and so retained an interest is deciding whether a particular medical interaction provided enough value to justify the expense. Physicians had a reciprocal incentive to be judicious in their recommendations, so as to maintain their reputations as good diagnosticians who did not rely on excessive or unwise diagnostic testing or treatments.
Over the past several decades, there has been a concerted and largely successful effort to reduce and eliminate economic barriers to healthcare. The decoupling of individual financial responsibility from the consumption of medical care has all but erased cost vs value considerations from patient and physician interactions. In 1984 it was estimated by the Stanford health care economist Victor Fuchs that at least 20% of American health care is harmful or low yield[iii]. Today, that figure appears to be a sorry underestimate.
The rationale for eliminating cost barriers to medical care has been that those on the lower rungs of the economic ladder may forgo or delay necessary care to their detriment. Evidence of a detrimental effect of cost sharing on outcomes is scant[iv], and the effects measured have been far less than imagined.
For instance, in the well known RAND study of free medical care vs cost sharing, the cost sharing group had one third fewer ambulatory visits and one third fewer hospitalizations than the free care group, and yet there was no difference in health outcomes between either group for the average patient, except for a trivial difference in corrected vision of 20/22 vs 20/22.5. In the subgroup of low-income high-risk patients, there was a significant 3.3 mmHg difference in diastolic blood pressure, but there was no difference in smoking, weight, cholesterol or any one of five self-assessed measures of health[v].
Overall, it has been difficult to show that the prevalent high utilization of health care resources in America yields significantly better health outcomes. On the contrary, excessive health care utilization may well be the greater harm[vi].
It was clearly shown in the RAND study that cost sharing had a dramatic effect on health care utilization, but only a tiny effect on health care outcomes. Nevertheless, it stands to reason, that cost sharing that is not indexed to income or wealth would have disproportionate effects on the working poor versus the wealthy. It would be rational to presume that the relative effect of cost sharing on health care purchases is greater for low-income patients than others, since the value of a marginal dollar spent for health care would be greater for low income patients.
While cost sharing seems to beneficially reduce excessive health care utilization, there is a valid concern that cost sharing may have a disproportionate effect on low-income groups. Any proposal to re-introduce market based incentives into the medical system would need to be sensitive to concerns about inequitable effects on low-income groups.
This leads me to propose that cost sharing should be progressively indexed to income, so that health care utilization is leveled across the spectrum from low to high-income groups.
In such a progressive co-payment scheme, one may, for example, envision a co-payment of 0.5% of all medical expenses for the working poor, and 25% for the wealthy. If the co-payment amounts are chosen correctly, per capita healthcare expenditures should be equal across income groups. Adjustments in co-payment percentages may be made to bring expenditures into equilibrium among income groups.
In one version of the scheme, the insurance company serves as a clearinghouse that uses the progressive co-payments to cross-subsidize low and high-income enrollees. On the other hand, there may be a concern that higher co-payments at progressively higher income levels will create disincentives for the working poor to increase their earnings. In that case, if the higher co-payments reduce premium costs, there would be an advantage in the offsetting incentive.
In an effective progressive cost sharing system, each patient would have a health care credit or debit card that must be used to cover co-payments. The co-payment may not be insured with a supplemental insurance policy, but could be drawn from a prepaid health savings account (HSA). Insurance payers may not disburse the balance of a bill until the patient pays his co-payment, so as to prevent providers from skirting the system by relieving patients of their financial responsibility. Kicking back payments to patients would be strictly illegal or result in cancellation of insurance contracts. However, one could envision independent charities whose purpose would be to cover co-payments for the needy.
Inpatient hospital and rehabilitation stays may need to be dealt with on a separate basis, since patients have little or no control over inpatient expenditures made on their behalf. For example, a fixed daily hospital co-payment should be charged directly to the patient. Like the percentage co-payments, these charges should be progressive and income based, perhaps $50/day for low-income patients and $500/day for upper income patients. At a minimum, such a plan would align the interest of the patient with payers in terms of optimizing hospital length of stay.
Maximum out of pocket expenditure caps would need to be placed on policies, which would be progressive according to income.
The progressive cost sharing system described here would have the beneficial effect of forcing physicians to explain and justify their recommendations to patients. This alone would tend to reduce the volume of many low yield diagnostic and therapeutic interventions, that today are recommended and provided with hardly a thought for cost vs value.
One may anticipate that such a system could create resistance among providers as the open checkbook “all-you-can-eat” style of medicine finds its’ limits. On the other hand, a progressive cost sharing system would provide something that has been lacking in medical care for some time: That is, a renewed shared responsibility between patient and physician for their joint medical decisions.
Any test recommended to rule out an unlikely diagnosis has a cost and a benefit. For example, consider a patient with a chest pain that appears to have a low likelihood of being cardiac in etiology. The patient is offered a stress test but decides to decline. The odds are that he has made a correct decision based on the information available at the time. However, months later he has a heart attack, possibly even unrelated to the symptoms he initially had. In this scenario, the onus for not performing the test falls on the patient rather than the physician. A system of shared responsibility for medical decisions will inevitably lead to a decline in malpractice suits and will result in the benefit of lower costs for liability insurance.
What is the moral and ethical basis of a progressive cost sharing medical system?
It is widely recognized that aggregate medical costs threaten to overwhelm the economy of the US, and that something will need to be done to restrain or reverse the inexorable increase in health care expenditures. Already, rationing decisions are being made by state governments that restrict the availability of high cost organ transplantations for Medicaid recipients. It is virtually foreordained that cutting “medical waste” and creating the highly bureaucratic Accountable Care Organizations will save little or nothing.
In a cost sharing system, the excess demand for medical care is restrained at its’ source by providers and consumers, depending upon the perceived value of care vs. the proportionate cost of care. Many will argue that physicians and patients cannot always make the best decisions, and that some patients will forgo care that they need, or that physicians will at times provide expensive care that is unnecessary. This point is conceded, but the decisions on what care to consume or not, lies in the hands of the patient and family, so the responsibility and consequences of these decisions are borne by the individual decision makers. Such a system is wholly consistent with the philosophical underpinnings of America, where central control of individuals’ day-to-day decisions is deeply unpopular. The alternative of Federal or State regulation and control of physician-patient interactions creates a visceral reaction in much of the public who decry, sometimes hyperbolically, institutions such as “Death Panels”.
Government edicts, such as denial of expensive cancer chemotherapy is often cited in these arguments. For example, consider the UK’s National Institute of Health and Clinical Effectiveness (NICE) Agency’s cost-effectiveness analysis that denies all patients access to Herceptin for treatment of metastatic breast cancer. Certainly the value of Herceptin may be vastly different for a moderately demented 85 year old living with 24 hour home aides, than for a 47 year old woman hoping to walk down the aisle at her daughter’s wedding in 4 months. A complete ban on the use of this expensive drug is not ethically consistent with many situations in which it may be highly valuable to certain individuals.
It is almost too obvious to state that medical decision making at times will be incorrect, whether individuals make them, or whether Federal regulators make them. The basic ethical and moral question for our time, is whether the right to make these decisions should rest with citizens and their physicians, or with Federal regulators?
A progressive cost sharing system is consistent with the same values that underpin our progressive income tax system. In fact, the inherent fairness of a progressive cost sharing system can be cross checked by ensuring that the per capita expenditure on health care is flat across income groups, ensuring equity of health care distribution.
[i] Smith, Adam. Wealth of Nations.
[ii] Garrett Hardin, "The Tragedy of the Commons", Science, Vol. 162, No. 3859 (December 13, 1968), pp. 1243-1248.
[iii] Fuchs, VR. The ”Rationing” of Medical Care. N Engl J Med 1984; 311:1572-1573
[iv] Kullgren JT, et al. Health Care Use and Decision Making Among Lower Income Families in High-Deductible Health Plans. Arch Intern Med 2010; 170(21):1918-1925
[v] Brook RH, et al. Does Free Care Improve Adult’s Health? NEJM 1983; 309:1426-34
[vi] Computed Tomography — An Increasing Source of Radiation Exposure. David J. Brenner, Ph.D., D.Sc., and Eric J. Hall, D.Phil., D.Sc. N Engl J Med 2007; 357:2277-2284