Wednesday, September 05, 2007

The Good and Bad of Cost-Sharing

The Business Journal had an article the other day on hospital profits in the Milwaukee area. Here's the chart that accompanied the article:

Click for larger view.
The focus of the article itself was on the losses experienced by some hospitals, though all systems in the area except for Wheaton Franciscan -- whose losses were mostly attributable to the close of St. Michael's last summer -- did manage to turn a profit in 2006.

Another more nuanced theme in the article look into why profits decreased for most hospitals and systems between 2005 and 2006. To be sure, the only system to experience increased hospital profits across the board in 2006 was Children's Health System, and that's at least partly due to the fact that the board for that system consists of just one hospital.

The article pointed to four primary factors that have driven decreases in hospital profits:
  1. Costs associated with hospital expansions
  2. Continued poor reimbursement levels from state programs
  3. Increased amounts of charity care due to more uninsured patients
  4. Bad debt resulting from insurance plans that require significant cost sharing, such as high deductible health plans (HDHPs).
The last point is probably the most politically potent. On the one hand, it's a good reminder that simply making HSAs state tax free -- a major plank of the state GOP health plan -- isn't going to make health care any more affordable and, in fact, can have the reverse effect.

But, on the other hand, news that bad debt is increasing due to an increased use of HDHPs can unfortunately give others the false impression that high deductibles are inherently faulty.

To be sure, it's not the existence of cost-sharing that's the problem. But some key pieces need to be in place for cost-sharing to effectively reduce overutilization, which is its big promise.

For starters, there need to be tangible protections in place to ensure that preventive care isn't applicable to the cost-sharing and that the cost-sharing amounts are affordable for the participant, the latter of which can be done by setting the cost-sharing amount based upon income, ensuring that a significant portion of the high deductible is pre-funded, or, better yet, some combination of the two.

But just as important as these structural points is educating participants on their responsibilities. Much of the focus on educating participants is often on price transparency, which is certainly important, but there also needs to be some concern for simplifying and standardizing policies and procedures so that people know what to expect during the billing process.

According to the Business Journal article, part of the increase in bad debt is due to the simple fact the people don't understand what they're going to owe when they head in for care. This has prompted hospitals to start hiring financial counselors to work with patients when they get to the hospital to discuss payment responsibilities, which is decent, yet reactive, approach.

A proactive response would be to simplify and standardize health plans across the board, which is exactly what the Wisconsin Health Plan (WHP) does for HDHPs. In addition to fully covering preventive care and pre-funding every participant's HSA with a significant portion of the deductible, the WHP would put everyone in the same boat when it comes to cost-sharing, thereby reducing confusion when people go in for care.

Of course, there still would be some variance in coverage options depending upon the health plan that the participant selected, but what wouldn't change is cost-sharing levels -- everyone would know what to expect, which still ensures the personal responsibility desired by the right without sacrificing the necessary protections desired by the left.

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Anonymous m.z. forrest said...

I'm assuming you subscribe to the belief that overconsumption is a significant issue in the system. There is at least one study (or maybe it was a book) that claims this claim is not valid.

In regards to HRA/HSA, funding them by means other than the beneficiary himself is not going to induce less consumption unless the actual net benefit is reduced. In the overwhelming number of cases, the net benefit is indeed reduced.

September 05, 2007  
Blogger Seth Zlotocha said...

I do believe there's overutilization in the system. Let me know if you run across a citation for that study or book -- I'm always open to new thinking on an issue if there's strong evidence for it.

Even if a HSA is funded by someone other than the beneficiary there's an incentive to not waste the funds since they can roll over from year to year. As a young, relatively healthy person I have a strong incentive to keep as much in my HSA as possible now for the future when my health -- or someone in my family's health -- takes a turn for the worse, which is likely to happen at some point.

Of course, the same is not true for a HRA since the employer owns that, which is why the WHP uses HSAs rather than HRAs.

September 05, 2007  
Anonymous m.z. forrest said...

“Moral hazard is overblown,” the Princeton economist Uwe Reinhardt says. “You always hear that the demand for health care is unlimited. This is just not true. People who are very well insured, who are very rich, do you see them check into the hospital because it’s free? Do people really like to go to the doctor? Do they check into the hospital instead of playing golf?”

It was part of a long article in the New Yorker. You'll probably find the whole article interesting.

September 05, 2007  
Blogger Seth Zlotocha said...

It is an interesting article -- thanks for passing it along.

The RAND study cited in the article is what carries the most weight for me. And that study does show that people can't always determine necessary care from unnecessary care, but, as economist Jason Furman points out, it also showed that "if related to a family's income, [cost-sharing] could reduce health spending by an average of 31 percent without any worse health outcomes. Subsequent research finds that the savings could be even greater."

And that's really the key -- making cost-sharing reasonable by not applying it to preventive care, tying it to income (which would be a good addition to the WHP), and ensuring first-dollar coverage by pre-funding a signficant portion of the deductible.

September 05, 2007  
Anonymous jp said...

Fear of malpractice litigation may be the major factor in over utilization.

September 06, 2007  
Blogger Seth Zlotocha said...

Yes, the malpractice system needs to be reformed, too, and a sound reform may be the creation of special courts that focus entirely on medical malpratice claims.

But before we chalk up overutilization to malpractice claims, let's see if we have any evidence to support that contention. While it makes logical sense that fear of malpractice suits can result in ordering more tests and procedures -- hence, leading to overutilization -- it also makes sense that fear of malpractice suits could lead doctors to refuse to treat patients with complicated ailments.

What's more, as this article in the Harvard Health Policy Review found, "Even if it is possible to determine that a doctor has ordered too many or too few tests, one may not be able to tell whether the doctor was worried about his legal liability or other concerns such as financial incentives or patients' requests."

It adds: "[I]n our interviews with physicians, we found that the public and personal consequences that doctors suffer when charged with medical malpractice are also significant and may ultimately be a more powerful influence on physicians' behavior than financial concerns."

So even if malpractice awards were severely limited, that doesn't mean defensive medicine that leads to overutilization will stop.

Nevertheless, in the end, there is certainly enough there to warrant malpractice reform, but not enough to assume that's all it would take to significantly reduce overutilization.

September 06, 2007  
Blogger Dad29 said...

Continued poor reimbursement levels from state programs

This is a long-term problem which will get worse, not better, as the Boomers retire, get sick, and pay with Medicare/Aid.

September 11, 2007  
Blogger Dad29 said...


"Over-testing" is at least partly a professional-pride thing. The doc does NOT want to be wrong, whether or not there are lawyers hanging around outside his door.

One could argue that "overtesting" has more to do with GE's introduction of better (and more expensive) testing products than with lawyers.

But that would be a perverse argument, no?

September 11, 2007  
Blogger Seth Zlotocha said...

The state doesn't have a role in Medicare payments, and Medicaid only covers long-term care for elderly who are poor and disabled, as opposed to acute care in hospitals and clinics where cost-shifting is really an issue.

September 11, 2007  

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