Unbiased Analysis of Today's Healthcare Issues

Do higher copayments decrease health care costs?

Written By: Jason Shafrin - Jan• 20•10

Merrill Goozner of GoozNews writes the following:

The share of health care costs borne by individuals has remained fairly steady over the past several decades, and that is the prime argument behind conservative and economist claims that making patients have “more skin in the game” will drive health care costs lower. That ignores the fact that most people (except those in some union plans) have experienced fast rising co-pays and deductibles for years. As health care inflation skyrocketed, employer-paid premiums skyrocketed. But so did individual payments in equal proportion. Where’s the evidence that the skyrocketing co-payments of the past decade held down health care costs?

Do higher copayments hold down health care costs?  In general, the answer is YES.  As Mr. Goozner has mentioned, there has been much evidence by economists that when patients pay more money out of their own pocket, they consume less medical care.  The RAND health insurance experiment finds this to be true in the strongest terms.

However, there are exceptions. For instance, higher co-payments on pharmaceuticals will decrease drug use, but lower pharmaceutical adherence may increase hospitalization rates thus increasing healthcare spending. This is a problem of how to design the insurance contract, not a violation of the central tenet of moral hazard (i.e., when someone else pays for a good, you will consume more of it).  In fact, I have written extensively on the issue of moral hazard.

Additionally, on a macro level, the majority of health care costs come from serious, end-of-life care. In these situations, the physician has much more control over the services provided than the patient.  Further, once a person has reached this stage, the copayments are likely small as the deductible has already been met.

The major problem with Mr. Goozner’s argument is that he does not distinguish between correlation and causation.  In recent history, copayments have increased and so have costs, but this does not mean that higher copayments caused the increased costs or even that they did little to stem the tide of cost increases.  Health care has changed on many dimensions including medical technology, how doctors treat patients, hospital and provider consolidation, etc.  The counterfactual against which one should measure the impact of higher copayments is the following scenario: what if all the exact same changes took place in recent history but copayments did not change over time.  How different would costs be from our current state?  Likely, healthcare care costs would have risen even faster than without the increased copayments.  Nevertheless, since one can never redo the past, this exercise is simply a thought experiment.

Logically, however, it makes sense that higher copayments and deductibles decrease medical costs.  If you go to the dentist and they want you to pay a few hundred dollars for an x-ray, you will be much more likely to acquiesce if your insurance is paying for the x-ray rather than it is coming out of your own pocket.

Higher copayments do decrease medical utilization, but they are just one of many factors that influence aggregate healthcare costs.

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