Map of life expectancy at birth from Global Education Project.

Wednesday, December 30, 2009

Moral Hazard and Co-pays

Now, on with the intro course.

I have mentioned Moral Hazard as the fear that people will buy insurance only after they get sick. Now let me introduce another way in which the term is used regarding health insurance. This is the idea that people will over-consume health care because somebody else is paying for it. Hey, it’s free, I’ll have the champagne! It is often argued that the way to contain medical costs is to make people pay more out of pocket.

Well, before we even think about the logic, that argument fails on the rather convincing criterion of being inconsistent with observable reality. As I have already indicated, Americans already pay more out of pocket for health care than people anywhere in the world, but nevertheless we spend more in total. In the real world, not the imagination of the ideologue, raising out of pocket costs absolutely does not result in lower medical expenditures. Insisting that it does is what’s called magical thinking: It must be true because I believe it. But it isn’t true. How can this be? What about economics 101, price elasticity of demand, and all that?

Well it ought to be obvious, I think. Just because my insurance would pay for me to have a coronary artery bypass graft, a PET scan, have three vertebrae fused, or a bowel resection doesn’t mean I’m going to run out and get them all. On the other hand, that really expensive stuff that drives much of medical spending is largely impervious to out-of-pocket cost. If your doctor says you need it, you’ll do it even if you have to take out a second mortgage. Yet less expensive procedures, which aren’t accompanied by desperation but might actually be cost effective or even cost saving, are price elastic, such as taking medication for high blood pressure.

My previous insurer, which happened to be Blue Cross/Blue Shield of Massachusetts, charges $250 for a colonoscopy in its standard plan. That's more than enough money, obviously, to discourage a lot of people from getting one. Every foregone colonoscopy saves them quite a bit of money, since the provider is probably charging them close to a grand. It means they can offer a lower premium compared to a hypothetical competitor that charged a more affordable co-pay, or none at all.

Now, it is difficult to imagine that anyone would go out of his or her way to get a colonoscopy that wasn't medically indicated just because it was cheap. We would only consider undergoing such an onerous experience because our doctor told us it was in our own best interest. The $250 can only make us refuse.

Some readers may dispute this, but it is generally accepted by the people who study these matters that screening colonoscopy, starting at age 50 and then at intervals depending on what is found the first time, is highly cost-effective from a social standpoint. It can actually prevent cancer from occurring in the first place, because the doctor removes pre-cancerous lesions during the procedure. That puts it way ahead of a mammogram. And it can detect cancers at an early stage when they are highly curable, whereas colon cancer detected after it becomes symptomatic is very bad news indeed.

So why doesn't the insurance company want me to have a colonoscopy? Because they figure, by the time I get cancer, I won't be their problem any more. I'll probably be on Medicare, actually, but even if I'm not there is a very good chance I will have changed jobs and be on a different private plan. (As indeed was the case.) So what is cost effective from the point of view of society as a whole is that there be no cost barrier to getting a colonoscopy; when it's indicated, people should do it, because the cost is well worth it and indeed, it might even save money in the long run. But that is not cost effective from the point of view of the insurance company, which doesn't want to pay for my colonoscopy on the pretty good bet that ultimately, they won't have to pay for my cancer.

Bottom line: Co-pays and deductibles do discourage people from using services or taking medications, but don't cause them to make those choices wisely, and can even result in higher costs in the long run. The way to trim waste is to manipulate provider incentives, not consumer incentives. Again, remember, what they taught you in Economics 101 was completely wrong.

6 comments:

Peter said...

Quote: Again, remember, what they taught you in Economics 101 was completely wrong.

Logic and evidence point to the reality that when people are presented with two equally acceptable options but one is more expensive than the other, those who have a third-party paying for the cost will more likely take the more expensive option.

I am not sure if you have any clinical experience, but often patients are presented with options in their management, as this is one of the goals of patient-centered medical care.

For instance, if a child bangs his head against the floor, and clinical exam shows little risk for epidural or subdural hemorrhage, but those can not be ruled out completely, there is still the option to do a CT scan to know definitively. The parents are given the option to have the scan, and because of moral hazard will more likely than not go ahead with the CT scan because of the possibility of a severe bleed occurring.

If a patient has a recent cold and 1.5 week-old enlarged lymph node, will the patient go with the clinically-acceptable "watch and wait" approach or go with the also-acceptable investigative approach? The options are usually offered to the patient, and with a patient on insurance, which option do you think will be taken?




Quote: Well, before we even think about the logic, that argument fails on the rather convincing criterion of being inconsistent with observable reality. As I have already indicated, Americans already pay more out of pocket for health care than people anywhere in the world, but nevertheless we spend more in total. In the real world, not the imagination of the ideologue, raising out of pocket costs absolutely does not result in lower medical expenditures. Insisting that it does is what’s called magical thinking: It must be true because I believe it. But it isn’t true. How can this be? What about economics 101, price elasticity of demand, and all that?

You are making cause-and-effect out of a correlation: more out-of-pocket spending does not cause more total spending, but can be associated with it. When more medical procedures and testing are done, the effect will be more money spent on out-of-pocket costs as well as more in total healthcare costs. You ignore the fact that the relative percentage of the total cost paid out-of-pocket is what is most important, not the absolute values of the two quantities.






On one point though, you are completely correct: provider incentives must be curtailed if cost is to be reduced. The primary provider incentive? Moral hazard due to insurance. If physicians know that there is a 3rd party paying for a test instead of the patient, physicians are more likely than not going to recommend the more expensive tests or treatments or medications.

The solution is to decrease this moral hazard and have patients take on more of the cost, decreasing the provider incentive for the more expensive but equally acceptable cost.

Cervantes said...

Thanks for the comment Peter but I don't really take your point. Co-pays aren't tailored to whether the physicians considers the intervention or test appropriate -- they're completely indiscriminate. If the scan was indicated and the co-pay led the patient not to get it, that would be bad. You just happened to pick an example where you think the test ought to be discouraged.

And my point is, precisely, that patients choices to forego tests or treatments due to copays are not necessarily wise ones. They may stop taking their hypertension meds or statins, not get a colonoscopy, etc., which could even increase costs in the future. Therefore making consumers pay more out of pocket is not a sound way to reduce spending.

And BTW if I were worried about my child dying of a cerebral hemorrhage I don't think a $50 co-pay would stop me from getting the scan.

C. Corax said...

You are making cause-and-effect out of a correlation: more out-of-pocket spending does not cause more total spending,

I cannot see where cervantes said anything remotely like this.

Scutterbuck said...

Just to add another perspective:
I'm roughly seeing two major viewpoints here. One says that the government knows best (or should) and that we should all be under its umbrella and follow its dictates. For instance, the best medical advice says that individuals over 50 should have a colonoscopy every ten years. So, there should be an all-inclusive health insurance plan - everyone pays in and everyone receives according to their need - that provides these colonoscopies. It's a Biblical equality. (One thing I do wonder: what if people, despite this offer, choose not to have their colonoscopy? Do we still pay for any problems they may have, or are they on their own?).
The other says that people should completely control their own decisions. If they feel their health is important enough, they will put their money towards it - they will make it a priority. This admittedly does not account for those who make their health a priority but cannot afford good healthcare, but certainly seems to apply to a strong percentage of the population. I suppose an equivalent example here is that realizing I will benefit from a colonoscopy at fifty, I will begin to save for it when I'm thirty or forty (whether by purchasing medical insurance or opening up an health savings account - some do actually carry over from year to year, as I recently found out). Sounds crappy (pardon the pun) when you consider what else I could be doing with my money - e.g. vacations, entertainments, new gadgets, new car, etc. - but, as they saying goes, "actions express priorities." Is my health important, or my current happiness?
At the end of the day, it seems to me that what we're debating here is whether or not people deserve the right to choose what to do with their life, their time, and their money. I do agree that for many, there simply isn't money available regardless of what they want to do, but I do believe that for many, the ultimate decision is, do I want luxury now, or sufficient money for necessities later?
A personal example: my wife's grandmother recently passed away from small cell carcinoma of the lung. Unfortunately, she and her husband nearly ran out of money trying to pay for treatments. That said, they spent a small fortune over the past decade or two golfing at extravagant golf courses (an no, they we not wealthy by any means). Should the money they spent on golfing have gone instead towards a mandatory health insurance, or did they simply choose to live the good life for those few years at the expense of a difficult time later in life?
This feels kind of like the old story about the ants and the grasshopper.
In medicine this is called paternalism and is quite a raging debate. How much power - control over our lives - are we willing to give to someone else?

Cervantes said...

Well Scutterbuck, there is a great deal I could say in response but I'll begin with this. Why are you talking about "government" control over what people do? The question is whether insurance -- no matter whether it's publicly or privately run -- will pay for a colonoscopy. Nobody is saying anybody has to get one. It's never going to be mandatory.

And you seem to have missed a basic point here: you can decide not to get insurance and save up for your colonoscopy instead, but what if it's positive? What if you have cancer? Did you save up for that? Obviously not, because you don't know whether you're going to get cancer or not.

So begin at the beginning and think this through.

Brian said...

Not sure if you came across this Cervantes, but Maggie Mahar posted this on her blog...about taxing "cadillac plans" and the obvious move towards high deductibile/higher co-pays. Definitely relevant to the moral hazard and co-pay discussion...
http://www.healthbeatblog.com/2009/12/fact-check-the-cadillac-controversy.html