The cost of costs

 

The reason insurers impose deductibles and copays is to discourage utilization. They believe, no doubt correctly, that if people have to spend their own money they may choose not to get as many medical services or buy as many medications. The problem with this reasoning is that people aren’t wise shoppers for medicine. Now, I’ll be the first to shout it from the rooftops that as a nation, we spend far too much on medical services that are low value or worthless. In fact, I will do so (metaphorically) later in this book. But it’s not because consumers of medicine aren’t wise shoppers, and making them pay out of pocket isn’t going to change that.

The idea of substantial deductibles is nonsensical on its face. It seems to imply that any and all medical spending, starting anew each year, must be discouraged. Sure, it might happen that you feel sick, decide not to go to the doctor because you don’t want to pay, and whatever was wrong gets better on its own.[1] But what might also happen is either a) you have some obvious medical need, let’s say a broken leg or a squeezing pain on the left side of your chest radiating into your arm, and it ends up costing you $8,000 which you don’t have, just your bad luck; or b) you have a less obvious need -- say, oh I don’t know, you bang your head and you have a really bad headache – but you don’t want to risk spending a lot of money so you hope it will just go away, and it turns out you had a brain hemorrhage and you wind up permanently disabled. The latter scenario, by the way, might end up costing your insurance company millions. Just saying.

Intuitively, the idea of copays might seem to make more sense. Forty-five bucks to see a specialist (as in the case of my own insurance), or $3.00 for a medication, probably isn’t going to bankrupt you, and it might make you think twice about whether you really need it, but won’t stop you if you’re seriously worried. Alas, the evidence is overwhelming that it does not in fact result in wiser choices. People generally only take about half of prescribed medications, but having to pay out of pocket is a substantial reason for this so-called “non-adherence.” (We used to call it “non-compliance” but this is no longer politically correct since it sounds paternalistic.) And people are very likely not to take medications that will indeed benefit them.

Because life, and death, are complicated, it’s been hard to convince everyone that copays can be bad for your health, but at least one clever study makes the case clearly. Because people enroll in Medicare in their first year of eligibility based on their month of birth, that means they have different numbers of months before they hit the donut hole – remember, that gap in coverage after you spend your first $2,500 – which means people with similar expenditures will encounter cost-sharing essentially at random based on their birthday. This allowed researchers to do the equivalent of an experiment,[2] and they found that just a $10 increase in cost sharing resulted in a 23% decrease in medication taking. Worse, people stopped taking essential drugs such as blood pressure medications and statins. Abruptly stopping these can be dangerous, and indeed, it led to a 33% increase in monthly mortality.[i] So the donut hole is either taking thousands of dollars out of people’s pockets, or it’s killing them, whichever comes first. Of course, the latter does save money.




[1] Even so, that visit to the doctor may not be a complete waste. You’ll get your blood pressure checked and your heart listened to, the doctor might see something or you might mention something that you didn’t think was important, but it turns out that it was. In any case you’ll get some reassurance.


[2] This kind of study uses what’s called an “instrumental variable,” something unrelated to the hypothetical causal mechanism being studied that sorts people into groups with different exposures, supporting strong inferences without having to do an unethical experiment.




[i] Amitabh Chandra, Evan Flack and Ziad Obermeyer. The health costs of cost sharing. NBER Working Paper No. 28439, National Bureau of Economic Research. February 2021, Revised April 2023.