Philadelphia Reflections

Correcting the Co-insurance Blunder

In this chapter we are discussing health insurance problems which the Affordable Care Act did not create, and for which its only blame is that it neglected to address them. The implication must be that a better health care reform bill would indeed address them, or at least give the public the impression that it considered the problems and for sufficient reason had to pass them by. It highlights one more important reason why this book hopes to generate the creation of a Grand Strategy rather than specific legislation.

The Blunder of Co-payment. Let's state that co-insurance sounds like a deductible but isn't, has shown very little deterrence value at its customary 20% level, creates the market for an extra insurance policy, and would never be missed if eliminated in its traditional form. A deductible, by contrast, is a single lump sum imposed at the beginning of an expense period, a so-called "Front-end deductible", whereas co-insurance imposes a sort of tax on every service, ie. a "20% co-pay". Examples: a deductible would be the first five thousand on a twenty-thousand dollar cost, per episode, or per year, and it does not change with the size of the bill. A 20% co-pay, or co-insurance, takes 20% of every charge. As the Affordable Care Act begins implementation, it is reported that the ACA plans to introduce 30%, 40%, and 60% co-payments through its insurance exchanges, in addition to a $5000 deductible, and in addition to tripling the premium. The matter merits considerable discussion, and it will probably receive it but details are presently very scanty. For example, there is already a flourishing market for 20% copay insurance which pays for nothing else, so the insurance companies will enjoy this feature of Obamacare which stimulates twice as many insurances. Congress would find a large co-payment enjoyable, since a 30% copay means the patient somehow pays at least 30% of its cost, out of his own pocket. These are also the numbers which get the businessman's attention in employer-based insurance. They appeared in a two-line notice in the New York Times, just before the Fourth of July holiday, and only chief financial officers have a lot of information about it. That sounds like a trial balloon which could soon be revised, but possibly not. If this is the final word, it will certainly imply the Administration is desperate to find reductions in the cost of the program. Put it in context: premium prices are doubled, a $5000 front-end deductible is imposed, a minimum of 30% of the program eventually lodges in copayment insurance which the patient must himself pay. On top of that, the only reliable evidence for what is going on comes from Chief Financial Officers, who as a group are the most hostile to the program because it involves them in myriads of complexities having nothing to do with their corporation's core business.

The position of this paper is that copayments should be scheduled to be eliminated entirely, but deductibles raised as high as possible, at least to $5000. This is not a small technical issue. Deductibles have proven effectiveness, while co-pay shows no effect on consumer behavior at the traditional 20% level. It is impractical to extend either approach to patients sick enough to deserve hospitalization as an inpatient because a growing proportion of "patient responsibility" charges reappear as bad debts. Alternatively, to raise office and outpatient price levels much above the minimum cost of hospitalization is not only unrelated but futile. It creates a substantial incentive to admit patients to the hospital in borderline cases, especially from emergency rooms and captive satellite clinics, recently enlarged to take advantage of artificially low-interest rates. Hospital administrators already complain that unpaid co-insurance is their biggest financial drain. The fact is, co-payments have already approached a practical upper limit, without any sign of affecting patient attitudes. Unpaid patient coinsurance is a sensitive indicator of dissatisfaction; there should be more feedback about it between the hospital and accrediting agencies. Since most insurance has a deductible less than $5000, there is probably some room left to increase deductibles, but public outcry can be expected unless something like a Health Savings Account is provided to ease the pain. Insurance companies will rush to be first with a new and improved "supplemental policy", another expensive blot on the landscape, designed to eliminate cost consciousness on the part of those who can afford it. The contradictory message sent by supplemental insurance is that reducing patient cost consciousness is a good thing.

A much better inpatient solution is available in the DRG system, even though it could use some improvement. And there is the potential of using credit cards attached to Health Savings Accounts as a source of data for improving DRG (Diagnosis-Related Groups) by capturing outpatient market costs and using them for market-based hospital cost accounting rather than hospital cost reports, which contain massive distortions from several levels of cost-shifting. Patient cost sharing, in general, is already approaching its limits and cannot be relied upon to produce the order of savings suggested by 50% co-pay. Other, more sophisticated, approaches are needed. To become convinced of this, it helps to understand its history and politics.

The way to cut hospital costs is to cut the indirect overhead costs.

How did we come to this? Because so many industrial workers were quite healthy, young workers have always subsidized older, sicker ones, on the untrustworthy premise that when young ones became old ones, their turn will come (if they still work for the same company.). Trying to maintain "community rates", it was hard to find ways to pacify the young ones, unless you left the old ones stranded. This created pressure to keep deductibles low, even trivial because they would apply to almost everyone no matter how small his annual medical expenses and the young ones were already complaining about how little they were getting. Just how much effect deductibles exerted on premiums was difficult to calculate quickly. By contrast, a co-payment rate of 5% would reduce employer (or government) cost by 5%, while 20% would reduce cost by 20%, etc. To make the immediate point, a 50% co-pay would cut the cost of Medicare to the government by 50%, whereas even an actuary would have trouble producing quickly how much the government would save by raising the deductible by 150%, or to $12,000 annually. Once the negotiators walk away from the table, important consequences for the patients and hospitals will persist and grow, and the long-term trend of costs will be up. One-time convenience for the negotiators should be the least consideration of all, but human nature is human nature. Legislators are implored to hire an actuary to tell them the answers to these numbers (in the form of a table of numbers), so they do not exchange momentary convenience for riots in the streets. And the President must be persuaded not to claim that the "service" benefits are unaffected, or his campaign promises of retaining benefits seemingly satisfied. If you double the premium and double the copayment, you are only providing 25% of the historical benefit, even if an appendectomy is an appendectomy and it's a "covered service". Because of bad debts, raising the copayment from 20% to 50% is only likely to increase revenue by 40% at most. The way to cut costs is to cut the indirect overhead costs, and this insurance talk seldom touches that subject. The place to get more revenue is from people who are healthy or to borrow it. At the moment, 50% of Medicare costs are borrowed, in the sense that they come from tax revenue, which increases the national deficit, which ultimately leads to borrowing.

Doesn't all that make it sound more attractive to look for new sources of revenue? The traditional sources are pretty well exhausted.

Originally published: Tuesday, April 09, 2013; most-recently modified: Thursday, May 09, 2019