Patients Can Get Quality Healthcare at Lower Cost With the Right Kind of Health Plan
The healthcare industry doesn’t get the same pressure from consumers to eliminate waste and inefficiencies as other industries do because in the vast majority of cases, the person who receives the services – the patient – doesn’t pay for most of the price of that service. If an MRI is “free” because insurance pays for it, why get a lower-cost X-ray instead, even if the X-ray would be good enough to accurately diagnose your condition?
To try and give patients more “skin in the game,” virtually all health plans require cost-sharing by patients, either through a copayment (e.g., $20 for a doctor’s visit or $30 for a prescription), co-insurance (e.g., 20% of the cost of a hospital stay), or a deductible (i.e., the patient pays 100% of the cost of services up to a specific amount before health insurance kicks in).
A survey conducted by the Kaiser Family Foundation and the Health Research and Educational Trust found that in 2013, three-fourths (78%) of workers with employer-sponsored health insurance now have a deductible, compared to only 55% in 2006. More than a third (38%) of workers have an annual deductible of $1,000 or more, compared to only 10% in 2006, and 15% have a deductible of $2,000 or more, compared to 3% in 2006. The numbers are higher for those who work for small businesses (those with under 200 employees) – over half (58%) now have deductibles of $1,000 or more, and nearly a third (31%) have deductibles of $2,000 or more.
Unfortunately, research studies have shown that co-payments, co-insurance, and deductibles don’t just discourage people from getting unnecessary services, they can also prevent people from getting necessary services that would avoid even more expensive problems in the future. For example, if money’s tight, someone who has a chronic health problem like high blood pressure, diabetes, or asthma may decide not to get their prescriptions filled or see their doctor when a problem first develops, particularly if they have a high deductible. But they’d also be more likely to later end up in the emergency room or need an expensive hospital stay. In other words, it can be penny-wise and pound foolish for the health plan to require the copayments and deductible. Although federal law now prohibits cost-sharing for important preventive services to avoid some of these kinds of problems, cost-sharing remains high for many medications and other services that can help people stay well.
That’s not the only problem with copayments, co-insurance, and deductibles, though. They also don’t provide people with any incentive to choose lower-cost providers for expensive services. Suppose you need knee surgery and you have a choice of two high-quality hospitals. Hospital #1 charges $15,000 and Hospital #2 charges $30,000. If you were paying on your own, you’d likely choose Hospital #1. But under a typical health plan, you would only be responsible for a 10% co-insurance payment up to an overall annual $1,500 limit on out-of-pocket expense. So it would cost you $1,500 for the surgery regardless of which hospital you chose. It would be the same under a high-deductible plan, because the cost of the surgery is well above the deductible. Since there is no incentive for you to choose the lower-cost hospital, there’s no incentive for Hospital #1 to stay low cost or for Hospital #2 to become more efficient or charge less.
Is there a better way? Three promising approaches to improved cost-sharing are being used by the most innovative employers and health plans around the country:
Value-based cost-sharing. A growing number of employers and health plans are reducing or eliminating cost-sharing for chronic disease medications in order to prevent high-cost complications and hospitalizations. This is particularly important when there is no generic equivalent for the drug a patient needs. Programs that have made medications free for patients with diabetes and high blood pressure have improved medication adherence and reduced complications without increasing total expenditures, and they may well reduce overall spending in the longer run.
Reference pricing. Why should you expect health insurance to pay extra for you to go to an expensive hospital if you can get high-quality care for less? CalPERS (the California state employee retirement system) found it was paying less than $20,000 for knee surgery at some hospitals and over $100,000 at others. Many hospitals were willing to do quality knee surgery for less than $30,000, so CalPERS told its members that it would pay no more than $30,000 (the “reference price”) for a knee replacement. CalPERS members are free to go to more expensive hospitals if they want to, but they have to pay any cost above $30,000 themselves. A new study found that after this policy was implemented, use of lower-priced quality hospitals increased by 21% and use of higher-priced hospitals decreased. Moreover, the higher-priced facilities reduced their prices by 34% in order to avoid losing patients. As a result, CalPERS saved $2.8 million and its members paid $300,000 less in cost-sharing.
Tiered networks. A tiered network goes a step further by grouping hospitals into multiple tiers based on their relative cost and quality. If a patient who needs non-emergency services chooses a hospital from a lower-cost/higher-quality tier, the patient pays less. The patient has an incentive to look for the lowest-cost, high-quality hospital, but unlike high-deductible plans or plans with high cost-sharing, insurance will cover most of the cost if the patient chooses a lower-cost, high-quality hospital.
Well-designed tiered networks are much better than the “narrow networks” or “high-performance networks” many health plans are now offering that look more like traditional HMOs than the broad-network PPO plans people have become used to. In a narrow network, the employer or health plan chooses which doctors and hospitals you can use and makes you pay a lot more if you get care from an “out-of-network” provider, i.e., the health plan “steers” you to the providers it chooses. But most people don’t know in advance what healthcare services they will need or whether the hospitals the health plan chose for the network will be the best for those specific services. For example, if a patient unexpectedly develops cancer, they may want to be able to afford to go to the highest-quality oncology provider, even if they get all of their other healthcare services from other, lower-cost providers. Moreover, there may be differences in cost among providers within the narrow network, and in a narrow network plan, the patient typically has no incentive to choose the lower-cost providers, merely to avoid the out-of-network providers.
In contrast, a tiered network allows you to use any high-quality hospital you wish when you have a healthcare problem, but you have to pay more if you choose a hospital that charges more to deliver care when a lower-cost hospital is available for that particular problem. The only “steering” is what the hospitals themselves do based on the quality of their services and the prices they charge; i.e., if a hospital wants to avoid losing patients, it can reduce its prices, improve its quality, or both.
Do tiered networks encourage better care at lower cost? The fact that many large, high-cost health systems try to prevent the use of tiered network plans may be the best evidence possible that tiered networks have significant potential to be effective in controlling high prices. Unfortunately, there are no true tiered network plans available in the Pittsburgh Region today. In Massachusetts, the state legislature required all health insurance companies to offer tiered network plans.
If employers and workers want to reduce their health insurance costs while improving the quality of the healthcare they receive, they need to demand that their health insurance plans use value-based cost-sharing, reference pricing, and tiered networks. In order for patients to make well-informed choices under these types of health plans, the region’s hospitals need to issue public reports on the quality of care they provide and post their prices for everyone to see.
(A version of this post appeared as the Regional Insights column in the Sunday, September 1, 2013 edition of the Pittsburgh Post-Gazette.)