Insurance Theory

Insurance lowers prices at the point of service and alleviates risk. The problem is that insured consumers buy services they would not otherwise buy if they were fully informed and had to pay the full price. This problem is termed moral hazard, and it drives people to consume excess care and leads to high premiums when patients are insulated from the full costs of care. Models of cost sharing should not be designed to lower premiums but rather to improve patient incentives and reduce excess use while encouraging price shopping. Optimal insurance would balance moral hazard’s tendency for overuse and risk aversion, meaning that it would reduce co-pays in situations where the benefit of care justifies the expense and increase co-pays for care whose value does not justify the expense. This encourages patients to consume services that are high value and reduce use of inappropriate services. But patients do not respond to cost sharing as economists would like. Instead, greater cost sharing leads to patient reductions in the use of appropriate and inappropriate services alike, and this leads to worse outcomes (Siu et al., 1986).

Dr. Chernew reviewed VBID in areas of medicine other than cancer. An important dimension of a VBID program, he said, is the services it targets for lower co-pays, such as important medications for chronic illnesses. Pitney Bowes has become the model for targeting chronic illness services (Freudenheim, 2007; Fuhrmans, 2004). The University of Michigan has gone one step further to discount co-pays not just for important services such as diabetes medications but also for belonging to certain patient programs. A second important dimension of a VBID program is its scope: will the program simply lower co-pays for high-value services or also raise co-pays for low-value services? It is important to recognize that VBID tends to cost more money if co-pays are only lowered because it leads to greater use of services and a greater employer share of spending for high-value services that would be used whether or not VBID were in place. Advocates of VBID say that we can pay for VBID’s extra spending because it leads to fewer adverse events and emergency department visits. The question is how many fewer adverse events will we have? VBID design will be more successful and the cost of VBID can be further offset if the patients targeted are at high risk for adverse events. The cost of VBID is further offset by benefits in patient productivity—important benefits that should not be overlooked. Another way to offset the costs of VBID is to increase the co-pays for low-value services or to implement a relatively small increase in cost over all services that are not deemed as having a high value. Dr. Chernew recalled a quote

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