Benefit Design in Health Care Reform:

Patient Cost-Sharing

September 1993

OTA-BP-H-112

NTIS order #PB93-231348

GPO stock #052-003-01339-8
Recommended Citation:

U.S. Congress, Office of Technology Assessment, Benefit Design in Health

Care Reform: Background Paper-Patient Cost-Sharing, OTA-BP-H-112

(Washington, DC: U.S. Government Printing Office, September 1993).
.—. —— ---

Foreword

H

ealth care is one of the Nation’s preeminent domestic policy concerns.

The contemporary health care reform debate has brought to the fore

thorny issues surrounding the design of health care benefits. The scope

and depth of health insurance coverage can have a substantial impact

on the health care services people obtain, on the costs of the health care system,

and, ultimately, on the health of the Nation.

This Background Paper is part of an OTA series on Benefit Design in

Health Care Reform that explores the merits of using information on health

effects and cost-effectiveness to formulate health insurance benefits. When it is

complete, the series will include publications on general policy issues, coverage

of clinical preventive services, benefits for mental health and substance abuse

treatment, and patient cost-sharing requirements. The benefit design series is a

component of a larger OTA assessment, Technology, Isurance, and the Health

Care System, which was requested by the Senate Committee on Labor and

Human Resources (Edward M. Kennedy, Chairman) and was endorsed by the

House Committee on Energy and Commerce (John D. Dingell, chairman), the

House Committee on Ways and Means Subcommittee on Health (Willis D.

Gradison, then Ranking Minority Member), and Senator Charles E. Grassley

(Committees on Budget, Finance, Special Committee on Aging). Other publications related to the assessment include Does Health Insurance Make a

Difference?-background Paper and An Inconsistent Picture: A Compilation of

Analyses of Economic Impacts of Competing Approaches to Health Care

Reform by Experts and Stakeholders.

This Background Paper examines the health services and economics literature to learn what is known about the effects of patient cost-sharing (that is,

annual deductibles, coinsurance, copayments, and out-of-pocket maximurns) on

patients’ use of health care services, on plan expenditures, and on patients’

health outcomes.

OTA was assisted in the preparation of this Background Paper by the

advisory panel for the Technology, Insurance, and the Health Care System

assessment, a group of leading health care provider, insurer, business, academic,

and consumer representatives, and by numerous other health policy experts.

OTA gratefully acknowledges the contribution of each of these individuals. As

with all OTA reports, the final responsibility for the content of this Background

Paper rests with OTA.

Roger C. Herdman, Director

. . . Ill
Advisory Panel

James C. Hunt, Chair

University Distinguished Professor

University of Tennessee-Memphis

Memphis, TN

Henry Aaron

Director

Economic Studies Program

Brookings Institution

Washington, DC

Robert Brook

Director

RAND Health Sciences program

RAND Corp.

Santa Monica, CA

Arthur Caplan

Director

Center for Biomedical Ethics

University of Minnesota

Minneapolis, MN

Deborah Chollet

Associate Director

Center for Risk Management and

Insurance Research

Georgia State University

Atlanta, GA

Olivia Cousins

Associate Professor

CUNY-Health Education

New York, NY

Jane L. Deigado

President and CEO

National Coalition of Hispanic Health

and Human Services Organizations

Washington, DC

Paula K. Diehr

Professor

Department of Biostatistics

School of Public Health and

Community Medicine

University of Washington

Seattle, WA

M. Joycelyn Eiders*

Commissioner of Health

State of Arkansas

Little Rock, AR

Jack Hadley

Co-Director

Center for Health Policy Studies

Georgetown University

Washington, DC

Douglas E. Henley

Physician in Private Practice

Hope Miih, NC

William Hobson

Executive Director

Central Seattle Community Health

Centers

Seattle, WA

John Lewin

Director of Health

State of Hawaii

Honolulu, HI

Barbara J. McNeil

Ridley Watts Professor and Head

Department of Health Care Policy

Harvard Medical School

Boston, MA

David Mechanic

Rene Dubos Professor of

Behavioral Sciences

Director

Institute for Health, Health Care

Policy, and Aging Research

Rutgers University

New Brunswick, NJ

Joseph Morris

Vice President for Information Systems

Delaware Valley Hospital Council

Philadelphia, PA

Patricia Nazemetz

Director of Benefits

Xerox Corp.

Stamford, CT

David G. Pockell

Senior Vice President and

Regional Manager

Kaiser Foundation Health Plan

Oakland, CA

Carl Scott

Senior Vice President

Mutual of Omaha

Omaha, NE

Gordon R. Trapnell

President

Gordon R. Trapnell Consulting

Actuaries, Ltd.

Annandale, VA

Cheryl B. Travis

Professor of Psychology and

Assistant Department Head

Department of Psychology

University of Tennessee

Knoxville, TN

Special Consultant

Stephen H. Long

Senior Economist

RAND Corp.

Washington, DC

● Until May 1993.

NOTE: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel members. panel does not

however, necessarily approve, disapprove, or endorse this report. OTA assumes full responsibility for the report and the accuracy of its contents.

iv
——— ..—. -— —

Clyde J. Behney

Assistant Director, OTA

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v
contents

1 Summary 1

What is Patient Cost-Sharing? 2

Summary of Findings 3

Fundamental Issues Related to Cost-Sharing 4

Does cost-sharing reduce utilization by promoting

the use of more cost-effective, appropriate care

and by discouraging the use of unnecessary

services? 4

Does cost-sharing have health effects? 5

Does cost-sharing help to control expenditures? 8

How are individuals with low incomes affected

by cost-sharing requirements? 8

Do coinsurance requirements affect children

differently? 8

How is the use of preventive services affected by

cost-sharing? 8

Other Questions and Pending Issues 9

■ Are there specific services that should be

considered for possible exemption from

cost-sharing? 9

 If cost-sharing is required, how can individuals be

shielded from the risk of financial hardship and

catastrophic costs? 9

■ Does cost-sharing help reduce premium

requirements? 3

s Is it administratively feasible to base cost-sharing

on income? 9

■ Does cost-sharing improve the efficiency of the

health care system? 10

 Is cost-sharing equitable? 10

 Is cost-sharing generally acceptable to

the public? 10

■ Should cost-sharing be required, what is the ideal

arrangement? 10

Conclusions 10

vii
2 Background 13

Why Cost-Sharing? 13

What Me the Out-of-Pocket Costs of

Insured People? 14

Current Trends in Patient Cost-Sharing 15

3 The Lessons and Limitations of the Rand

Health Insurance Experiment (HIE) 23

Description 23

Limitations of the Rand HIE 26

Key Findings 26

 Does patient cost-sharing affect utilization of

health care services? 26

 Does coinsurance reduce utilization by

promoting the use of more cost-effective,

appropriate care and by discouraging the

use of unnecessary services? 29

■ Does cost-sharing have health effects? 29

 Does cost-sharing help to control overall

expenditures? 34

■ How are individuals with low incomes affected

by cost-sharing requirements? 34

■ Do coinsurance requirements affect children

differently? 35

 How is the use of preventive services affected by

cost-sharing? 35

Boxes

1-A Other Publications in the Office of Technology

Assessment’s Series on Benefit Design in

Health Care Reform 3

1-B Important Limitations of the Rand Health Insurance

Experiment 6

2-A Health Insurance premiums 15

2-B Balance Billing 16

3-A The Sources of Information on Health Status Used in

the Rand Health Insurance Experiment 31

3-B The Risk of Dying Related to Patient

Cost-Sharing 33

Tables

1-1 Elements of Out-of-Pocket Spending in EmploymentBased Health Coverage 4

1-2 Patient Cost-Sharing: Conventional Wisdom vs. the

Evidence 5

. . Vlll
2-1 State Medicaid Programs Requiring Copayments for

Basic Physician, Clinic, and Hospital Services 20

3-1 Selected Studies on the Effects of Cost-Sharing on

Utilization, Expenditures, and Health 24

3-2 Summary of the Significant Differences Between

Rand Health Insurance Experiment Plans in the

Predicted Probability of an Episode of Care 28

3-3 Medical Effectiveness Groupings Used in the Rand

Health Insurance Experiment 30

APPENDIXES

A Overview of Technology, Insurance, and the Health

Care System 37

B Method of the Study 4 0

C Acknowledgements 41

D Selected Additional Research on the Effects of

Patient Cost-Sharing on the Use and Cost of

Health Care 43

E Abbreviations and Glossary of Terms 47

REFERENCES 51

INDEX 57

ix
Summary

A

s reform of the Nation’s health care system has risen to

the top of the domestic policy agenda, the issue of benefit

packages has increased in importance. Clearly, the scope

and depth of services that are covered in any health

insurance scheme can have a tremendous impact on how much

health care people obtain, on the costs to the system, and,

ultimately, on the health of the Nation’s people. To provide

Americans with an optimal level of care, at a reasonable cost,

policymakers at all levels have been rethinking traditional

approaches to benefit design and considering the merits of using

explicit scientific criteria to more clearly define the benefit

stfucture.

This background paper is one of a series of publications on

benefit design in health care reform being issued as part of the

Office of Technology Assessment’s (OTA) assessment, Technology, Insurance, and the Health Care System. It examines the

health services and economics literature to learn what is known

about how patient cost-sharing affects the use of health care

services, expenditures, and, ultimately, health outcomes. The

focus is on basic physician and hospital care for services not

typically related to mental and substance abuse disorders.l This

chapter provides a summary of OTA’s findings. Chapter 2 begins

with a brief review of the philosophy behind patient cost-sharing

and includes a discussion of current trends in private and publicly

financed health coverage. Chapter 3 reviews the lessons and

limitations of the Rand Health Insurance Experiment (HIE), the

most valuable cost-sharing research available. An appendix

L I

1 Also see OTA’s “Pharmaceutical R&D: Costs, Risks, and Rewards, ’ for information

on cost-sharing in prescription drug coverage (79). Prescription drug coverage is not

within the scope of this paper.

1
2 I Benefit Design: Patient Cost-Sharing

presents the findings of selected studies that have

examined the actual imposition of cost-sharing in

various settings. (The other publications in the

Benefit Design Series are described in box l-A.)

The overall assessment is being conducted in

response to a request from the Senate Committee

on Labor and Human Resources (Senator Edward

M. Kennedy, Chairman), which was endorsed by

the House Committee on Energy and Commerce

(Congressman John D. Dingell, Chairman), the

House Committee on Ways and Means Subcommittee on Health (then-Ranking Minority Member Willis D. Gradison), and Senator Charles

Grassley, a member of OTA’s Technology Assessment Board. Chairman Dingell asked OTA to

assess the extent to which a minimum benefit

package could be designed based on information

about health effects and cost-effectiveness. Other

requesters agreed that this was an important

question and that OTA should address it by means

of an overall brief on the topic, as well as through

examinations of the evidence on clinical preventive services, mental health and substance abuse

treatment services, and patient cost-sharing.

WHAT IS PATIENT COST-SHARING?

Almost all Americans with health insurance

contribute to the premiums for their health

coverage and have varying levels of out-ofpocket responsibility when they visit a physician,

are hospitalized, or seek many other health care

services. Employers are increasingly using patient cost-sharing to control the health care costs

associated with plans they may offer to their

employees and also as an incentive to employees

to enroll in more tightly controlled managed-care

plans. Cost-sharing also continues to be a basic

feature of many health care reform proposals.

In traditional indemnity or fee-for-service (FFS)

health care plans, cost-sharing typically consists

of:

■ an initial deductible; 2

■ plus a percentage of covered expenses, referred

to as coinsurance; 3

● up to a maximum annual dollar amount.4

Members of health maintenance organizations

(HMOS) are rarely subject to deductibles or

coinsurance but often pay a flat copayment 5 for

primary care visits and sometimes for hospitalization.

This background paper focuses only on certain

forms of patient cost-sharing-those such as

deductibles, coinsurance, and copayments that

are based on a person’s actual use of health

services and that are typically levied at the time

services are received. Deductibles, coinsurance,

and copayments are designed, in part, to make

people ‘‘think twice” before seeking care and to

forgo the use of services that are expected to bring

little benefit. Premium costs serve a different

purpose than other cost-sharing mechanisms;

they do not directly affect how many services are

2 A deductible is the amount of covered health care expenses (e.g., $200, $500, $1,000) that must be incurred by the health plan enrollee

and his or her dependents before any health benefits become payable by the health plan. Deductible requirements apply to each individual in

a family for a specific time period (usually a year). Some plans specify deductibles after which no additional individual deductibles are

required; family deductibles are typically equivalent to two or three times the individual deductible.

3 Coinsurance refers to the freed percentage of covered expenses shared by a health plan and an enrollee after the deductible requirement

has been met. For example, an 80-20 coinsurance arrangement means That after the deductible is reached, 80 percent of covered expenses we

paid by the plan and 20 percent are paid by the person covered by the plan.

4 Such maximums are dollar limits on covered out-of-pocket expenses (e.g., $750 or $1,000) for deductible and coinsurance requirements

incurred by the health plan enrollee. Not all health plans place limits on enrollees’ out-of-pocket expenses.

5 Copayments are fixed-dollar fees that a health plan enrollee is required to pay for a covered service (e.g., $10 per office visit $3 per

prescription drug).
——

Chapter l-Summary | 3

Box l-A-Other Publications in the Office of Technology Assessment’s

Series on Benefit Design in Health Care Reform

● Benefit Design in Health Care: Report #1-Clinical Preventive Services (U.S. Congress, OTA, in

preparation for September 1993). This report describes how information on effectiveness and costeffectiveness might be used to design insurance benefit packages that might include clinical preventive

servoces. The scope of the report is limited to clinical preventive services for asymptomatic persons (i.e.,

individuals without symptoms). Evidence on selected clinical preventive services is reviewed. The review

covers most, but not all, services that might today be considered for inclusion in a benefit package, as well

as issues to be considered for future decisions on inclusion or exclusion.

● Benefit Design in Health Care Reform: #2 - Mental Health and Substance Abuse Treatment Services

(U.S. Congress, OTA, in preparation). This report has three goals. First, at the request of Congress, the report

addresses the question of whether mental health and substance abuse benefits should be in a core benefit

package, should there be such a package. Second, the report describes whether information on effectiveness

and cost-effectiveness could be used to select specfic types of mental health and substance abuse services

for coverage, and the limitations of using such information. And third, the report reviews information on the

effectiveness and cost-effectiveness of services for selected mental health and substance abuse conditions.

● Benifit Design in Health care Reform: Report #3--General Policy issues (U.S. Congress, OTA, in

preparation). This report uses the analyses in this background paper and the two publications listed above,

as well as other sources (e.g., U.S. Congress, OTA, Evaluation of the Oregon Medicaid Proposal, May 1992)

to gain insights into the possibilities and pitfalls associated with trying to design a benefit package based on

effectiveness and cost-effectiveness information, in relation to other critical factors, such as public

preferences and political considerations.

SOURCE: Office of Technology Assessment 1993.

purchased, but rather the amount and type of

insurance purchased.6

Discussions of cost-sharing policy typically

center on copayments, coinsurance, and deductibles, but insured individuals have other, sometimes substantial, out-of-pocket health care costs

(see table l-l). These include the liability for

physician fees that exceed the amount of reimbursement ‘‘allowed’ by the health plan, referred

to as “balance billing”; care received for uncovered preexisting conditions or during the waiting

period before an employee or dependent becomes

eligible for coverage; and frequently uncovered

services such as routine physicals, vision and

hearing care, experimental treatments, and

speech, physical, and occupational therapy.

SUMMARY OF FINDINGS

The folIowing discussion reviews 14 fundamental questions key to developing cost-sharing

policy. The first six questions are discussed in the

context of the cost-sharing literature, emphasizing the lessons and limitations of the literature

the Rand Health Insurance Experiment (HIE) in

particular. OTA found that the HIE provides the

most valuable research available concerning the

use effects of cost-sharing and is the only source

examining the health implications of costsharing. The HIE, closely examined, challenges

commonly held notions about cost-sharing (see

table 1-2). It also offers some fundamental lessons

6 Nevertheless there is a relationship between premiums and other forms of cost-sharing. If a purchaser faces a choice between higher

premiums with limited cost-sharing and lower premiums with high cost-sharing, he or she may choose to purchase the less expensive policy

with higher deductibles and copayments or coinsurance.
4 | Benefit Design: Patient Cost-Sharing

Table l-l—Elements of Out-of Pocket Spending in Empioyment-Based Health Coverage

premiums + Cost-sharing for covered benefits

. deductibles ●

. colnsuranoe

● copayments b

● balance billingb

●

●

●

●

●

●

●

●

●

●

●

+ Coverage excluslonss = Total out-of-pocket spending

treatment for uncovered preexisting

conditions

many preventive services (e.g., wellbaby care, well-child care, adult

physicals)

prenatal and maternity care for nonspouse dependents

services provided during new employee waiting periods

hospital stays beyond an approved

length of stay

dental services

vision care

hearing aids

speech, physical, and occupational

therapy

rehabilitation care

infertility (e.g., in vitro fertilization)

voluntary sterilization

experimental treatments (e.g., some

AIDS drugs, autologous bone marrow

transplants for breast cancer)

cosmetic surgery

a includes ~mon ex~usions that are sometimes but typically not covered by employer-sponsored health plans. Based on surveys ~d@d by

the Health Insurance Association of America (1 992), KPMG Peat Marwick(1992), and the Department of Labor Bureau of Labor Statistics (1993).

b ~Ian@ billing imlu~s the pm~&~s charges that ex~~ the health plan’s “usual or C@Onl@’ arnwnt for the billed services.

SOURCE: Office of Tdnology Assessment, 1993.

about the impact of patient cost-sharing on the use

of health care services in a generally healthy,

nonelderly population, but the significant limitations of the experiment should be acknowledged

(see box l-B).

The final eight questions are also addressed

here because of their importance to cost-sharing

policy; they are reviewed only briefly because the

available literature provides little relevant wisdom and OTA did not examine these issues in

depth.

Fundamental Issues Related to

Cost-Sharing

1. Does cost-sharing reduce utilization by

promoting the use of more cost-effective, appropriate care and by discouraging the use of

unnecessary services?

It now seems obvious, but the HIE and other

cost-sharing literature have plainly demonstrated

that, on average, insured individuals seek medical

attention less often when they have to pay an

out-of-pocket portion of the cost.

Although it is often argued that cost-sharing

motivates people to seek information and make

better decisions about their health care (i.e., to

avoid the frivolous use of care), the HIE offers no

supporting evidence for this. Instead it suggests

that cost-sharing is a rather crude instrument

for matching health care services with health

needs. In fact, the experiment found that coinsurance deters individuals from seeking all types of

care, even potentially effective treatment.

In addition, the HIE confirms the power of the

health care provider in determiningg the use of

health services. HIE participants in cost-sharing

plans were much less likely to seek medical
—-

Chapter l-Summary |5

Table 1-2—Patient Cost-Sharing: Conventional Wisdom vs. the Evidence

Conventional wisdom

. Cost-sharing reduces utilization

by promoting the use of more

cost+ffective, appropriate care

and by discouraging the use of

unnecessary services.

● Cost-sharing does not pose any

health risks.

● Cost-sharing reduces total

system-wide health care

spending.

 Eliminating cost-sharing encourages compliance with preventive care recommendations.

Evidence

No. The Rand Health Insurance Experiment (HIE) offers no supporting evidence for this

and, instead, suggests that cost-sharing Isa rather crude instrument for matching health

care services with health needs. Coinsurance deterred individuals from seeking all types

of care, even potentially effective treatment and appropriate hospitalizations. The HIE

also confirmed the power of the health care provider in determining demand for medical

care. HIE participants in cost-sharing plans were much less likely to seek medical

attention than others, but once they did, the amount and cost of their care was largely

unaffected by cost-sharing and apparently was determined principally by their physician,

The jury is out. The HIE health-related findings are inconclusive in many respects. They

do suggest, however, that some individuals, especially lower income persons in poor

health, may be harmed by cost-sharing. The HI E identified three instances in adults (i.e.,

diastolic blood pressure; the estimated risk of dying from any cause based on smoking

habits, cholesterol level, and systolic blood pressure; and corrected vision) and one in

Iow-incomme children (i.e., anemia) where cost-sharing harmed the average participant.

While this may suggest that the health risks of cost-sharing are minimal, this conclusion

is confounded by the HIE finding that potentially effective treatment and appropriate

hospitalizations were significantly deterred by cost-sharing, This conflict in the healthrelated results of the HIE may be due in part to the design of the experiment. For

example, the Rand researchers acknowledge that the sample size was too small to

measure how the experiment affected low-income chiidren and adults, adults with

chronic conditions such as cancer and rheumatoid arthritis, and children with chronic

diseases such as asthma, congenital anomalies, or with life-threatening conditions.

it is clear that coinsurance has a major Impact on expenditures, at least in the short term

and under the conditions of the HIE. The total annual medical expenditures of individuals

(i.e., insurer payments plus patients’ out-of-pocket costs for covered services) with no

rest-sharing in the HIE were 23 percent higher than those with a 25 percent coinsurance

rate, and 46 percent higher than those with a 95 percent rate. The Long term cost

implications of deterring the use of potentially effective health care services are not

known.

Yes, but not necessarily to recommended levels. Preventive care use in the HiE was well

below recommended levels in both the no-cost-sharing and cost-sharing plans.

Participants in cost-sharing plans were the least likely to use preventive care of any t ype

including annual physical examinations, Pap smears by women ages 45 to 65, and

immunizations among children under 7 years of age.

SOURCE: Office of Technology Assessment, 1993, based on W. Manning, J. Newhouse, N. Duan, et al. “Health Insurance and the Demand for

Medical Care: Evidence from a Randomized Experiment,” American Economic /review77(3):251 -277, 1987; K. Lohr, R. Brook, C. Kamberg, et al.,

“Use of Medical Care in the Rand Health Insurance Experiment: Diagnosis- and Service-specific Analyses in a Randomized Controlled Trial,”

contract report prepared for the U.S. Department of Health and Human Services, Contract No. 016B-80, Santa Monica, CA, December 1986; R.

Brook, J. Ware, Rogers, W. H., et al., “The Effect of Coinsurance on the Health of Adults: Results from the Rand Health Insurance Experiment,”

contract report prepared for the U.S. Department of Health and Human servises, Contract No. 016B-80, Santa Monica, CA, December 1984; E.

Keeler and J. Rolph, “How Cost Sharing Reduced Medical Spending of Participants in the Health Insurancx Experiment,” Jourmd of the American

Medica/Association 249(16):2220-2222, 1983; and N. Lurie, W. Manning, C. Peterson, et al,, “Preventive Care: Do We Practice What We Preach?”

American Journal of Pubfic Health 77(7):801-804, July 1987.

attention than others, but once they did, the 2. Does cost-sharing have health effects?

amount and cost of their care was largely Despite persistent press reports and convenunaffected by deductible or coinsurance re- tional wisdom to the contrary (see, for example,

quirements and apparently was determined pM- 54, 55), OTA finds that the health results of the

cipally by their physician or other health care HIE are largely inconclusive. The HIE findings

provider. do suggest, however, that some individuals,
6 I Benefit Design: Patient Cost-Sharing

Box I-B—Important Limitations of the Rand Health Insurance Experiment

The Rand Health Insurance Experiment (HIE) provides policymakers the richest source of information

available on the efects of patient cost-sharing. Nonetheless, there are limitiations to the experiment’s relevance

to today’s health reform deliberations. These limitations are not due to the shortcomings of the Rand designERS

but result largely from three factors: the dramatic changes in American health care delivery and financing since

the time of the experiment,l the relatively small size of the HIE study population, and the unique nature of the

health coverage provided to HIE participants. The most critical limitations are outlined below:

. The HIE was essentially a study of the effects of coinsurance on the average use of traditional, fee-for-service

medical care by generally healthy, nonelderly individuals who were either well- or very well-insured.

. The HIE health plans were atypically comprehensive; for example, prescription drugs and preventive care

were fully covered. HIE participants had complete freedom of choice of providers and there were no limits

on providers’ discretion to order services for patients-hardly typical of today’s increasingly restrictive

managed-care environment.

● The Rand researchers acknowledge that the sample size was too small to adequately measure how the

experiment affected low-income children and adults,2 adults with chrotic conditions such as cancer and

rheumatoid arthritis, and children with chronic diseases such as asthma, with congenital anomalies, or with

Iife-threatening conditions.

. All the participants in the experiment were protected by income-based limits on their out-of-pocket costs,

an approach to cost-sharing that was unique at the time of the experiment and remains rare today, Further,

this feature of the experiment probably moderated the effect of cost-sharing on low-incomeparticipants since

1 ti HIE WWJ COIMIUCtd from 1974 through 1982. ‘lhe design period of tie~occumd even earlier.

2 ~~~w ~-$~ ~ dew dfi~dy ~ tie VfiOUS Mri(j -w& ~difJws khdhtgWdtiwi~ my

incomes as great as two times the Federal poverty level (FP’L). The FPL was estimated to be $14,343 for a fkrnily of four in

1992 (83).

especially lower-income7 individuals in poor ever, three instances in which the average adult

health, may be harmed by the deterrent effects of

cost-sharing. In general, the HIE researchers

concluded that not having cost-sharing led to

more medical care, but they were unable to find

much evidence that, for the average participant,

more care led to better health outcomes. Nor did

they fmd much measurable harm from less care

among average participants. There were, howwith no cost-sharing was shown to experience

better health outcomes: diastolic blood pressure

improved significantly among participants with

hypertension; 8 the estimated risk of dying for

those who were at elevated risk wasreducedby 10

percent;9 ~d corrected vision @?I’0Vt3d @@Y

due to an increased number of eye exarninations.

Among children, the only measurable poor health

T The HIE working definitions of ‘low income’ or “poor” di.fferedacross the series of published Rand findings. In many of the HE reports,

‘‘low income’ was used to describe persons whose family incomes were at the bottom 20 percent of the HIt3 income distribution well below

the Federal poverty level. Because of sample size limitations, some important Rand analyses used a much broader definition of low income,

one that included a kuge segment of the population with family incomes as great as two times the Federal poverty level-equivalent to one

out of three nonelderly individuals (71.9 million people in the U. S.) in 1991.

8 Not having cost-sharing reduced diastolic blood pressure among clinically defined hypertensive HE participants by an average of 1.9 mm

Hg.

g The high-risk group included the 25 percent of the sample who were the least healthy, based on their initial levels of serum cholesterol,

blood pressure, and cigaxette smoking.
—..

Chapter l-Summary [ 7

they were the most likely to exceed their annual out-of-pocket cost ceiling, after which all covered services

became available with no cost-sharing.3

● Any possible long-term health effects of cost-sharing could not be identified led with confidence because

participants were followed for a maximum of five years.

● The HIE could not examine how providers might respond to national scale changes in patient cost-sharing.

This dynamic could have important cost implications if, for example, widespread increases in patient

cost-sharing diminished demand for health care services and providers responded by increasing their fees

or the volume of services they provide to their patients. On the other hand, expanding coverage to those who

are currently uninsured could generate demand for care that would more than compensate for the deterrent

effects of cost-sharing.

. Finally, the HIE and the cost-sharing literature in general offer almost no insight into how cost-sharing

influences use of care and health outcomes in a managed-care environment! In fact, the only peer-reviewed

cost-sharing studies on health maintenance organizations derive from a single staff model plan, the Group

Health Cooperative of Puget Sound, and these analyses do not assess health effects.5 This gap in our

knowledge is especially critical today as employers and other payers steadily persuade Americans to adopt

the strictures of managed care and as they also persuade HMOS to adopt cost-sharing in addition to other

means of trying to keep utilization low.

3~ maximum out-of-pocket liability was set at either 5 percen~ 10 percen~ or 15 percent of family income per year,

or no more than $1,000($750 in some sites). Note that anyone with afarnily income over $25,000 (in 1973 doffars) was excluded

from the experiment; inflating this by the change in median household income, this is the equivalent of approximately $78,(XM

in 1992 dollars.

4 me H~w~domly ~sign~ a group of people to an HMO to assess the effect of an HMO delivery Vsrem (which

did not require patient cost-sharing) on utilization and health outcomes, but that component of the study is not within the scope

of this report because there was no patient cost-sharing in the HMO.

5 These s~~es W= conduct~ by D. Cherkiq L. Grothaus, and H. Wagner (15,16) and Wew not Pm of the HE. See

appendix D for a review of this literature.

SOURCE: (Mce of Technology Assessment 1993.

outcome was found among low-income children thought to be “highly effective” but without any

with anemia.10 Low-income children who were at

highest risk of anemia were much less likely to

have anemia at the end of the study if they were

enrolled in a plan that did not require cost-sharing

than if they were in a cost-sharing plan. While

this limited set of health effects implies that

cost-sharing poses health risks to an average,

healthy population in only a few instances, this

conclusion is called into question by the HIE

finding (see #1 above) that coinsurance significantly kept individuals from potentially effective treatment, even hospitalizations that were

judged to be appropriate. How is it that

coinsurance substantially reduced the use of care

measurable harm? This may be due in part to the

design of the experiment (see box l-B). For

example, the Rand researchers acknowledge that

the sample size was too small to measure how the

experiment affected low-income children and

adults, adults with chronic conditions such as

cancer and rheumatoid arthritis, and children with

chronic diseases such as asthma, congenital

anomalies, or with life-threatening conditions.

In addition, the long-term health effects of

cost-sharing remain unknown. One example, the

HIE finding that coinsurance led to significant

reductions in Papanicolaou (Pap) smears and

immunizations, is enough to cast doubt on the

10 ~ most of the~@yses, c~l&en were defied to ~clude ~yone ~der the age of 14. No separate analyses of adolescents were

conducted.
8 I Benefit Design: Patient Cost-Sharing

conclusion that there was no long-term harm from

financial obstacles to these particular preventive

services.

3. Does cost-sharing help to control expenditures?

Coinsurance requirements substantially reduced

the total health care spending in the HIE by

keeping people out of the health care system

altogether.ll HIE participants with no cost-sharing

incurred 23 percent higher anual expenditures

than those who were subject to 25 percent

coinsurance, and 46 percent higher annual expenditures than those with 95 percent coinsurance.

However, the long-term cost implications of

deterring the use of potentially effective health

care services are not known.

4. How are individuals with low incomes

affected by cost-sharing requirements?

Cost-sharing was based in part on income in the

HIE and this feature of the experiment probably

moderated the effects of cost-sharing on lowerincome families. Nonetheless, even with the

income protections in the HIE health plans, the

Rand findings reveal a pattern of greater costsharing effects on HIE participants with lower

incomes, especially those in poor health. In many

of the Rand reports, persons with lower incomes

used care less often than those who were better off

financially, sometimes with striking results. For

example, the improvement in blood pressure

among those with hypertension was greatest for

those HIE participants with low incomes who

were in a no-cost-sharing plan and this improvement had significant mortality implications. In

addition, low-income adults who began the experiment in poor health, and were enrolled in a

plan with no cost-sharing, reported the largest

reduction in serious symptoms during the course

of the study .12

5. Do coinsurance requirements affect children differently?

The HIE found that, on average, coinsurance

had similar effects on children’s and adults’ use

and expenditures for outpatient care. In contrast,

while adults in the no-cost-sharing plan were

hospitalized at greater rates than others, the

absence of cost-sharing did not lead to more

pediatric hospitalizations except for children

under 5. Thus, the hospital-related findings suggest that there would be little risk of overutilization of hospital care by children 5 years old and

over, if children’s hospital stays were exempt

from patient cost-sharing. However, should outpatient cost-sharing be required of adults, the HIE

findings do not support different requirements for

children overall, with two important exceptions.

First, not having cost-sharing in the HIE led to

significantly higher use of any pediatric preventive service, especially immunizations among

children under age 7. In light of this finding,

eliminating cost-sharing for certain children’s

preventive services could be justified if prevention were a policy goal.

Second, the HIE findings reveal that coinsurance has a substantially stronger deterrent effect

among low-income children compared with others with greater financial resources in the HIE;

these low-income children included anyone under

age 14 with family incomes up to 200 percent of

the Federal poverty level. Special income protections for low-income children, as defined in the

Rand HIE, may be necessary to ensure their

access to basic, primary care.

6. How is the use of preventive services

affected by cost-sharing?13

A broad range of clinical preventive services

for asymptomatic individuals was fully covered

by the HIE health plans and subject to the same

I I Spnding includ~ all expenses reimbursed by the health plan to providers as well as out-of-pocket COStS borne by the pticipan~.

12 ~~ou~ tie HE demons~tes tie ~nefits of not having cost-sharing to some low-income individuals, studies of Medicaid kn&lCibeS

and other low-income groups also make clear that “free care” alone does not assure adequate access to care (58).

13 For a review of issues related to designing preventive health care hneflts, see “Benefit Design in Health Care Reform: Report

#l--Clinical Preventive Services,” (80).
—. .—— .——

Chapter l--Summary |9

deductible and coinsurance requirements as all

other health services. Consequently, the experiment offers several insights. First, requiring

coinsurance significantly reduced use of Pap

smears by women ages 45 to 65 and immunizations among young children. Second, despite the

higher use of preventive services in the no-costsharing plan, use of these services remained well

below recommended levels. Finally, even though

HIE participants in the no-cost-sharing plan had,

on average, an additional one to two physician

visits annually, this increased contact with their

doctor appeared to have no influence on their

smoking habits, weight, or cholesterol levels.

Other Questions and Pending Issues

Although available cost-sharing research provides limited insight into the following policy

questions, they are briefly reviewed here because

of their importance.

7. Are there specific services that should be

considered for possible exemption from costsharing?

If cost-sharing is required, current research

provides little evidence to support exemptions

from cost-sharing for any specific services other

than selected preventive services (see #6 above).

However, several categories of care might merit

cost-sharing exemptions or special consideration,

including prenatal, maternity care, and services

for the chronically ill, In addition, Brook has

argued that cost-sharing policy be used to promote higher rates of appropriate care by, for

example, waiving or reducing cost-sharing in

cases where medical care interventions have

clearly been demonstrated to be appropriate (10).

8. If cost-sharing is required, how can

individuals be shielded from the risk of financial hardship and catastrophic costs?

Maximums on out-of-pocket expenditures based

on income and limits on balance billing would

substantially lessen the risk of financial hardship

due to health care costs. There are no reports of

the extent to which balance billing contributes to

catastrophic health care costs. However, without

limits on balance billing, the public would remain

vulnerable to costs substantially in excess of their

health plan’s out-of-pocket maximum.

9. Does cost-sharing help reduce premium

requirements?

Patient cost-sharing clearly reduces overall

health expenditures and would thereby reduce

premium requirements, but the extent of savings

would depend on the type of cost-sharing mechanism and the amount. The reduction in premiums

would also depend, in part, on the administrative

complexity of the cost-sharing structure. If outof-pocket payments are allowed to vary substantially with income, type of service, or other

patient characteristics, the related administrative

costs could reduce any savings generated by a

drop in demand for services.

10. Is it administratively feasible to base

cost-sharing on income?

Although there are many supporters of incomebased cost-sharing, little attention has been paid

to the methods, logistics, and financial tradeoffs

of administering such a policy. Important questions remain unresolved: how to determine and

define income, how to account for changing

personal or economic circumstances that families

often encounter during a year (e.g., becoming

unemployed, changing jobs, getting married or

divorced), and whether the Federal income tax

system can be relied onto support the administration of cost-sharing by providing income data or

allowing for end-of-year tax credits or additional

cost-sharing payments. Also, if cost-sharing were

to be based on income, the HIE findings suggest

that a substantial proportion of the population

with family incomes above the Federal poverty

level may require special income protections to

ensure adequate access to care (see #4 above) .14

Administrative costs are likely to increase with

the complexity of the cost-sharing system and the

14 me F~er~ pove~ level was estimated to be $14,343 for a ftiy Of fOW ti 1992.
10 I Benefit Design: Patient Cost-Sharing

amount of information required to determine

patients’ out-of-pocket payments. Simplicity would

argue for flat, nominal copayments characteristic

of health maintenance organizations, yet such

nominal fees generate only minimal revenue that

would be futher offset by administrative costs.

11. Does cost-sharing improve the efficiency

of the health care system?

If efficiency implies that patient cost-sharing

alone would make the system less wasteful, the

answer is probably no. Coinsurance requirements

would reduce total expenditures and the volume

of services by deterring people from seeking

medical attention altogether, although this would

have no effect on overall efficiency. Some also

argue that coinsurance and deductibles help

minimize fraud and abuse by motivating patients

to scrutinize the charges they are obligated to pay

(75).

12. Is cost-sharing equitable?

Equity in health coverage may be viewed in

several ways. ‘‘Horizontal equity’ would require

that individuals with the same income face the

same economic burden. “Vertical equity” implies that persons with greater resources should

bear a greater financial burden than others (71).

Equity in access to care calls for the allocation of

services on the basis of need, suggesting inequity

when a person’s cost-sharing requirements are an

important predictor of his or her access to care (3).

The HIE results indicate that in order to facilitate

equitable access to potentially effective health

care services, cost-sharing should be based on

income. Compared with others who had higher

family incomes, the deterrent effect of coinsurance was substantially stronger among lowincome children and adults across a wide range of

preventive (including well-child care, general

adult medical examinations, and Pap smears),

acute (including care identified as ‘‘highly effective”), and chronic care services. Among the

lower-income adults at elevated risk, the absence

of cost-sharing appeared to yield substantial

benefits in improved vision, blood pressure, and

even risk of dying.

Equity concerns can also be voiced for those

who have chronic health problems and are repeatedly required to pay each year’s maximum

cost-sharing obligation.

13. Is cost-sharing generally acceptable to

the public?

Some polling data indicate that many consumers commonly perceive cost-sharing to be more

the problem than the solution to the health care

crisis and that they are particularly worried about

rising out-of-pocket expenses, confirming billing

procedures, and unforeseen restrictions in coverage (35). It could be that personal preferences

regarding cost-sharing could depend, to a great

extent, on persons’ economic status, their knowledge of their risk for incurring health care costs,

their attitudes toward financial risk, and their past

experience with the health care system (e.g.,

whether they have ever experienced substantial

out-of-pocket costs) (53).

14. If cost-sharing is required, what is the

ideal arrangement?

Unfortunately, the literature offers little guidance for developing specific cost-sharing formulae. The search for the ideal form and amount of

cost-sharing cannot be separated from efforts to

plan and reform the overall structure of health

plan coverage and delivery. There is no obvious,

magic formula for calculating precise recommended deductible, coinsurance, and out-ofpocket maximum levels in fee-for-service or

managed health care. No one solution would fit

all approaches to financing and health care

delivery nor would it be equitable in all circumstances.

CONCLUSIONS

The cost-sharing literature makes very clear a

basic lesson of human nature: people will use

services less often when they have to pay for

them. However, conventional wisdom to the

contray, there is no evidence that people make

better choices and decisions about their health

care when they bear some of the cost. In the Rand
Chapter l-Summary | 11

ing all types of care, even potentially effective

treatment and appropriate hospitalizations.

The overriding power of the health care provider in determining the use of health services

was also made clear, at least within the circumstances of the Rand HIE. In the HIE, once an

individual sought medical attention, the amount

and cost of their care was largely unaffected by

cost-sharing and apparently was determined Principally by their physician.

Policymakers can be less certain about the

health implications of cost-sharing but the HIE

findings suggest that, if health effects are a

concern, Congress should be cautious about the

extent to which cost-sharing is relied onto control

costs, especially for sick, low-income individuals.

These individuals are the most likely to benefit

from receiving health care services at no out-ofpocket cost and the most likely to be harmed by

patient cost-sharing requirements. Policymakers

should also be aware that there is no evidence to

suggest that cost-sharing’s greater deterrent effect

on those with lower incomes ceases at a rigid

dollar income threshold.

Finally, the lack of information on how patient

cost-sharing affects children and adults in poor

health, regardless of their income, is worrisome

and merits further investigation.
. . ——— -----

P

atient cost-sharing

whether it should

reform is a critical

cost-sharing? Do

Background

is common in health insurance and

remain a feature of national health

issue. What are the effects of patient

upfront copayments affect health

outcomes because they discourage the use of health services?

Does not having cost-sharing lead to unnecessary, frivolous

care? Is there evidence that patients really do make better choices

when they bear some of the costs of their care? Which

cost- sharing mechanisms work best? If cost-sharing is warranted,

should poor people, people with chronic illnesses, children,

pregnant women, or others be shielded from it? These are some

of the fundamental questions that relate to cost-sharing policy in

all models of health reform, whether they be managed competition, single payer, or other approaches.

WHY COST-SHARING?

Patient cost-sharing has been increasingly viewed by many

employers and health benefit managers as an essential deterrent

to health services and as a way to minimize premium price

increases (30,40). For those who believe that harnessing competitive forces is key to health care reform, requiring patients to

share in the costs of their health care is based on perhaps one of

the most fundamental concepts of competition: that consumers

make better choices when they bear some of the financial cost of

their decisions (56).

Patient cost-sharing has long been a standard feature of

conventional fee-for-service (FFS) health care delivery,l but the

1 Xn fee-for-service health care, physicians and other providers bill separately for each

patient encounter or semice rendered. This system contrasts with salary, per capia or

other prepayment systems, where thepayrnent to the practitioner does not change with the

number of services actually rendered.

13

2

—
14 I Benefit Design: Patient Cost-Sharing

cost-sharing philosophy of health maintenance

organizations (HMOS) has, until recently, been

decidedly different.2 In all HMOS, for example,

health plan members must obtain care within the

HMO system to be covered and HMO contract

physicians are at financial risk for the care

provided to enrolled members. In such a setting,

extensive cost-sharing has typically been viewed

as an unnecessary barrier to care because overall

utilization and access to specialty care are so

tightly controlled. Yet, recently, employers have

demanded that even the most tightly structured

HMOS require at least nominal copayments to

futher reduce access to primary care providers

and to help lessen premium requirements (14,59).

Advocates of increasing the number of people

in HMOS and other managed care plans use

differntial cost-sharing as a ‘‘carrot and stick”;

for example, some health plans structure nominal

out-of-pocket payments to encourage consumers

to ‘‘sample” managed care with its more limited

choice of providers, while relatively high costsharing requirements are used to persuade people

to surrender their attachment to fee-for-service

medicine and unlimited freedom of choice of

providers (31,40). Many reform proposals also

view cost-sharing as a way to encourage or

discourage the use of specific health services; for

example, by mandating little or no cost-sharing

for some or all preventive services and requiring

high out-of-pocket payments for inappropriate

use of the emergency room (for example, in the

102d Congress H.R. 3205, H.R. 5514, and H.R.

5502; refs. 1 and 2).

Still others reject cost-sharing as an ill-advised

financial obstacle to early diagnosis and treatment (for example, in the 102d Congress S. 2320,

H.R. 1300; 34).

WHAT ARE THE OUT-OF-POCKET COSTS

OF INSURED PEOPLE?

Today, almost all Americans with health insurance contribute to the premiums for their health

insurance and have varying levels of out-ofpocket responsibility when they visit a physician,

are hospitalized, or seek many other health care

services (see box 2-A). In traditional indemnity3

or FFS health care plans, cost-sharing beyond

premiums typically consists of:

an initial dedictob; 4

plus a percentage of covered expenses, referred

to as coinsurance; 5

up to a maximum annual dollar amount.6

In addition, covered benefits are usually subject to a lifetime maximum after which the

insured person is fully liable for any health care

costs.

Members of health maintenance organizations

(HMO) are rarely subject to deductibles or

coinsurance but often must pay a flat copayment7

2 Health maintenance organizations are organizations tha~ in return for prospective per capita (cavitation) payments, act as both insurer and

provider of .sped3ed health care services. Prepaid group practices and independent practice associations (WAS) are types of HMOS.

3 Traditional indemnity plans are fee-for-service health plans that typically reimburse health care providers on a ‘‘reasonable and

customary” basis or as billed.

d A deductible is the amount of covered health care expenses (e.g., $200, $500, $1,000) that must be incurred by the health plan enrollee

and his or her dependents before any health benefits become payable by the health plan. Deductible requirements apply to each individual in

a family for a specitlc time period (usually a year). Some plans specify fumily deductibles after which no additional individual deductibles are

required; family deductibles are typically equivalent to two or three times the individual deductible.

5 Coinsurance refers to the freed percentage of covered expenses shared by a health plan and an enrollee after the deductible requirement

has been met. For example, an 80-20 coinsurance arrangement means tha~ after the deductible is reached, 80 percent of covered expenses are

paid by the plan and 20 percent are paid by the person covered by the plan.

6 Such maximums are dollar limits on covered out-of-pocket expenses (e.g., $750 or $1,000) for deductible and coinsurance requirements

incurred by the health plan enrollee. Not all health plans place limits on enrollees’ out-of-pocket expenses.

7 Copayments are fixed dollar amounts that a health plan enrollee is required to pay for a covered service (e.g., $10 per office visit $3 per

prescription drug).
——.

Chapter 2–Background |15

Box 2-A—Health Insurance Premiums

This background paper focuses only on certain forms of patient cost-sharing-those such as deductibles and

coinsurance that are based on a person’s actual use of medical cam services and that are typically levied at the

time services are received. Deductibles, coinsurance, and copayments are designed, in part, to make people ‘think

twice" before seeking care and to forgo the use of services that are expected to bring little benefit. Premium costs

serve a different purpose; they do not directly affect how many services are purchased, but rather the amount and

type of insurance purchased. Nevertheless these two types of cost-sharing are related. If a purchaser faces a choice

between higher premiums with limited cost-sharing and lower premiums with high cost-sharing, he or she may

choose to purchase the less expensive policy with higher deductibles and copayments or coinsurance.

Premiums are a major component of total consumer spending for health care. In 1990, it was estimated that

U.S. households spent a total of $224.7 billion on health care expenses; 19 percent or $42.6 billion were payments

by consumers for private health insurance premiums (42).

There is little agreement on the degree to which higher premiums reduce the purchase of insurance. Estimates

range from a very low price responsiveness—where a 10 percent increase in premiums reduces the purchase of

insurance by only 1.6 percent—to very high estimates, in which a 10 percent premium increase reduces insurance

purchase by 28 percent (48).

SOURCE: Office of Technology Assessment 1993.

for primary care visits and sometimes for hospi- pocket spending by people under 65 with private

talization (Group Health Association of America

(28)).

In addition to cost-sharing for covered services,

other health care costs are commonly borne by

those with private and public health insurance

(see table 1-1 presented earlier in this report).

These include the difference between the provider’s bill and the health plan’s approved

reimbursement for a covered service or ‘‘balance

billing” (see box 2-B); care received for uncovered preexisting conditions or during the waiting

period before an employee or dependent becomes

eligible for coverage; and frequently uncovered

services such as preventive services, vision and

hearing care, experimental treatments, and

speech, physical, and occupational therapy.

The National Medical Expenditure Survey

conducted by the Agency for Health Care Policy

and Research provides estimates of total out-ofhealth insurance, but the proportion of these

dollars paid to meet health plan cost-sharing

requirements is not known. In 1987, the privately

insured population under age 65 spent in aggregate (excluding premium expenses) approximately $51.9 billion out-of-pocket for health care

services; this equalled about 28 percent of their

total cost of care (85).8 On an individual basis, the

proportion of health care expenses paid by

insurers and the insured is split almost evenly: on

average in 1987, people under 65 with private

health insurance paid about one-half of their

health expenses and their insurers paid most of the

balance (86).9

Current Trends in Patient Cost-Sharing

Publicly and privately funded surveys of employment-based health plans are the principal

8 This figure includes expenses for inpatient hospital and physician services, ambulatory physician and nonphysician services including

vision care and telephone calls with a charge, prescribed medicines, home health care services, dental services, and medical equipment

purchases and rentals (85). Over-the-counter medications are not included.

g In addition to payments by private health insurers, an unknown proportion of health care spending for privately insured people under age

65 is paid by other sources such as Medicare, Medicaid, other public programs, worker’s compensatio~ and private charity care (86).
16 I Benefit Design: Patient Cost-Sharing

Box 2-B—Balance Billing

Balance billing is an important component of patient cost-sharing that is often overlooked in analyses of

cost-sharing policy. There are no data estimating the dollar value of consumer payments for balance billing but

the burden on individuals can be considerable.

Balance billing works as folows. In fee-for-service health insurance, when someone submits a health claim,

the insurer first determines the expenses on the claim that are “eligible” for reimbursement. The eligible

expenses, often referred to as the ‘‘usual or customary amount,’ are those that are ultimely applied to

coinsurance and deductible requirements to determine patients’ out-of-pocket liabilities. The isured individual

is responsible for 100 percent of balance billing, i.e., provider charges that exceed the usual or customary amount

regardless of any coinsurance or deductible requirements. The insurer compares the charges on each insurance

claim with the amount it usually allows for the billed services. Each insurer determines the usual and customary

charges based on local fees for services and procedures. The usual and customary proportion of physicians’

charges accepted by insurers varies and is often unknown to patients (18). For example, some companies set

reimbursement at the 90th percentile of the average charges for a particular service in the provider’s geographic

area while others use the 75th percentile.

Thus, as illustrated in the example below, if after meeting deductible requirements, the coinsurance rate is

80 percent and the health insurance plan reimburses physician charges at the 75th percentile, the insured patient

would actually be liable for 40 percent of the physician’s fees.

Physician fee = $100

Usual and customary amount (at 75th percentile) = .75x $100= $75.00

Balance billing = $100- $75.00= $25.00

Insurer’s total cost = $60.00

(.80 coinsurance X $75,00)

Patient’s out-of-pocket cost = $40.00

(.20 coinsurance X $75.00) + $25 balance billing

Patient share of total cost= $40/$100=40 percent

T’here is no limit on balance billing in private health insurance. Under Medicare, physicians are prohibited

from charging Medicare patients more than 115 percent of the approved Medicare fee schedule. Some reform

proposals have argued for eliminating or limiting balance billing so that consumers are protected from excessive

out-of-pocket expenses and are better able to predict the costs of their care (8,50).

SOURCE: Office of Technology Assessment, 1993.

sources of data on the cost-sharing features of the extent of required cost-sharing in individual or

private health insurance, but no one survey

provides a wholly representative picture of the

health coverage provided to the Nation’s

workforce. Further, the details of sampling and

question construction in privately-funded surveys

are typically proprietary (i.e., not open to public

scrutiny) and have been criticized on methodological grounds. In addition, little is known about

nonemployment-sponsored health plans (25). Nonetheless, the available surveys clearly show that

employer-sponsored health insurance plans are

increasingly using deductibles, coinsurance, and

copayments to deter utilization, minimize premium requirements, increase consumer costconsciousness, and promote alternative delivery

systems such as HMOS, preferred provider organ-
Chapter 2–Background I 17

izations (PPOs), and point of service (POS) plans10

(32,40,76,89).

This trend toward increasing reliance on patient cost-sharing is further reflected in a 1992

survey of business executives; it found that 61

percent of respondents reported that they perceived sharing costs with employees to be a very

effective cost-control measure (30). A large

proportion of respondents (i.e., up to 47 percent)

also planned to have their company’s employees

bear the increasing costs of health benefits in

1991 and 1992. In light of these plans, it should

also be pointed out that efforts by employers to

shift costs to the employee are frequently a

contentious issue in labor-management disputes

(76).11

Fee-For-Service Coverage

Deductibles

In 1991, the average individual deductible in

traditional FFS medium and large establishments

was $198 per year (89). Although there appears to

be a trend among some employers to base

deductible requirements on wages, income-based

arrangements are still relatively uncommon. In

1991,5 percent of participants in medium or large

employer health plans were subject to deductibles

that varied with their wages (89).

Coinsurance

Coinsurance rates of 80 percent insurancefinanced and 20 percent employee-financed are

the most prevalent in employer-based plans of all

sizes and are typically applied to both ambulatory

and inpatient care (72,88,89). The 80-20 combination has been the predominant coinsurance rate

for some time, although not until the late 1980s

did most plans also require cost-sharing for the

entire portion of a hospital stay (87).

Annual Limits on Out-of-Pocket Expenses12

In FFS plans, coinsurance is typically required

only up to some maximum annual limit after

which allowed charges for covered benefits

become fully reimbursable. Dollar limits on

out-of-pocket expenses vary; in 1991, the most

common individual limits ranged from $750 to

$1,000 for participants in health plans sponsored

by medium and large firms.13 Still, as many as 11

percent of participants in these health plans had

no limit at all on their out-of-pocket expenses

(89).

The cost to insurers of including an annual

out-of-pocket limit is minimal because most

insureds’ expenses do not reach their limit (73).

The Congressional Research Service has, for

example, calculated that in 1988 a typical annual

premium would have increased by only 0.7

percent if it included a $1,000 annual out-ofpocket maximum as compared to no limit (73).

Maximum Lifetime Benefit

Most indemnity plans place a limit on the

amount they will reimburse an insured person for

medical expenses over a lifetime. In 1991, threelo me tem prefem~ prO~&r organization (PPO) refers to a variety of different insurance arrangements under wtich pki.D enrollees who

choose to obtain medical care from a specfled group of ‘preferred’ providers receive certain advantages, such as reduced cost-sharing charges.

PPO providers typically furnish services at lower than usual fees inreturnfor prompt payment by the health insurance plan and a certain assured

volume of patients. Point-of-service (KM) plans are a hybrid form of managed-care plan based on a mixture of cavitation and fee-for-semice

(FFS) payment arrangements. P(X plans permit health plan enrollees to choose a FFS, PPO, or HMO provider at the time he or she seeks

services (rather than at the time they choose [o enroll in a health plan).

1 I ~ 1989, tie IM@ s~e isme was he~~ benefi~, awou~g for @ percent of work stoppages and 78 percent of s-g worketx (76).

12 Jjmi~ on Out-of-vket exwmes ~su~ly qply to the sum of d~uctible ~d coinsurance (e.g., 20 percent of dowed charges) payInentS

incurred by the insured for allowed charges for covered benefits; balance billing payments are never limited in private health plans. Dental and

mental health benefits are usually subject to separate limitations. Individual and family limits may be separate.

13 ~e~do~~ tits ~ply only tO out-of-pocket coinsurance payments.
18 I Benefit Design: Patient Cost-Sharing

quarters of participants in medium and large

firms’ health plans that required cost-sharing had

a lifetime maximum, most commonly set at $1

million (89).

Health Maintenance Organizations (HMOS)

The cost-sharing features of HMOs mirror both

industry philosophy and government mandates

established in the HMO Act of 1973 (Public Law

93-222) and its amendments in 1988 (Public Law

100-51) (28). The HMO Act of 1973 established

guidelines that set limits on the type and extent of

patient cost-sharing in health maintenance organizations. Although Federal HMO requirements do

not apply to all HMOs, they determine the

cost-sharing burden of the three out of four HMO

enrollees who belong to federally qualified HMOs

(29).14 Among federally qualified HMOs, copayments may not exceed 50 percent of the total cost

of any individual service and, in the aggregate,

copayments may not exceed more than 20 percent

of the cost of providing all “basic health services” as defined by Federal regulations (42 CFR

417.104(4)(i); 42 USCA S300e-1(1)).15 In addition, an individual’s total copayment charges may

not exceed 200 percent of the total annual

premium cost that would be required for coverage

with no copayments. Deductibles for basic benefits are prohibited except for open-ended arrangements such as point-of-service plans (42 USCA

S300e(b)(l)).

Copayments are the most common cost- sharing feature of HMO coverage and are used most

often by Independent Practice Associations (IPAs)

(28). 16 Overall, in 1991, 72 percent of HMO

enrollees were required to pay a fixed copayment

for primary care visits. Among the best-selling

packages

17 offered by HMO, primary care visit`

copayments ranged from $2 to $15 in 1991 (28).

Because access to physician specialists in HMOs

is typically controlled by ‘‘gatekeeper” primary

care providers, copayments for specialty care are

usually not required (53).

In 1991, three-quarters of HMO enrollees were

not subject to cost-sharing when hospitalized,

according to a survey of HMOs by the Group

Health Association of America (28). Copayments

for hospital care were used most often in IPAmodel HMOs but are also used in some staffmodel HMOS.

18

Some reform proposals apparently leave the

door open to types and levels of cost-sharing that

have traditionally been associated with fee-forservice, indemnity health insurance. For example,

Sheils and his colleagues analyzed various impacts of high-and low-cost-sharing for managed

care under a managed competition model of

reform (69). In their high-cost-sharing scenario,

individuals would face a $250 deductible ($500

per family) with 20 percent coinsurance up to a

maximum out-of-pocket of $2,000 ($3,000 per

family).

14A Fe&~y qfid HMO is one that has&en det ermined by the U.S. Department of HeaIth and Human Services to meet the standards

set forth in Title XIII of the Public Health Service Acl in such areas as fmncial and aWstrative stability, quality, scope of services covere~

and rate-setting practices.

15 F~e~ s~~ and re@tions define HM() kic he~ti services to include: physician services (including COnSUhant and referral Servi@S

by physicians); inpatient and outpatient hospital semices; short-term rehabilitation if it is expected to result in significant improvement of the

member’s condition within two months; medically necessary emergency services; at least 20 necessary and appropriate evaluative and/or crisis

intervention mental health visits; diagnosis, medical treatment and referral services for abuse of or addiction to alcohol and drugs; diagnostic

laboratory and diagnostic and therapeutic radiologic services; home health services; and certain preventive health services.

IS ~de~dentfiactice ASSOCiatiOnS (lFAs) are a form of HMO in which participating physicians mmainintheir indqmdmt OfflCe sett@S

seeing both enrollees of the IPA and patients covered by other health insurance plans. Participating physicians may be reimbursed by the IPA

on a fee-for-semice or a cavitation basis.

17 me ~oup H@~ ~mce &m~tion of America usm “~st.sel~ pac~ge’ in its industry aIM@S to d~tibe @ fwtUres of the

typical HMO benefit package. On average, 69 percent of total HMO enrollment is represented in the best-selling packages (28).

18 ~ s~ff ~~el ~os, he majon~ of he~~ pl~ ~~ees ~c~ed for by physici~ who m typically W&.&d S@ff of the HMO.
Chapter 2–Background |19

Other Private Health Insurance

Arrangements

In recent years, many employment-based

health plans have initiated various hybrid insurance arrangements. For example, preferred provider organizations (PPOs) selectively contract

with providers for discounted services but pay

them on a traditional fee-for-service basis. Employees who enroll in PPOs are often exempt

from deductibles or have reduced cost-sharing

compared with those who choose more traditional

health plans with unrestricted choice of providers

(31,40). Point of Service (POS) plans combine the

features of FFS and HMO health plans and are

among the fastest growing of ‘‘hybrid’ delivery

systems (22). POS plans allow enrollees considerable freedom of choice in selecting a provider

but the choice is made in the context of costsharing requirements that promote HMOS over

PPOs and discourage traditional FFS care overall.

In a typical POS arrangement, HMO care is

available at little or no cost at the point of service,

PPO care is offered at reduced cost-sharing rates,

and traditional FFS care is subject to standard or

even higher than average deductible and coinsurance requirements.

Yet the reductions in out-of-pocket cost- sharing offered to PPO health plan members who use

preferred providers may not be cost saving to the

insurer and employer. Although controlled studies are lacking, reports are increasing that, despite

negotiated discounts with preferred providers,

little or no savings can be found when coinsurance requirements are waived or reduced for the

use of FFS preferred providers (20,26,33,92).

Publicly Funded Plans

Medicare

Cost-sharing is a basic feature of Medicare

coverage. In addition, unlike most health plans,

Medicare has no maximum liability on out-ofpocket expenses (61). However, only 20 percent

of Medicare beneficiaries actually have to pay

deductibles and coinsurance because they are

either covered by a supplemental Medigap plan or

are dually eligible for Medicaid benefits19 (47).

As of 1992, Medicare beneficiaries were required to pay a $652 deductible on the frost

hospital admission in a benefit period20 and $163

daily copayment for hospitilal stays of 61 to 90

days (84). A $326 daily copayment is also

required if, during the course of a benefit period,

total hospital stays exceed 90 days. The Medicare

inpatient hospital deductible is updated annually.

Medicare coverage for physician services is

optional under Part B coverage and requires a

separate premium. For those who purchase Part B

benefits, Medicare requires 20 percent coinsurance after a $100 annual deductible. Balance

billing is limited in the Medicare program;

Federal law does not allow physicians to charge

Medicare patients more than 115 percent of the

Medicare fee schedule.

Unlike private insurance plans which have

steadily increased cost-sharing in recent years,

Medicare has implemented few changes in costsharing requirements (61). During the 1990 budget

reconciliation hearings, major increases in Medicare premiums and cost-sharing were dropped as

a result of the much publicized opposition by

elderly people.

19 Feder~ M~ic~d law reqfies states to pay the coinsurance for Medicare participants with family incomes under 100 WrCent of tie

Federal poverty level (74).

m M~cme Part A ~nefits are paid on the basis of benefit periods. A Medicare benefit period is defined as beginning with tk fmt by a

beneficiary receives Medicare covered inpatient hospital services (84). It ends when the beneficirq has been out of a hospital or sldlled nursing

facility (SNF) for 60 days in a row. It also ends if the beneficiary remains in a SNF but does not receive skilled care there for 60 days in a row.

A new benefit period starts when inpatient hospital services are again required. The number of benefit periods is unlimited.
20 I Benefit Design: Patient Cost-Sharing

Table 2-l-State Medicaid Programs Requiring Copayments for Basic Physician, Clinic

and Hospital Services, as of Jan. 1, 1991

State Service category Copayment amounta,b

—

Arizona

California

Coloradod

Illinois

Kansas

Mississippi

Missouri

Montana

South Dakota

Virginia

Alabama Federally qualified health centers

Inpatient hospital

Outpatient hospitatc

Physician off ice visits (excluding optometric)

Rural health ciinicsC

office visits

Elective surgery

Nonemergency use of emergency room

Emergency room (inappropriate use)

Outpatient hospital

Physician services

Inpatient hospital

Outpatient hospital

Physician visits

Rural health clinics

Inpatient hospital

Ambulatory surgery center services

Hospital:

inpatient

nonemergency outpatient

outpatient surgery

Physician office visit

Hospital:

emergency room

inpatient

Rural health clinic-office visit

Hospital:

Inpatient

outpatient

Clinic Services

Hospital:

inpatient

outpatient

Physician

North Carolina Hospital-outpatient

Physician

Pennsylvania Hospital:

inpatient

nonemergency service in a hospital

emergency room

Ambulatory surgical center

Hospital-outpatient (except lab)

Physician

Clinic

Hospital:

inpatient

outpatient, nonemergency

Physician

$1.00

50.00/admksion

3.00

1.00

1.00

1.00

5.00

5.00

5.00

1.00

2.00

15.oo/stay

3.00

2.00

2.00

Variese

3.00

25.00/admission

1.00

3.00

1,00

2.00

5.00

1.00

1 O.00/admission

3.00

1.00

3.00/day f

1.00

1.00

1.00

0.50

3.00/da~

Variesh

Variesh

Varlesl

Varlesl

3.00

1 .Ooj’k

30.00/admission

2.00

1.00
—.

Chapter 2–Background

Table 2-l-State Medicaid Programs Requiring Copayments for Basic Physician, Clinic

and Hospital Services, as of Jan. 1, 1991-Continued

I 21

State Service category Copayment amount

Wisconsin Hospital:

inpatient, general 3.00/da~

outpatient 3.00

surgery 3.00

Physician visits:m

cunsultaion 3.00

diagnostic procedure in office 1.00

office 1.00

outpatient hospital 1.00

a unless otherwise spe~f id, ~payment amounts are p~d perserv~e visit. They ap~y to all population groups allowed under the law 8XCept WhW8

otherwise noted.

b States may not impse these fees on ~tWorically or m~i=lly needy persons un~r a variety of circumstances, including: SerViC6S pfddd to

children; pregnancy-related, emergency, family planning and hospice care; and services provided to categorically needy persons in health

maintenance organizations.

C For these servims the State rquires the copayment be pa~ per dain-1 for all M~”~aid beneficiafi~ who are also Medicare eligible. All other

Medicaid beneficiary-the copayment is per visit.

d Applies to persons age 19 and over.

e $2 for per diem of $275 to $325; $3 per diem over $325.

f M~imum copayment charge of $66 per stay.

9 Maximum copayment charge of $21 per stay.

h In Pennsylvania the ~payment for sewias range from $1 t. $6 b~~ on the M~i@id fee for the services provided. If the MdicAd f- is:

$1.00-10.00 the copay is $1; $10.01-25.00 the copay is $2; $25.01-50.00 the copay is $4; $50.01 or more the copay is $6.

! Copayment is 5 percent of reimbursement for these services.

J Applies to pregnant women for nonpregnancy-related services.

k ~plies to persons age 21 and over.

I MWimum ~payment Of $75 per StaY.

m A -p of $30 ~mulative limit per ~[endar year per physician for all physician services (physician visit% su~ery, lab and x-ray *rv~es, and

diagnostic tests) applies.

SOURCE: U.S. Congress, Library of Congress, Congressional Research Service, Medicaid Source Book: Background Data and Analysis

(Washington, DC: U.S. Government Printing Office, January 1993).

Medicaid

Although Federal

programs to impose

beneficiaries under

rules permit State Medicaid

flat copayments for selected

certain circumstances, only

10 States require them for basic physician or

hospital care (see table 2-1) (74). States are

prohibited from imposing deductible or coinsurance charges on categorically needy persons (e.g.,

recipients of Aid-to-Families With Dependent

Children [AFDC] cash assistance) or medically

needy persons under a variety of circumstances,

including: services provided to children; pregancyrelated, emergency, family planning, and hospice

care; and services provided to categorically needy

enrollees in HMOS (74).21 If cost-sharing charges

are used, they must be ‘‘nominal’ that is, the

maximum deductible for noninstitutional services cannot exceed $2.00 per month, coinsurance

may range from $.50 to $3.00 (depending on the

Medicaid payment amount). Providers are prohibited from denying care to those who are unable

to or who do not pay their cost-sharing charges.

21 “Categofic~y needy” refers to those who are Medicaid-eligible by belonging to certain categories of poor people, such ~ those who

are members of families with dependent children where one parent is absent incapacitated, or unemployed. States have the option to offer

Medicaid to medically needy persons when their family income and resources lie above the AFDC need standards ~they meet the categorical

requirements of the program (e.g., an absent parent or disability).
The Lessons

and Limitations

of the Rand

Health Insurance

Experiment 1 3

various

T

he Rand Health Insurance Experiment is the most

relevant and valuable research available concerning the

effects of patient cost-sharing. The HIE was a randomized, controlled trial specifically designed to study how

cost-sharing arrangements affect the use and cost of

health services as well as health outcomes. 2 This chapter

examines the lessons and limitations of the experiment focusing

on basic physician and hospitaI care services.3

Other notable studies of the effects of patient cost-sharing are

reviewed in appendix D. Also see table 3-1 for a summary of the

characteristics of the other important studies on the effects of

cost-sharing on utilization, expenditures, and health.

DESCRIPTION

The Health Insurance Experiment (HIE), conducted by the

Rand Corporation between November 1974 and January 1982,4

employed a true experimental design to determine the effect o f

patient cost-sharing on the utilization and cost of medical

services, and on patients’ health status.5 The HIE is widely

regarded as one of the most important studies ever conducted in

the health services area, and its results—particularly with regard

 This chapter benefited from a review prepared under contract to OTA by Thomas

Rice.

2 See OTA’s background paper, ‘‘Does Health Insurance Make a Difference?,’ for a

review of the literature exarnining the effects of health insurance per se on access to and

use of care and health outcomes (78).

s Although not reviewed here, there is an additional Rand HIE literature examinin g the

effects of cost-s- on dental care and mental health care (e.g., ref. 5 and 91).

—

d The Rand experiment was in the field during this period, but the design phase of the

HIE began earlier and analysts continue to use the experiment’s rich database today.

s The study was funded by the U.S. Department of Health and Human Services.

23
24 I Benefit Design: Patient Cost-Sharing

Table 3-l-Selected Studies on the Effects of Cost-Sharing on Utilization, Expenditures, and Health

Study authors Type of Number in Location of

and year study sample study population

Scitovsky and Snyder, 1972 Interrupted time series;b studied a 2,567 Stanford University Palo Alto, CA (single clinic).

and Scitovsky and McCall, prepaid health plan that imposed a employees and their de1977 (based on 1966 and 25% coinsurance for all physian pendents.

1968 data) services.

Rand Health insurance Ex- Randomized trial? studied the ef- 5,814 persons in 2,005 Six sites: Dayton, OH;

periment; various authors fects of various coinsurance rates families. Seattle, WA; Fitchburg, MA;

(based on data from Nov. and out-of-pocket maximums. Franklin County, MA; Char1974-Jan. 1982) Ieston, SC; Georgetown

County, SC.

Fahs, 1992 (based on 1976- Nonequivalent group designd stud- 1,089 UMWAe and New Kensington, PA (single

1978 data) ied the UMWA health plan before nonUMWA patients diag- clinic).

and after the institution of a $7.50 nosed with diabetes meilipervisitcopayment and compared tus, urinary tract infection,

it with the United Steelworker’s or sore throat.

health plan which did not change

during the same time period.

Cherkin, Grothaus, and V@- Nonequivalent group design;d stud- 30,415 Washington State Seattle, WA (single staffner, 1990-91 (basedon 1985 ied the effects of a new $5.00 and 21,633 Federal employ- rnodel HMO).

data) repayment on State employees ees enroIled in the Group

compared with Federal employ- Health Cooperative of Puget

ees who had no copayment re- Sound.

quirements.

a FuII citations are listed at the end of this repoti.

b lntermpt~ Time ~rle~: At~Pe of ~ua~i~xperiment in whi~ the effec~ of an intervention are inferred from comparing measures of performance

(e.g., use of health care services) taken at many time intervals before the intervention with measures taken at many intervals aflerwwck (19).

Quasi+xperiments are experiments that have interventions, outcome measures, and experimental units, but do not use random assignment to

create the comparisons from which intervention-caused change is inferred.

C Ran&mlz~ Trl~l: Ra~Omized experiments are characterized by the Use of initial random assignment for inferfing interventirln~used change

(19). Randomized trials are often usedtotestthe safety and efficacy of a medical technology in which people are randomly assigned to experimental

or control groups, and outcomes are compared.

d Nonequivalent GrouP ~~ign: A type of ~uasi-experiment in whi~ the r~ponses (e.g., use of health @re services) of a treatment group and

a comparison group are measured before and after a treatment (19). However, study participants are not randomly assigned to treatment versus

comparison conditions, and the design is subject to threats to internal validity related to selection-maturation (i.e., res~ndents in one group could

be changing more so than in the other group).

e UMWA refers t. United Mine Wokers of America beneficiaries.

SOURCE: Office of Technology Assessment, 1993.

to the impact of cost-sharing on the use and cost

of care-are widely used in the cost projections of

various health care reform proposals.

Approximately 5,800 persons in six sites6 were

randomly assigned, for three years or five years,

to one of over a dozen fee-for-service health

insurance plans.7 The study included individuals

and families who, before participation in the

experiment, had private health insurance or Medicaid coverage as well as those who were uninsured.

As an inducement to participate in the experiment, participants were to be compensated on a

monthly basis if their current (preexperimental)

health insurance policy provided more financial

6 The sites were: Dayton, Ohio; Seattle, Washington the city of Fitchburg and Franklin County, Massachusetts; and the city of Charleston

and Georgetown County, South Carolina.

7 The HIE also randomly assigned a group of people to an HMO in the Seattle area to assess the effect of an HMO deZivery~stern (not patient

cost-sharing) on utilization and health outcomes, but that component of the study is not within the scope of this report.
Chapter 3-The Lessons and Limitations oft he Rand Health Insurance Experiment 25

protection than the insurance plan to which they

were randomly assigned.89 The primary exclusion criteria were that the 3 percent of the

population with the highest income (over $25,000

in 1973 dollarsl0) and people age 62 and over

were excluded from the sample. Other people

excluded from the sample included those eligible

for Medicare due to disability, those in jails or

institutions, military personnel and their dependents, and veterans with service-connected disabilities (46).

All the participants in the study received health

insurance coverage that was, in part, incomebased.11 The experimental health plans varied on

two dimensions: the coinsurance rate and the

out-of-pocket maximum. Coinsurance was imposed on all medical services and rates were set

at O percent, 12 25 percent, 50 percent, and 95

percent; out-of-pocket maximums (which applied

to all plans with a coinsurance rate above O

percent) were set at either 5 percent, 10 percent,

or 15 percent of family income per year, but could

never exceed $1,000 ($750 in some sites) .13

Finally, one plan (called the “individual deductible’ plan) provided free inpatient care but had a

$150 dedeductible14 per person for outpatient services .

All of the HIE health insurance plans provided

the same benefit package. Coverage was atypically comprehensive; prescription drugs, preventive care, and the services of a wide range of

providers were fully covered.17 Participants had

s Suppose, for example, that a person had a policy with a $500 out-of-pocket annual maximum. Lf the person was assigned to the

no-cost-sharing pla~ he or she would not be eligible for a cash subsidy because that person would never be worse off financially under the

experiment. If, however, the person was assigned to a cost-sharing plan, he or she could spend up to $1,000 or a particular percentage of income,

whichever was less. Lf the person faced a $1,000 maximum out-of-pocket liability under the experiment but only $500 beforehand, he or she

was given a subsidy of $500 per year to participate. Ln that way, becoming involved in the experiment could not make the person worse off.

9 In additio~ the desi~ers of the HIE were concerned that PartiC@DtS might bemme medic~y uninsurable during the course of the

experiment (13). To ensure that all HIE participants would continue to have access to health coverage after the experiment evexy participant

was reimbursed for the amount they had to payout-of-pocket for their premiums. This kept participants’ preexperimental health insurance active

during the experiment and avaitable to the participants afterwards,

10 ~afig this by We charlge in median household income, this is the equivalent of approximately $78,000 ti 1992 dollars.

11 The out-of-pocket maximum was the only cost-sharing feature based on income.

12 The ‘O percent plan is gcnemlly referred to as the ‘free care’ plan in the HIE literature but is referred to by OTA as the ‘no-cost-sharing

plan” throughout this paper.

13 The $750 or $1,)()() amu~ l~tswere cons~t &ou@out tie &year ~urse of tie experiment, so there is no single 1992 equiwdent.

Even if one were to use the midpoint of the experiment (1978) as the base, there is still no unambiguous way to inflate, for example, $1,000

to 1992 dollars. Using growth in median household income, the $1,000 figure would be about $2,000 in 1992 dollars. Using the overall

consumer price index (CPI), it would be about $2,151. Using growth in the medical component of the CPI, it would be about $3,076. Using

growth in per capita personal medical expenditures, it would be about $3,900.

id Using the mid~int of the experiment as the base year (i.e., 1978) and infIating by the overall consumer price index, this wouId be about

$323 in 1992 dollars.

15 me swctwe of~s p~ was ac~~ly somew~tmore compllmt~. patients were respomible for paying 95 pmcent of outpatient expenses

per year up to an out-of-pocket maximum of $150 perpersoq with a total family limit of $450. According to the HIE researchers, this effectively

amounted to a $150 outpatient deductible with care provided free after the deductible was met (41).

16 The Puqose of tie ~dividu~ deductible plan was to allow’ tie researchers to e xamine the extent to which price induces people to substitute

inpatient for outpatient care.

17 coverage ~clud~ ~patlent ~d Ouqatient hospital care, physician se~ices, arlcil@ servims (e.g., X-ray ad laborato~ tests), skilled

nursing facility stays, maternity benefits, up to 52 mental health visits per year, prescription drugs, certain over-the-counter medications for

selected conditions (e.g., chronic allergic conditions, arthritis, pregnancy, and chronic respiratory disease), dental care, vision care (including

eyeglasses), hearing care, home heatth care, preventive semices, substance abuse treatment and rehabilitation family planning, acupuncture

(if performed by a physician), and equipment and supplies (including prosthetic devices). A wide range of providers was covered, included

chiropractors; audiologists; clinicat psychologists; optometrists; podiarnsts; physical, occupational, and speech therapists; Christian Science

nurses; and private duty nurses. The principal exclusions from coverage were most orthodontics, cosmetic dental services, and cosmetic surgery

(12).
26 I Benefit Design: Patient Cost-Sharing

complete freedom of choice of providers and

there were no limits on providers’ discretion to

order services for patients. Payments to providers

were based on ‘reasonable or standard’ charges .18

LIMITATIONS OF THE RAND HIE

Despite its status as the only true experimental

test of the effects of a variety of levels of patient

cost-sharing, it is important to recognize that the

HIE had several limitations which hamper its

usefulness to policymakers of the 1990s (see box

1-B presented earlier in this paper). As a result, it

became essentially a study of the average use of

health care paid for on a fee-for-service basis by

nonelderly individuals who were either well- or

very well-insured. Because of sample size, the

HIE was especially weak at assessing the health

effects of cost-sharing on certain population

subgroups, even those included in the experiment.

These subgroups included people who may have

had substantial health care needs, including

low-income children and adults, adults with

chronic conditions such as cancer and rheumatoid

arthritis, and children with chronic diseases such

as asthma, congenital anomalies, or with lifethreatening conditions. Thus, the health effects of

patient cost-sharing on many individuals with

greater than average health care needs remain

largely unknown.

In addition, the HIE could not examine how

providers would respond to national-scale changes

in patient cost-sharing. This dynamic could have

important cost implications if, for example, widespread increases in patient cost-sharing diminished demand for health care services and providers responded by increasing their fees or the

volume of services they provide to their patients.

Also, some HIE providers were aware that their

patients were participating in a federally funded

experiment. It is not known whether this knowledge may have affected provider behavior.

Finally, by design, participants in the HIE were

subject to numerous unique interventions including: requirements to complete a biweekly diary on

health care use, symptoms, and restricted activity;

annual health questionnaires; and even compensation if the participants’ preexperimental health

insurance policy provided more financial protection than the insurance plan to which they were

randomly assigned. These features are not typical

of most insurance policies, and they may have

affected the conclusions of the study.

KEY FINDINGS

Within the caveats above, the HIE generated a

wealth of published reports related to coinsurance

and its effects on health care use and outcomes.19

The key findings of the experiment are discussed

below in the context of seven fundamental

questions key to the development of cost-sharing

policy.

Does patient cost-sharing affect utilization

of health care services?

In general, the HIE found that coinsurance was

a significant deterrent to health care utilization.20

Above all, coinsurance reduced the number of

medical care contacts for which treatment was

sought (46). However, once someone in the

experiment sought medical attention, the amount

and intensity of services that they received was

largely unaffected by coinsurance and apparently was determined principally by physicians or other health care providers (36). That

is, as coinsurance requirements increased, people

la Excqt in rwe instices, the HIE paid the providers’ charges hl M (51).

19 ~thoughthe~dresemhers typically describe the experirnentalhealth plans as being ‘cost-sharing’ or ‘free Cue’ plans, the Pficipd

type of cost-sharing analyzed was coinsurance. Unless this review of the HIE indicates otherwise, the reader can assume that ‘ ‘cost-sharing’

refers to coinsurance and that separate effects of wuying coinsurance level are not available.

m me -d findings imply a d~~e in utihtion of 2,0 percent with every 10 percent increase in cost-sharing ShdM to earlier restits

reported by Scitovsky and McCall (see appendix A) (46,66).
Chapter 3-The Lessons and Limitations of the Rand Health Insurance Experiment 127

were less likely to seek any ambulatory care.21

HIE participants who were subject to any coinsurance had, on average, at least one fewer contact

with a provider each year than the participants

who had no cost sharing. Probably as a result,

those subject to coinsurance were also much less

likely to be hospitalized and, on average, received

fewer prescription medications, procedures, and

diagnostic tests (i.e., X-rays and laboratory tests),

compared with participants who did not face

coinsurance requirements (24,43).

Similarly, although the likelihood of being

hospitalized was significantly lower in the costsharing plans—’paying’ patients were hospitalized about one-third less often than enrollees with

no cost-sharing-average costs per hospital stay

for the cost-sharing and no-cost-sharing plans

were not significantly different (36). In addition,

a widely held view concerning the relationship of

inpatient to outpatient health insurance coverage

was not supported by the Rand experiment

(46,63). It had been previously thought that

increasing outpatient benefits, while holding

constant inpatient coverage, would reduce total

expenditures by encouraging early intervention in

the outpatient setting. Instead, on average, HIE

participants who had to pay some portion of their

outpatient costs but no portion of their hospital

care had lower total costs overall (46).

Finally, coinsurance was found to deter care

significantly for more than half of the diagnostic

categories studied, including chronic, acute, and

preventive care (see table 3-2) (43). This effect

was strongest among low-income participants,22

especially low-income children (see more on

income effects below). For example, the likelihood that a low-income child on a cost-sharing

plan had an episode of outpatient care for the

diagnosis “diarrhea and gastroenteritis” was

only 37 percent of that of low-income children

with no cost-sharing. As another example, lowincome women subject to cost-sharing were half

as likely as similar women without cost-sharing

to seek medical attention for “vaginitis and

cervicitis."

Effects of Out-of-Pocket Maximums and

Deductibles

HIE analysts found that deductibles alone

appear to reduce use of services.23 They also

reported no differences in utilization by the

coinsurance groups with differing out-of-pocket

maximus.24 The Rand researchers had hypothesized that once people in the cost-sharing groups

exceeded their annual out-of-pocket maximums,

they would seek care at the same rate as those who

had no cost-sharing at all. This did not take place,

however, leading the Rand researchers to speculate that “people may not have the energy or

inclination to think about their future insurance

status’ when making medical care decisions (37).

Z1 ~sf~ding IepEsents face-to-face con~cts with physicians, osteopaths, or other providers ~d excludes visits for OtdY radiology,

anesthesiology, or pathology services. Dental care and outpatient psychotherapy are also excluded.

‘2 hw-income in this analysis was equivalent to family incomes as great as rwo times the Federal poverty level (FPL). The FPL was

estimated to be $14,343 for a family of four in 1992 (83).

23 sticuy spting, with one exception (tie ‘‘individual deductible’ group) the HIE did not employ deductibles. As noted earlier, the

‘‘individual deductible’ plan was actudy devised as a plan that required 95 percent coinsurance for outpatient expenses per year up to an

out-of-pocket maximum of $150 per person, with a total family limit of $450. No cost-sharing was required for inpatient services. This

arrangement was functionally equivalent to a $150 outpatient deductible with no cost-sharing after the deductible requirements were met. In

addition, the group that had to pay 95 percent coinsurance for all covered services faced a deductible approximately equal to the size of their

annual out-of-pocket maximum (5, 10, or 15 percent of income up to $750 or $1,000 per year).

U For this ~ason, ~most all tie HrE analyses were conducted by coinsurance category, grouping together the diffment out-of-pocket

maximums.
28 I Benefit Design: Patient Cost-Sharing

Table 3-2—Summary of the Significant Differences Between Rand Health Insurance Experiment Health

Plans in the Predicted Probability of an Episode of Care

The relative probability of an episode Cost-sharing

Condition of care in a cost-sharing plan compared population

or service with the no-cost-sharing planab subgroup c

General medical examination 547 0

71

68

79

Low income adults

Nonpoor adults

low-income children

Nonpoor children

Vision examinations 58

61d

low-income adults

Low-income children

Hay fever

obesity

Acute upper respiratory infection

39 Low-income adults

49 Nonpoor adults

49

65

low-income children

Nonpoor children

Acute pharyngitis 54

68

56

82

Low-income adults

Nonpoor adults

low-income children

Nonpoor chiidren

Otitis media 45d

~ d

Low-income adults

Low-income children

Diarrhea and gastroenteritis 37 law-income children

Vaginitis and cervicitis 50

54

low-income women

Nonpoor women

Skin rashes and other noninfectious 57

skin diseases 69

w

Low-income adults

Nonpoor adults

low-income children

Lacerations, contusions, and 58

abrasions 72

46

Low-inmme adults

Nonpoor adults

low-income children

Acute sprains and strains 33 Low-income chiidren

Other injuries and adverse effects 72

44

Nonpoor adults

Low-inmme chiidren

a AII eff=ts of ~st-sharing shown in this table significant at P <0.05 unless otherwise indicated.

b shows the Pro~bility of seeking ~re for th~~e ~ubj~t to ~t+haring divid~ by the pro~bility of seeking care for those with 110 cost-sharing.

C t,~w-imome?l in~u~s anyone with a fmily imme up t. 200 percent of the Faderal Povefly level (FpL). “NonPoor” includes those with family

incomes greater than or equal to 200 percent of the FPL.

d Significant at P <0.10.

SOURCE: Lohr, K., Brook, R., Kamberg, C., et al., “Use of Medical Care in the Rand Health Insurance Experiment, Diagnosis- and Service-Specific

Analyses in a Randomized Controlled Trial, ’’contract report prepared forthe U.S. Department of Health and Human Services, contract No. 01 66-S0,

Santa Monica, CA, December 1966. Used by permission.
Chapter 3-The Lessons and Limitations of the Rand Health Insurance Experiment 129

Does coinsurance reduce utilization by promoting the use of more cost-effective,

appropriate care and by discouraging the

use of unnecessary services?

Advocates of patient cost-sharing argue that

requiring patients to bear some of their costs of

car-e will motivate them to ‘‘think twice’ before

seeking medical attention and lead patients to

make better choices between appropriate and

inappropriate care (49). The Rand researchers

attempted to validate this claim by examining

whether coinsurance equally deterred patients

from seeking care for conditions for which

treatments were thought to vary in effectiveness.

In one analysis, more than 80 conditions and

symptoms were divided into four groups: 1) those

where medical care interventions were judged

likelylikely to be highly effective, 2) quite effective, 3)

less effective, or 4) ineffective or self-care effective (see table 3-3).25 They found that higher

coinsurance rates apparently did not lead the

study population to make better decisions about

their medical care (43). In fact, coinsurance

generally reduced the seeking of care that was

judged likely to be “highly effective” and likely

to be ‘‘rarely effective’ equally. One study

subgroup was an exception: children from average-to above-average-income families. For these

children, apparently, their parents did selectively

reduce their use of medical services in favor of

care that was more likely to be ‘‘highly effective. ’

In addition, a separate analysis found that

coinsurance did not selectively reduce ‘‘inappropriate” hospital stays among adults (70).26

,

27 In

fact, cost-sharing deterred both “appropriate”

and ‘‘inappropriate’ hospitalizations based on

the criteria used by the researchers. Using the HIE

researchers’ appropriateness criteria, Siu and

colleagues estimated that, when cost-sharing was

required for both out- and in-patient services,

there were almost 22 percent fewer “appropriate’ hospital stays and 27 percent fewer ‘ ‘inappropriate” hospital stays.

Does cost-sharing have health effects?

Overall, the HIE health-related findings are

inconclusive but they do suggest that some

individuals, especially lower income persons in

poor health, may be harmed by the deterrent

effects of cost-sharing. In general, the HIE

researchers concluded that not having cost- sharing led patients to seek more medical care, but

they were unable to find much evidence that, for

the average participant, more care led to better

health outcomes. Nor did they find much measurable harm, in the short term, from Less care among

average participants. (See box 3-A for a summaryW

of the sources of information on health status used

in the HIE.) In only three areas did the adults with

no cost-sharing experience better health outcomes: diastolic blood pressure (i.e., hypertension), the estimated risk of dying for those who

were at elevated risk, and corrected vision:

a) Hypertension—Having no cost-sharing significantly reduced diastolic blood pressure for

clinically defined hypertensives by an average of

25 me ~oupings were developed through an iterative ranking process by Rand physicians and were also based on the actual content Of

participants’ insurance claims data. Thus, for example, although chest pain may be a serious symptom, the claims analysis found tha~ for the

purposes of insurance claims, it was actually being used as a catch-all diagnosis for minor complaints. Consequently, for the medical

effectiveness analysis, chest pain was placed in the least effective category.

26 ~edete~inationof “appropriate” and “inappropriate” hospital stays was based onphysicianreviews of patients’ hospitirecords using

the Appropriateness Evacuation Protocol (70). This technique assesses unnecessary days of hospital care based on 27 criteria related to medical

services, nursing and life-support services, and the patient’s condition (see ref. 27). Physician reviewers were altowed to override the protocol

based on their clinical judgment.

27 pedia~c admissiom, admissions related to pregnancy and to alcohol rehabilitation+ and psychiatric admissions were excluded from the

analysis by Siu and his colleagues (70).
30 I Benefit Design: Patient Cost-Sharing

Table 3-3-Medical Effectiveness Groupings Used in the Rand Health Insurance Experiment

Group 1: Highly Effective Treatment by Medical Care

System

Medical care highly effective: acute conditions

Eyes-conjunctivitis

Otitis media acute

Acute sinusitis

Strep throat

Acute lower respiratory infections (acute bronchitis)

Pneumonia

Vaginitis and cervidtis

Nonfungal skin infections

Trauma-fractures

Trauma--lacerations, contusions, abrasions

Medical care highly effective: acute or chronic conditions

Sexually transmitted disease or pelvic inflammatory disease

Malignant neoplasm, including skin

Gout

Anemias

Enuresis

Seizure disorders

Eyes—strabismus, glaucoma, cataracts

Otitis media not otherwise specified

Chronic sinusitis

Peptic and nonpeptic ulcer disease

Hernia

Urinary tract infection

Skin-dermatoptrytoses

Medical care highly effective: chronic conditions

Thyroid disease

Diabetes

Otitis media chronic

Hypertension and abnormal blood pressure

Cardiac arrhythmias

Congestive heart failure

Chronic bronchitis, chronic obstructive pulmonary

disease

Rheumatic disease (rheumatoid arthritis)

Group 2: Quite Effective Treatment by Medical Care

System

Diarrhea and gastroenteritis (infectious)

Benign and unspecified neoplasm

Thrombophlebitis

Hemorrhoids

Hay fever (chronic rhinitis)

Acute pharynitis and tonsillitis

Acute middle respiratory infections (tracheitis, laryngitis)

Asthma

Chronic enteritis, mlitis

Perirectal conditions

Menstrual and menopausal disorders

Acne

Group 2 (Continued)

Adverse effects of medicinal agents

Other abnormal findings

Group 3: Less Effective Treatment by Medical Care

System

Hypercholesterolemia, hyperlipidemia

Mental retardation

Peripheral neuropathy, neuritis, and sciatica

Ears-deafness

Vertiglnous syndromes

Other heart disease

Edema

Cerebrovascular disease

Varicose veins of lower extremities

Prostatic hypertrophy, prostatitis

Other cervical disease

Other musculoskeletal disease

Lymphadenopathy

Vehicular accidents

Other injuries and adverse effects

Group 4: Medical Care Rarely Effective or Self-Care

Effective

Medical care rarely effective

Viral exanthems

Hypoglycemia

obesity

Chest pain

Shortness of breath

Hypertrophy of tonsils or adenoids

Chronic cystic breast disease

Other breast disease (nonmalignant)

Debility and fatigue (malaise)

Over-the-counter or self-care effective

influenza (viral)

Fever

Headaches

Cough

Acute URi

Throat pain

Irritable colon

Abdominal pain

Nausea or vomiting

Constipation

Other rashes and skin conditions

Degenerative joint disease

Imw back pain diseases and syndromes

Bursitis or synovitis and fibrositis or myalgia

Acute sprains and strains

Muscle problems

SOURCE: Lohr, K., Brook, R., Kamberg, C., et al., “Use of Medical Care in the Rand Health Insurance Experiment: Diagnosis-and Servi--spedfic

Analyses ina Random izedControlledTrial,” contract report prepared forthe U.S. Department of Health and Human Services, Contract No.016B-80,

Santa Monica, CA, December 1966. Used by permission.
Chapter 3-The lessons and Limitations of the Rand Health Insurance Experiment |31

Box 3-A—The Sources of Information on Health Status Used in the

Rand Health Insurance Experiment

The health status information used to evaluate the health effects of patient cost-sharing in the Rand Health

Insurance Experiment were drawn from the following sources:

. A comprehensive medical history questionnaire that collected data on general health status, health habits,

and about 20 important chronic diseases from all participants (and from parents on behalf of children under

age 14) upon enrollment and exit from the experiment (12).

. A medical screening examination that was performed on a randomly selected 60 percent of the sample at

enrollment and on all participants at exit from the experiment. The medical screening consisted of a

thorough physical examination and numerous physiological measurements, including blood pressure,

serum cholesterol level, visual acuity, shortness of breath, hearing loss, glucose intolerance, thyroid

abnormalities, hemoglobin, and other tests (39).

. An annual questionaire completed by all adult paticipants regarding their functional limitations in

everyday life due to poor health and whether they visited a physician in the past month for an inventory

of 27 serious and minor symptoms (12). Examples of the serious symptoms include chest pain when

exercising, loss of consciousness, and shortness of breath with light exercise or light work. Minor

symptoms include cough without fever for less than one week, nose stopped up for two weeks or more,

and an upset stomach for less than 24 hours.

. A biweekly diary on health care use, symptoms, and restricted activity for each family member that the

designated head of the family completed throughout the full term of the experiment (12,64,68).

SOURCE: Office of Technology Assessment 1993.

1.9 mm Hg (38).28 The improvement in blood plan, one-half of the gain in hypertension control

pressure among those with hypertension was even derived from a screening entry exam that led to

greater for participants with low incomes than for notification of patients’ physicians when hyperhigh-income participants (i.e., 3,5 vs 1.1 mm Hg tension was identified.3

1 The deterrent effect of

improvement). 29~

30 The reduction in blood pressure coinsurance on use of services among the 856

was achieved largely through additional physi- HIE participants with hypertension is particularly

cian contacts, where problems were diagnosed striking. There were 42 HIE participants with

and treatment initiated. In the no-cost-sharing hypertension who never visited a physician durZS Pticipants were identified as ‘‘hypertensive” on entry into the experiment if they (a) reported taking antihypertensive drugs; (b) were

found to have a repeated systolic blood pressure greater than or equal to 160 mm Hg or diastolic blood pressure greater than or equal to 95 mm

Hg during the physical examinatiou (c) had a repeated systolic blood pressure greater than or equal to 140 mm Hg or diastolic blood pressure

greater than or equal to 90 mm Hg and reported that their physician had previously told them they were hyptntensive; or (d) reported that a

physician had told them more than once they were hypertensive and were among the random sample that did not get an entry physical exam

or had systolic blood pressure greater than or equal to 130 mm Hg or diastolic blood pressure greater than or equal to 80 mm Hg. Others were

called ‘‘hypertensive’ upon exit from the experiment if they met criteria& b, or c or if (e) they had both repeated enrollment and exit systolic

blood pressure greater than or equal to 140 mmHg or diastolic blood pressure greater than or equal to 90 mm Hg or (f) a physician had reported

on an insurance claim form and the participants reported they had been diagnosed as hypertensive, or the physician had reported hypertension

on two or more insurance claim forms (38).

29 ~ this ~~y5i5, low ~come wa5 def~ed~ tie bottom 20 percent of the s~dy s~p]e’s income dis~bution (an average $7,300 for a f~ly

of four in 1982 dollars); high income was defined as the top 40 percent (an average $40,000 for a family of four in 1982 dollars) (38).

30 me 1.1 mm Hg apparent ‘‘improvement’ among high-income hypertensive participants was not statistically significant.

31 A random Smple of 60 percent of he HIE study population had a physical examination WOn en~ into the expefient (12).
32 I Benefit Design: Patient Cost-Sharing

ing the study (i.e., three to five years). Only five

of these 42 were on the no-cost-sharing plan—

significantly fewer than would be expected statistically if cost-sharing had no effect on utilization.

In addition, those without cost-sharing were more

likely to reduce smoking and to keep to a low-salt

diet, and they tended to follow their medication

regimens more closely.

The hypertension findings and the vision

results (reported below) led the Rand researchers

to conclude that not having cost-sharing benefits

people the most when they have specific conditions that physicians have been trained to diagnose and treat (11).

b) Risk o~Dying—For high-risk HIE particiPants,sz the estimated risk of dying from any

cause (’‘on the basis of smoking habits, cholesterol level, and systolic blood pressure’ ‘), was an

average 10 percent higher in the cost-sharing

plans (see Box 3-B) (12). This difference was

signtilcant and mostly related to the greater

improvement of blood pressure in the plans

without cost-sharing. Imw-income participants at

risk for hypertension had the greatest reduction in

risk of dying+verall, their risk was 14 percent

lower if they were enrolled in a no-cost-sharing

rather than a cost-sharing plan. The potential risk

of death horn other causes (e.g., cancer, liver

disease) was not assessed.

c) Vision33—Not having cost-sharing signtilcantly improved corrected vision among average

participants in the HIE (11,44). Lurie and her

colleagues have reported that the improvement in

vision was largely due to an increased number of

eye examinations received by people in the

no-cost-sharing plan (44). Once the average HIE

participant received an eye exam, coinsurance

appeared to have no effect on their obtaining

corrective lenses. However, this was not true of

low-income individuals.34 Imw-income enrollees

with impaired vision were the least likely to have

an eye exam if they were in a cost-sharing plan

and they purchased fewer lenses if they did have

an eye exam.

Among children, the single, measurable, poor

health outcome was found among children of

low-income families (90). I.mw-income children

who were at highest risk of anemia were much

less likely to have anemia at the end of the study

if they were enrolled in a plan without costsharing than if they were in a cost-sharing plan.

While the above suggests that cost-sharing

poses health risks in only a few instances, this

finding is confounded by the HIE conclusion that

coinsurance significantly kept individuals from

potentially effective treatment, even hospitalizations that appeared to be appropriate (43,70).

How is it that coinsurance substantially reduced

the use of care thought to be “highly effective”

but without any measurable harm? Some observers have noted that the overall health effects

component of the HIE findings is basically a

‘‘nonresult’ (56). Others have concluded that the

obvious mixed messages of the HIE hea.lthrelated findings rest in part on the limited

measures of health and appropriateness of medical care available to the Rand researchers (60).

Even today the methods for measuring health

outcomes and effectiveness of care are relatively

immature and their ultimate usefulness is still

uncertain (77).

—

32 me high-risk group included & 25 percent of the sample who were the least healthy, based on their initial levels of serum cholesterol,

blood pressure, and cigarette smoking. For example, a person was considered to be at elevated risk of hypertension if he or she had a diastolic

blood pressure reading of 83 mm Hg. or more, or was taking hypertension drugs at enrollment (11).

33 Vision Semices were subject t. the same cost-sharing requirements as other services, but coverage was limited to: one eye exam for

refraction purposes per year; one pair of corrective lenses per year (contact lenses had an additional charge); and one pair of frames every two

years, with a maximum payment based on the typical price of standard frames in that area (44).

34 ~ ws a~ysis, IOw income was defined as the bottom one-third of the HIE study population’s income distribution% equivalent to 200

pereent of the Federal poverty level.
Chapter 3-The Lessons and Limitations of the Rand Health Insurance Experiment |33

Box 3-B—The Risk of Dying Related to Patient Cost-Sharing

Brook, Ware, Rogers, et al., provide the following example to illustrate the magnitude of the gains associated

with no patient cost-sharing relative to any cost-sharing in the Rand Health Insurance Experiment (HIE):

‘‘An average 50-year-old man in the late 1970’s had approximately a 5-percent chance of dying

within five years (U.S. Public Health Service, 1980). A 50-year-old man at elevated risk had

approximately double that chance of dying. If 1,000 50-year-old men at elevated risk were enrolled

on a freel rather than a cost-sharing plan, then we would anticipate that about 11 of them, who would

otherwisee have died, would be alive five years later (1,000 x 0.05 x [2.11 - 1.90] = 10.5). ”2

The magnitude of the effect of cost-sharing on low-income3 men at elevated risk is even more dramatic, even

with the conservative assumption that 50-year-old low-income men are only at average risk (i.e., 5-percent chance

within five years) of dying. The HIE results imply that if 1,000 low-income 50-year-old men at elevated risk were

enrolled in a no-cost-sharing rather than a cost-sharing plan, then we would anticipate that about 15 of them, who

would otherwise have died, would be alive five years later (1,000 x 0.05 x [2.13 - 1.83] = 15,0).4

1 me @d researchers us~ the term “free” to describe the no-cost-sharing Plan.

2 For high-risk HIE participa.n~, the relative risk of dying was found to be 2.11 for those in the CoSt--g plain ~d

1.90 for those in the no-cost-sharing plan.

3 ~w-~come was defined as the bottom 20 percent of the HIE study sample’s income distribution (an average $7.300

for a family of four in 1982 dollars or about $10,613 in 1992 dollars).

4 For high-risk, low-income I-IIEpar(icipants, the relative risk of dying was found to be 2.13 for those iII the cost-shfig

plans and 1.83 for those in the no-cost-sharing plan.

SOURCE: Based on an example provided in ‘The Effect of Coinsurance cm the Health of Adults: Results from the Rand Health

Insurance Experiment” (p. 26) by Robert Brook, John Ware, William Rogers, et al., under a grant from the U.S. Department

of Health and Human Services, December 1984.

It is especially important to recognize, as longer period. For example, the HIE research

acknowledged by the HIE researchers, that the found that coinsurance led to significant reducsmall size of the HIE study population may have

masked the effects of cost-sharing on health and

access to care for certain groups with greater than

average health care needs, especially low-income

‘‘at-risk’ persons, chronically ill children and

adults, and people with relatively rare conditions

(e.g., cancer or congenital anomalies). Although

these groups were too few in number to generate

measurable results in the experiment, they make

up an important proportion of the general population and, by definition, have substantial health

care needs.

It may also be that by examining the impact of

cost-sharing on health status for only three to five

years, the study could not detect clinically significant effects that manifest themselves only over a

tions in Papanicolaou (Pap) smears among women

ages 45 to 65 (see below) (45), but they were not

able to identify any related harm (e.g., higher rates

of cervical cancer among women subject to

cost-sharing) within the time period studied.

In addition, the Rand investigators suggest that

the health benefits of not having cost-sharing in

the HIE may have been offset by the adverse

effects of unnecessary care-leading to no measurable net effect on the typical participant ( 12,43).

For example, HIE participants in the no-costsharing plan used 85 percent more antibiotics than

those who were subject to coinsurance (24). The

increased use of antibiotics was across all diagnoses, including conditions such as viral infections,

for which antibiotic use is ineffective and inap-
34 I Benefit Design: Patient Cost-Sharing

propriate. As a result, people in the no-costsharing plan were found to be much more likely

to suffer adverse effects from the unnecessary use

of antibiotics.

Does cost-sharing help to control overall

expenditures?

It is clear that coinsurance has a major impact

on expenditures, at least in the short term. The

total anual medical expenditures of individuals

(i.e., insurer payments plus patients’ out-ofpocket costs for covered services) who were not

subject to cost-sharing in the HIE were 23 percent

higher than those with a 25 percent coinsurance

rate, and 46 percent higher than those with a 95

percent rate (46).

As noted earlier, coinsurance reduced costs

almost entirely by deterring people from seeking

any medical attention, including potentially effective treatments. The long-term cost implications of deterring potentially effective health care

services are not known.

How are individuals with low incomes

affected by cost-sharing requirements?

Patient cost-sharing was based, at least in part,

on income in the HIE. This feature of the

experiment probably moderated the effects of

cost-sharing on lower-income families. That is,

since the maximum limit on expenditures in the

HIE was income-related, poor families were the

most likely to exceed their annual out-of-pocket

cost ceiling, after which all covered services

became free.35 Without this protection, lowerincome families in cost-sharing plans might have

spent even less on medical care than they did

during the experiment (41).

Nonetheless, even with the income protections

in the HIE health plans, the Rand findings reveal

a pattern of greater cost-sharing effects on HIE

participants with lower incomes. As noted above,

individuals in the experiment with lower incomes

used care less often than those who were better off

financally, sometimes with striking results. For

example, cost-sharing significantly increased the

estimated risk of dying for some low-income men

(also see box 3-B). In addition, low-income adults

who began the experiment in poor health, and

were enrolled in a no-cost-sharing plan, reported

the largest reduction in serious symptoms36 during the course of the study (68).

The HIE working definitions of ‘low income’

and “poor” differed across the series of published Rand findings. In many of the HIE reports,

“low income” was used to describe persons

whose family incomes were at the bottom 20

percent of the HIE income distribution, well

below the Federal poverty level (see, for example,

ref. 12,39). Because of sample size limitations,

some important HIE analyses used a much

broader definition of low income, one that included a large segment of the working population

with family incomes as great as two times the

Federal poverty level (see, for example, ref.

4,41,43,44,46). These HIE analyses could have

implications for as many as one out of three

nonelderly individuals in the U.S.37

Regardless of how “low income” is defined,

policymakers should be aware that there is no

evidence to suggest that cost-sharing’s greater

deterrent effect on those with lower incomes

—

35 The maximum out-of-pocket liability remained at $750 or $1,000 throughout the experiment. These limits, however, would never have

been reached by a low-income person because the most they could have paid was 15 percent of their income before reaching their own

maximum.

36 Sefious ~ptoms hclude chest pain when exercising; bleeding other than nose bleeds or periods not caused by accidents; 10SS of

consciousness, fainting or passing out shortness of breath with light exercise or light work and weight loss of more than 10 pounds (unless

through diet).

37 vnpub~sh~ tiw from the hlarch 1992 Current Population Survey show that 71,889,000 nonelderly U.S. residents, or 32.5 percent of

all nonelderly U.S. residents, lived in families with incomes below 200 percent of the Federal poverty level in 1991 (21).
Chapter &The Lessons and Limitations of the Rand Health Insurance Experiment |35

ceases at a rigid dollar income threshold. In

addition, the HIE analysts concluded that sick,

low-income individuals are the most likely to

benefit from receiving health care services at no

out-of-pocket cost (11).

Do coinsurance requirements affect

children differently?

The HIE found that, in general, coinsurance

had similar effects on children’s and adults’ use

of and expenditures for outpatient care.38 Among

average children, coinsurance led to about one

fewer. office visit per year (4). This less frequent

contact with health care providers significantly

reduced pediatric preventive services, especially

immunizations among children under age 7 (45).

Sixty percent of children in the no-cost-sharing

plan received a well-care examination, immunization, or tuberculosis test; only 49 percent of the

children in the cost-sharing plans had at least one

of these preventive services.

Adults in cost-sharing plans had approximately

one-third fewer hospital stays than others. By

contrast, coinsurance did not affect the overall

frequency of children’s hospitalizations (90) except for children under 5 (41). Among these

younger children, the plans with no cost-sharing

requirements for inpatient care showed significantly greater hospital use than the cost-sharing

plans (41). As was true for low-in-come adults, the

Rand findings also revealed that coinsurance has

a substantially stronger deterrent effect among

lower income children (i.e., with family incomes

up to two times the Federal poverty level)

compared with other children with greater financial resources in the HIE.

How is the use of preventive services

affected by cost= sharing?39

The HIE health plans covered clinical preventive services for asymptomatic individuals in the

same way it covered all other health services.

Nonetheless, Lurie and her colleagues found that

preventive care use in the HIE was well below

recommended levels in both the no-cost-sharing

and cost-sharing plans (45). For example, across

all HIE plans, fully 7 percent of newborns had had

no well-baby care in the first 18 months of life;

only 45 percent of infants received the recommended three doses of diphtheria, tetanus, and

pertussis (DTP) and poliovirus vaccines at the

recommended time; only 57 percent of women

ages 45 to 65 received a Pap smear during the

3-year study period; and a very low 2 percent of

women in this age group had a mammogram for

preventive purposes during the same time period.40

When Lurie and her colleagues compared

cost-sharing and no-cost-sharing plans, they found

that participants in cost-sharing plans were the

least likely to use preventive care of any type

including immunizations, annual physical examinations, general medical examinations, routine

gynecologic examinations, and office visits listed

only as well-care visits (45). In particular, coinsurance was found to reduce significantly the use

of Pap smears by women ages 45 to 65. While 65

percent of women in this age group in the

no-cost-sharing plan had a Pap smear at some

point during the 3-year study period, only 52

percent of similar women in the cost-sharing

plans had the procedure. Coinsurance was also

associated with lower immunization rates among

children under 7 years of age. In the 3-year study

period, 49 percent of the children under 7 who

38 ~ noted ~~ve, ~ ~oSt of tie HE ~~yses, c~~en w~e defi~ to ~clude anyone Uder tie age of 14. NO SepMate aIldyStX Of

adolescents were conducted.

39 For ~ rmlew of issues related to designing preventive healti care benefitS, See “Benefit Design in Health Care Reform: Report

#l-Clinical Preventive Services” (80).

40 ~additio~ 6 pement of women aged 45 to 6.5 ~d a mammo~am for d@nostic WdUatiOn.
36 I Benefit Design: Patient Cost-Sharing

were subject to coinsurance had at least one two physician visits annually, this increased

immunization compared with 59 percent of simi- contact with their doctor appeared to have no

lar children in the no-cost-sharing plan. influence on smoking or dietary habits related to

Even though HIE participants in the no-cost- the prevention of many types of cancer and

sharing plan had, on average, an additional one to cardiovascular disease (12).
..—...-—

Appendix A: Overview of

OTA Assessment:

Technology, Insurance,

and the Health

Care System

Background

c

ongress has been concerned for many years

with serious and growing problems of health

care costs, access, and quality. In response to

a request from the Senate Committee on

Labor and Human Resources (Edward M. Kennedy,

Chairman) that was endorsed by the House Committee

on Energy and Commerce (John D. Dingell, Chairman), the House Committee on Ways and Means

Subcommittee on Health (Willis D. Gradison, then

Ranking Minority Member), and Senator Charles E.

Grassley (Committees on Budget, Finance, Special

Committee on Aging), the Office of Technology

Assessments (OTA’s) assessment, Technology, Insurance, and the Health Care System, addresses these

congressional concerns by focusing on the following

issues:

1. What does the available literature say about the

impact of health insurance on access to care and patient

health outcomes?

2. Can a minimum benefit package for uninsured

people be fashioned from the perspective of effectiveness and cost-effectiveness?

In addition, Senator Ted Stevens (as a member of the

Technology Assessment Board) asked OTA to examine an additional question under the auspices of this

assessment:

3, What cost implications do the leading types of

health care reform proposals have in seven areas:

health care spending and savings; Federal, State, and

local budgets; employers (large and small); employment; households (low-, middle-, and upper-income);

other costs in the economy; and administrative costs?

The assessment was approved by the Technology

Assessment Board in April 1991, and began in July,

1991. In June 1992, the letter was received from

Senator Stevens. An advisory panel for the overall

assessment was formed in November 1991. The

advisory panel met in January 1992, December 1992,

and in May 1993.

Documents Produced as Part of

the Assessment

The following documents have been or will be

available as part of the assessment.

Publications Avalible From the U.S.

Government Printing Office

Does Health Insurance Make a Dlfference? (OTA-BPH-99).

This interim report, requested by the U.S. Senate

Labor and Human Resources Committee, summarizes

the state of the literature on the relationships among

insurance coverage, access, and patient health outcomes; provides a conceptual framework for evaluating access to health care and the health effects of such

access; and provides an overview of insured and

uninsured populations in the United States as of 1990.

The background paper is available from the U.S.

Superintendent of Documents (phone number 202/275-

3030; address: Washington, DC 20402; GPO stock

number 052-003-01301-1, $5.00 per copy) or, for

congressional purposes, from OTA (49241).

37
38 I Benefit Design: Patient Cost-Sharing

An Inconsistent Picture: A Compilation of Analyses of

Economic Impacts of Competing Approaches to

Health Care Reform by Experts and Stakeholders

(OTA-H-54).

This report compiles and summarizes available

analyses of the economic impacts of four major

competing approaches to health care reform (popularly

known as “single payer,” “play-or-pay,” “individual

vouchers or tax credits, ’ and ‘‘managed competition”). The report was requested by Senator Ted

Stevens, and was released in June 1993. The report is

available for public use from the U.S. Superintendent

of Documents (phone number 202/783-3238; address:

P.O. Box 371954, Pittsburgh, PA 15250-7954; GPO

stock number 052-003-01327-4, $8.00 per copy) or,

for congressional purposes, from OTA (49241).

Benefit Design Series-Publications from this

series of reports explore issues involved in designing

a benefit package based on effectiveness and costeffectiveness, in relation to other critical factors in

benefit design. Two of the topics (clinical preventive

services; mental health/substance abuse) were chosen

in part because of Congressional interest in them as

contentious, ‘gray’ areas in benefit design and in part

because of OTA’s already-existing expertise in the

topics. Patient cost-sharing was in some respects a new

area for OTA, but was an issue of particular importance

in the benefit design debates. The general issues report

will pull together lessons learned about benefit design

from the other reports in the Benefit Design Series and

from other sources, including previous work by OTA.

The reports in this series are:

Benefit Design in Health Care Reform: Report #l—

Clinical Preventive Services (September 1993).

This report addresses issues pertaining to insurance

coverage of clinical preventive services. The report

describes how information on effectiveness and costeffectiveness can, and cannot, be used for purposes of

insurance benefit design and for improving access to

effective clinical preventive services.

Benefit Design in Health Care Reform: Background

Paper-Patient Cost-Sharing (September 1993).

This background paper describes what is known,

and not known, about the effects of patient costsharing on the use of health care services, expenditures, and health outcomes based on a review of the

literature.

Benefit Design in Health Care Reform: Report #2—

Mental Health and Substance Abuse Treatment Services (in preparation).

This report addresses issues pertaining to insurance

coverage for mental health and substance abuse

services. The report emphasizes the role that scientific

data on efficacy, effectiveness, and cost-effectiveness

can, and cannot, play in the design of insurance

benefits for mental health and substance abuse treatment.

Benefit Design in Health Care Reform: Report #3-

General Policy Issues (in preparation).

This report reviews policy issues related to the topic

of designing benefit packages based on effectiveness

and cost-effectiveness in relation to other factors such

as public preferences, professional judgment, and

political concerns.

Background Papers Available Only From OTA

These background papers are available from OTA.

For Congressional use call 49241, and for public use,

call 202/228-6590.

Health Insurance: The Hawaii Experience Background Paper (OTA-BP-H-1O8). (June 1993).

This Background Paper provides a detailed look at

the State that is often considered a model for what other

States can do to help provide universal or nearuniversal health insurance coverage for their residents.

Unfortunately, valid data were not available to demonstrate either the overall financial costs of Hawaii’s

approach or the health effects on residents.

Coverage of Preventive Services: Provisions of Selected Current Health Care Reform Proposals (OTABP-H-1 10). (October 1992).

This background paper summarizes the provisions

of selected congressional (102d Congress) and private

health care reform proposals with respect to the

coverage of clinical preventive services.

Contractor Papers Available from National

Technical Information Service or from the Authors

Primary Care for the Uninsured: A Review of the

Literature

Paper prepared under contract to OTA by David

Blumenthal, M. D., M. P, P., Elizabeth Mort, M. D.,
... —-————

Appendix A-Overview of OTA Assessment: Technology, Insurance, and the Health Care System | 39

M. P. H., and Jennifer N. Edwards, M.H.S., Health

Policy Research and Development Unit, General

Internal Medicine, Massachusetts General Hospital

(May 1993).

The Relationship among Insurance Coverage, Access

to Services and Health Outcomes: Case Study of

Depression

Paper prepared under contract to OTA by Thomas

McGuire, Ph. D., Department of Economics, Boston

University, Boston, MA (July 1993).

Nonfinancial Barriers to Access to Health Care

Paper prepared under contract to OTA by Joanne

Lukomnik& M. D., New York, NY (in preparation for

October 1993).

Other Contractor Papers to be Available from OTA

or GPO

Insurance Status and Health Care Utilization: Analysis of Four Data Bases and Cost Implications for

Universal Coverage&Background Paper

Paper in preparation under contract to OTA and

CRS, by Steven long and M. Susan Marquis, Rand

Corporation, Washington, DC (in preparation).

This background paper is scheduled to be available

in January 1994; plans for distribution are not yet final.

Lasers in Health Care: Coverage Decisions

The results of this survey, being conducted under

contract to OTA by Neil Powe, M. D., M. B.A., M. P. H.,

and Claudia Steiner, M.D., M. P. H., Johns Hopkins

University, are scheduled to be available in September

1994. Plans for distribution of the results are not yet

final.
Appendix B:

Method of

the Study

T

his background paper, Benefit Design in

Health Care Reform: Background Paper—

Patient Cost-Sharing is one of a series of the

Office of Technology Assessment (OTA)

publications on benefit design in health care reform

that are being issued as part of OTA’s assessment,

Technology, Insurance, and the Health Care System.

The paper addresses the available evidence on how

patient cost-sharing affects the use of health care

services, expenditures, and, ultimately, health outcomes. This appendix summarizes the method used for

this report.

OTA contracted with Thomas Rice for an initial

review of the health services research and economics

literature. The focus of the review was on basic

physician and hospital care for services not typically

related to mental and substance abuse disorders. The

first draft of this literature review underwent extensive

review by members of the Advisory Panel for the

overall OTA assessment, as well as by individuals

from the health insurance industry, the academic

community, health care professionals, representatives

of patients, research organizations, businesses, and

Federal agencies. Dr. Rice submitted a final draft to

OTA in February 1993.

A further revision of the background paper was

prepared by OTA after considering all reviewer

comments and further research. This draft was sent out

for additional review to approximately 30 outside

experts. OTA bears all responsibility for the content of

this background paper.

40
..

Appendix C:

Acknowledgments

OTA wishes to thank the Technology, Insurance, and the Health Care System Advisory Panel and the

individuals and organizations listed below for their assistance with this report, These individuals and organizations

do not necessarily approve, disapprove, or endorse this report. OTA assumes full responsibility for the report and

the accuracy of its content.

Judy Arnold

Lewin VHI

Fairfax, VA

David Blumenthal

Massachusetts General Hospital

Boston, MA

Daniel Cherkin

Center for Health Studies

Group Health Cooperative of

Puget Sound

Seattle, WA

Bill Custer

Employee Benefit Research

Institute

Washington, DC

Eva Eagle

Kaiser Foundation Health Plan

Oakland, CA

Marianne C. Fahs

Mt. Sinai Medical Center

New York, NY

Marilyn Field

Institute of Medicine

Washington, DC

Jon Gabel

KPMG Peat Marwick

Washington, DC

Karen Ignagni

AFL-CIO

Washington, DC

Diana Jest

Blue Cross Blue Shield

Association

Washington, DC

Clare Komisky

Health Insurance Association of

America

Washington, DC

Kathryn Langwell

Congressional Budget Office

Washington, DC

Kathleen N. Lohr

Institute of Medicine

National Academy of Sciences

Washington, DC

Willard Manning

School of Public Health

University of Minnesota

Minneapolis, MN

Marianne Miller

Health Insurance Association

of America

Washington, DC

Alan Monheit

Agency for Health Care Policy

and Research

Rockville, MD

Michael Morrisey

University of Alabama

School of Public Health

Birmingham, AL

41
42 I Benefit Design: Patient Cost-Sharing

Edward Neuschler

Health Insurance Association of

America

Washington, DC

Joseph Newhouse

Division of Health Policy Research

and Education

Harvard University

Boston, MA

Michael O’Grady

Congressional Research Service

Library of Congress

Washington, DC

Janet O’Keefe

American Psychologhl Association

Washington, DC

Sue Palsbo

Group Health Association of

America

Washington, DC

Charles E. Phelps

Department of Community and

Preventive Medicine

University of Rochester School of

Medicine

Rochester, NY

Edie Rasell

Economic Policy Institute

Washington, DC

Tom Rice

UCLA School of Public Health

Department of Health Services

Ims Angeles, CA

Sirneon Rubenstein

Group Health Cooperative of

Puget Sound

Seattle, WA

Gordon Schiff

Cook County Hospital

Chicago, IL

Ann Scitovs@

Palo Alto Medical Foundation

Research Institute

Palo Alto, CA

Barbara Starfield

Division of Health Policy

School of Hygiene and Public

Health

Johns Hopkins University

Baltimore, MD

Bruce Vladeck

Health Care Financing

Administration

Washington, DC
Appendix D: Selected

Research on the

Effects of Patient

Cost-Sharing on the Use

and Cost of Health Carel

T

his appendix reviews selected studies that

examined the actual imposition of costsharing in various settings, including the Palo

Alto Medical Clinic, United Mine Workers of

America health plan, the California Medicaid program,

and the Group Health Cooperative of Puget Sound. As

noted in chapter 3, these studies are not considered as

valuable as the Rand Health Insurance Experiment

(HIE)-and are not discussed in detail in the main

body of this background paper-for two reasons: first,

they were not conducted under experimental conditions and, second, they did not examine the health

status of study participants. The sine qua non of

scientific experiments-the random assignment of

study participants to experimental (and control, if

appropriate) conditions-was not a feature of the

studies discussed below. Thus, although these studies

resulted in some potentially intriguing findings (e.g.,

23) and/or they are consistent with the HE, their

apparent findings may be the result of forces other than

the imposition of patient cost-sharing. Limitations of

the studies other than the lack of a randomized control

group are discussed briefly for each study.

Palo Alto Medical Clinic

The first notable study on cost-sharing reported in

the literature took place at Stanford University in the

late 1960s (66,67).2 The setting was the Palo Alto

Medical Clinic (PAMC), which was operated largely

on a fee-for-service basis.

Through 1966, the faculty and staff at Stanford and

their dependents had received care through a prepaid

medical plan, without any cost-sharing requirements.

In an effort to minimize premium rate increases and

curb health care utilization and costs, 25 percent

coinsurance requirements on physician inpatient and

all outpatient services (including ancillary services

such as laboratory and X-ray procedures) were instituted in April 1967. Only inpatient services billed by

the hospital were exempt from the coinsurance requirement. Scitovsky and Snyder analyzed the change in

utilization between 1966 and 1%8 but they did not

examine the impact of any changes in utilization on

health status. Nor could they analyze the impact of

deductibles on use of services, since none were

included in the plan.

1 This literature review benefited from an initial review prepared under contract to O’E4 by Thomas Rice.

z Another study of interest from that time period was one examhing the imposition of copayments in the province of Saskatchewan+ Canada

in 1%8 (6) and their subsequent removal with the enactment in Canada of universal, fmt-dollarcoverage in 1971 (7). This study is less relevant

than those reviewed here primarily because of the diffhdty of controlling for the various factors that may have changed province-wide

utilization over time. Like the studies discussed here, the analyses of the Saskatchewan experience found an apparently substantial impact of

copayments on service usage.

43
44 I Benefit Design: Patient Cost-Sharing

The study’s overall finding3 was that the utilization

and total cost of all physician services fell considerably—

by 24.8 percent and 25.7 percent respectively-with

the imposition of the 25 percent coinsurance rate. In

addition, the use of outpatient ancillary services

dropped by 16.6 percent and ancillary costs declined

by 25.7 percent. These findings imply a decline in

utilization of 1.4 percent with every 10 percent

increase in cost-sharing. In a follow-up study four

years later, Scitovsky and McCall found that utilization remained at this same lower level, implying that

the effect of cost-sharing on the use of services was

permanent rather than transitory (66).

There are limitations to the study design used by

Scitovsky and Snyder, but the study’s results appear

valid, The findings could be questioned if, for instance,

something changed over the study period (e.g., health

status or other efforts at cost containment), that might

have had the effect of reducing 1968 utilization

compared to the 1966 level. For example, if a serious

flu epidemic had hit the area in 1966, and not in 1968,

then one would expect 1968 utilization to be lower

even in the absence of the institution of coinsurance.

Such events are unlikely to have influenced the results,

however. In an effort to test for the impact of illness on

demand, the authors compared the number of physician visits at PAMC with those in another area health

plan-the Kaiser Foundation of Northern CaIiforniaand showed that Kaiser’s physician visits per capita

did not change between 1966 and 1968.4 A second

problem would be if, in response to the coinsurance

requirements, employees sought more services outside

of the health plan for which utilization data were

recorded (the PAMC). This would result in underestimating use in 1968, thereby overestimating the decline

over the study period. This was also unlikely because

in-plan use was still reimbursed at a 75 percent rate,

whereas out-of-plan use was not covered at all.

There is also no way to know whether the experience

at Stanford in the 1960s—representing a single plan in

a university setting in the San Francisco Bay Areacan be generalized to either other places or to the

present time. The health plan under which Stanford

employees and dependents were initially enrolled was

a prepaid medical plan, which was also somewhat

unusual for the time.

The United Mine Workers of America

Health Plan

The effects of newly instituted cost-sharing have

also been studied from the experience of the United

Mine Workers of America (UMWA) health plan. Until

July 1977, the UMWA health plan reimbursed for all

covered benefits at no charge to patients. On July 1,

1977, the health plan was dramatically modified to

include cost-sharing requirements that were very high

for that time: a $250 annual inpatient deductible and a

40 percent coinsurance on physician and most outpatient services up to a $500 per family maximum5 (65).

These changes were short-lived, however. Five months

after they came into effect, the UMWA struck, in part

as a result of the reduction in health benefits. After the

strike, cost-sharing was reduced substantially, to a flat

$7.506 copayment per physician visit (23,62).

Although an analysis of the five-month period

preceding the strike has been published (65), data

limitations seriously threaten the validity of this

study. 7 Two other studies based on the UMWA

data-Roddy, Wallen, and Meyers (62) and Fahs

(23)-examined utilization in the poststrike period.

The study by Fahs is unlike other cost-sharing analyses

because it focuses not only on how patients respond to

cost-sharing but also on how physicians behave when

a large segment of their patient population is required

to pay for a portion of the costs of care. The author

examined one large multispecialty group practice in

western Pennsylvania whose patients were, almost

exclusively, mine workers, steelworkers, and their

families; the steelworkers did not experience any

3 The findings reported here are adjusted for age.

d phe]~s ad N~hoUse alSO make this point in their reanalysis of the Scitovsky and Snyder data (57).

5 The $250 deductible would be equivalent to approximately $579 in 1992 dollars (based on the rate of increase in the overall consumer

price index between 1977 and 1992). Similarly, the $500 deductible would be equivalent to approximately $1,158 in 1992 dollars.

6 Inflating by the consumer price index, this would be equivalent to about $16.00 in 1992 dollars.

7 For exmp]e, tie study was not able to take into account the potential impacts of rumors among the mine workers tittie cost-srequirements would be temporary, seasonal factors that affect use of health services, and changes in provider payment methods that coincided

with the implementation of cost-sharing (65).
Appendix D-Selected Research on the Effects of Patient Cost-Sharing |45

change in their health plan benefits over the study

period. The practice’s medical records and billing files

were used to analyze episodes of treatment for

diabetes, urinary tract infection, tonsillitis, pharyngitis, and ‘‘sore throat conditions’ in the year before

the institution of cost-sharing and the subsequent two

years.

The sample size for the study by Fahs was small,8

and the analysis is limited to a relatively unique

geographic area (i.e., New Kensington, Pennsylvania)

and population, but it nonetheless examines a generally unexplored and important factor in the dynamics

of cost-sharing, that is, providers’ behavior. Fahs’

findings suggest that physicians may raise their fees or

even induce demand for their services when a significant share of their patients is suddenly deterred from

seeking care because of increases in their out-ofpocket costs. The physicians serving the UMWA and

the steelworkers were salaried by an established group

practice, the Russelton Medical Group (RMG) of

Miners, Inc. Yet, after UMWA cost-sharing was

imposed, the RMG management increased the fees to

steelworkers for physician ambulatory and inpatient

services. There is also some evidence that the group

practice physicians may have deliberately increased

the steelworkers’ inpatient lengths-of-stays to compensate for the drop in demand by UMWA patients.

Studies of Cost-Sharing in Medicaid

Federal rules permit State Medicaid programs to

impose copayments only for selected beneficiaries

under certain conditions. However, 40 States do not

require cost-sharing for basic physician and hospital

care and, in those that do, it is commonplace for the

copayment fees to go uncollected (see ch. 2) (74).9

In only a few instances has Medicaid cost-sharing

for physician and hospital services been studied at all

and in no instance has methodologically rigorous

research been conducted. Thus, it may not be possible

to come to valid conclusions about the impact of

patient cost-sharing on the use of Medicaid services or

the health implications for Medicaid beneficiaries.10

One instance that has been examined is the California Medicaid program’s implementation of patient

cost-sharing. In January 1972, California received an

18-month waiver from the Federal government to

charge $1 per visitll for the first two physician visits

per month. 12 Several reports analyzing the effects ‘f

the waiver have been published but the data, study

design, and other shortcomings of these analyses are so

problematic that the related findings do not merit

reporting here (9,32,63).

Studies of Patient Cost-Sharing in Health

Maintenance Organizations

There is virtually no peer-reviewed literature on the

effects of cost-sharing in a managed-care environment.

In fact, all of the available published analyses derive

from the cost-sharing experience of one staff model

HMO-the Group Health Cooperative (GHC) of Puget

Sound (15,16,17).13 For the first time, beginning in

1985, Washington State employees enrolled in the

GHC were required to pay a $5 copayment for

14 Inpatient care, immuniza- ambulatory care visits.

tions, injections, laboratory tests, and radiology remained exempt from copayments. In contrast, Federal

employees enrolled in the GHC continued to have

g ne sample included 1,089 UMWA and nonUMWA patients diagnosed with diabetes mellitus, urinary tract infectio~ or sore throat.

g Federal regulations prohibit providers from denying care to Medicaid patients who do not pay their cost-sharing charges.

10 me Rmd H~l~~umnceExperiment (HIE) included individuals who had been Medicaid beneficiarkbefore enrobgin the experiment

but they made up onty a small portion of the study population. In additiom during the HIE, previously Medicaid-covered individuals had the

same private health coverage as other participants in the experiment and were not subject to any of the obstacles to c= that are characteristic

of many Medicaid programs (e.g., relatively low provider payment levels, problems in provider participatio~ etc.). (An extensive review of

the KIF! appears in chapter 3.)

11 Mating by tie cons~er price index, this would be equivalent to about $3.36 in 1992 dollars.

12 physician Vlsi[s dtig hospit~ stays were exempted fmm the copayment r~u~ements.

13 AdditlO~ ~~yses look at me impact of prescription drug copayments in an HMO se~ing, but these gO beyond the SCOW Of MS

background paper.

1.I me copaPent applied t. w vi5its t. physici~s, physician assistants, nurse practitioners, optometrists, and physic~ ~eraPists (1 5). Some

groups of enrollees were already subject to a substantial copayment for visits to mental health professionals after the fust 10 or 20 such visits

during a year (16),
46 I Benefit Design:

access to ambulatory

Patient Cost-Sharing

care without paying a copayment. Each of the GHC analyses focuses on the

ambulatory care utilization of Washington State employees compared with Federal employees who were

enrolled in GHC at the same time; health effects were

not studied.

The $5 copayment led to an almost 11 percent

reduction in primary care visits which was found to

persist over a one-year time period15 (15). Specialty

care visits declined by a statistically insignificant 3

percent. The authors suggest that the effect on specialty care may have been limited because GHC

patients could not visit a specialist without a referral

from a primary care physician (15). The copayment’s

deterrent effect on primary care use was greatest

among women under age 40; their visits dropped at

twice the rate of men in the same age group.

The effect on use of preventive services varied (16).

General physical examinations fell by 14 percent after

the copayment was introduced; the greatest decline (20

to 25 percent) was among children under age 17 of

both sexes. Immunizations16 of children under 2 years

old and breast and cervical cancer screening of women

40- to 63-years-old appeared to be unaffected by the

institution of the $5 charge. The observed effects of

cost-sharing on the immunization rates of older

children appear to be inconclusive.

1s Primary care visits were defied as those provided by family physicians, pediatricians, internists, physician assistants, and family npractitioners.

16 Note tit ~thou@ no copayment was charged for ilIUUUXliZ4itiOIlS, childhood ~btions provided in conjunction with a physical

examination were subject to the $5 office visit copayment.
Abbreviations

FFs —Fee-for-service

GHC -Group Health Cooperative of Puget Sound

HIE —Health Insurance Experiment (Rand

Corporation)

HMo —Health maintenance organization

IPA —Independent Practice Association

OTA -Office of Technology Assessment

PAMC —Palo Alto Medical Clinic

P o s —Point of service plan

PPO —Preferred provider organization

UMWA —United Mine Workers of America

Terms

Access to services: Potential and actual entry of a

population into the health care delivery system.

Elements of access include availability, affordability, and approachability.

Balance billing: In fee-for-service health insurance,

refers to the practice of billing patients in excess of

the amount approved by the health plan.

Benefit design: The determination of the terms of the

benefit package.

Benefit package: In this report, benefit package refers

primarily to the services and providers that are

covered by a health insurance plan, and to the

financial and other terms of such coverage (e.g.,

patient cost-sharing, limitations on amounts and

numbers of visits or days). However, a benefit

package can be said to consist in total of the terms

of the contract between the subscriber or enrollee

and the insurer. The terms of payment to health care

Appendix E:

Abbreviations and

Glossary of

Terms

providers may also be part of the terms of a benefit

package.

Benefits: The covered health care services and the

amount payable by a health insurance plan to a

beneficiary under the terms of the plan.

Chronic condition: A problem or disease that is

lingering and lasting, as opposed to acute. For

purposes of DHHS’S National Health Interview

Survey, a condition is considered “chronic” if: 1)

the respondent indicates it was first noticed more

than 3 months before the reference date of the

interview and it exists at the time of the interview,

or 2) it is a type of condition that ordinarily has a

duration of more than 3 months. Examples of

conditions that are considered chronic regardless of

their time of onset are Alzheimer’s disease, osteoarthritis, diabetes, heart conditions, emphysema,

and arthritis.

Clinical Preventive Services: Interventions comprising medical procedures, tests, or visits with health

care providers that are undertaken for the purpose of

promoting health or preventing disease or unwanted

health conditions (e.g., pregnancy), not for responding to patient signs, symptoms, or complaints.

Coinsurance: A requirement that insured individuals

pay a fried percentage of covered expenses usually

after any deductible has been met. For example, an

80-20 coinsurance arrangement means that, after

the deductible is reached, 80 percent of covered

expenses are paid by the plan and 20 percent are

paid by the person covered by the plan. Compare

copayment.

47
48 I Benefit Design: Patient Cost-Sharing

Congenital anomalies: Any abnormality, whether

genetic or not, that is present at birth.

Copayment: A fixed dollar amount that a health plan

enrollee is required to pay for a covered service

(e.g., $10 per office visit, $3 per prescription drug).

Cost-sharing: The provisions of a health benefits plan

that require the enrollee to pay a portion of the

charges for services covered by the plan, typically

exclusive of premium cost-sharing (i.e., sharing of

the cost of a health care plan premium between a

sponsor and an enrollee). Usual forms of costsharing include deductibles, coinsurance, and copayments. These payments are made at the time a

service is received or shortly thereafter, and are only

made by those people with insurance who seek

treatment.

Deductible: The amount of covered health care

expenses (e.g., $200, $500, $1,000) that must be

incurred by the health plan enrollee and his or her

dependents before any health benefits become

payable by the health plan. Deductible requirements

apply to each individual in a family for a specific

time period (usually a year). Some plans specify

family deductibles after which no additional individual deductibles are reqiuired; family deductibles

are typically equivalent to two or three times the

individual deductible.

Federal poverty level: The official U.S. Government

definition of poverty based on cash income levels

for families of different sizes. Responsibility for

changing poverty concepts and definitions rests

with the Office of Management and Budget in the

Executive Office of the President of the United

States. The preliminary estimates of poverty thresholds for the continental United States in 1992 were:

$7,141 for one person, $9,132 for two persons,

$11,187 for three persons, and $14,343 for four

persons. Alaska and Hawaii have higher thresholds.

Fee-for-service: In fee-for-semice health care, physicians and other providers bill separately for each

patient encounter or service rendered. This system

contrasts with salary, per capita, or other prepayment systems, where the payment to the practitioner

does not change with the number of services

actually rendered.

Health care provider: An individual or institution

that provides medical services (e.g., a physician,

hospital, laboratory, etc). This term should not be

confused with an insurance company which “provides’ insurance.

Health insurance: In this report, the term “health

insurance’ is used broadly to include various types

of health plans that are designed to reimburse or

indemnify individuals or families for the costs of

medical care, or (as in HMOS) to arrange for the

delivery of that care. In this report the term includes

traditional private indemnity fee-for-service coverage, prepaid health plans such as HMOS, selffunded employment-based health plans, Medicaid,

and Medicare.

Health maintenance organizations (HMOS): A

health care organization that, in return for prospective per capita (cavitation) payments, acts as both

insurer and provider of specified health care services to an enrolled population.

Independent practice association (IPA): A form of

HMO in which participating physicians remain in

their independent office settings, seeing both enrollees of the IPA and patients covered by other health

insurance plans. Participating physicians may be

reimbursed by the IPA on a fee-for-service or a

cavitation basis.

Managed care: A general term applied to a range of

initiatives from organized health care delivery

systems (e.g., HMOS) to features of health care

plans (e.g., preadmission certification programs,

utilization review programs) that attempt to control

or coordinate enrollees’ use of (and thus to control

the cost of) services.

Managed Competition: An approach to health care

reform that would combine health insurance market

reform with health care delivery system restructuring. The theory of Managed Competition is that the

quality and efficiency of health care delivery will

improve if independent groups compete with one

another for consumers in a government-regulated

market.

Medicaid: A joint Federal-State program of Federal

matching grants to the States to provide health

insurance for categories of the poor and medically

indigent. States determine eligibility, payments,

and benefits consistent with Federal standards.

Medicare: A federally administered health insurance

program covering the cost of services for people

who are 65 years of age or older, receiving Social

Security Disability Insurance payments for at least
Appendix E–Abbreviations and Glossary of Terms 149

2 years, and persons with end-stage renal disease.

Medicare consists of two separate but coordinated

programs-hospital insurance (Part A) and supplementary medical insurance (Part B).

Nonelderly: Used generally to refer to anyone under

age 65. In the Rand Health Insurance Experiment,

anyone over age 61 was excluded from participating in the study.

Out-of-pocket expenses or spending: Payments made

by an individual for medical services, prescription

drugs, and certain medical equipment and supplies.

These may include direct payments to providers for

uncovered services, or by uninsured people, as well

as payments for deductibles and coinsurance for

covered services, for provider charges in excess of

the plan’s limits, and for enrollee premium payments.

Pap smear: A screening test for women for cervical

cancer.

Point-of-Service (POS) Plan: A hybrid form of

managed care plan based on a mixture of cavitation

and fee-for-service (FFS) payment arrangements.

POS plans permit health plan enrollees to choose a

FFS, PPO, or HMO provider at the time he or she

seeks services (rather than at the time they choose

to enroll in a health plan).

Preferred provider organization (PPO): Refers to a

variety of different insurance arrangements under

which plan enrollees who choose to obtain medical

care from a specified group of ‘preferred’ providers receive certain advantages, such as reduced

cost-sharing charges. PPO providers typically furnish services at lower than usual fees in return for

prompt payment by the health insurance plan and a

certain assured volume of patients.

Premium: The price or amount which must be paid

periodically (e.g., monthly, biweekly) to purchase

insurance coverage or to keep an insurance policy

in force. Premiums paid to health maintenance

organizations or similar organizations are often

called cavitation payments.

Preventive services: Services intended to prevent the

occurrence of a disease or unwanted condition (e.g.,

pregnancy) or its consequences. Preventive health

care includes health care programs aimed at warding off illnesses (e.g., immunizations), early detection of disease (e.g., Pap smears), or inhibiting

further deterioration of the body (e.g., exercise or

prophylactic surgery). Prevention is also concerned

with general preventive measures aimed at improving the healthfulness of the environment and with

the promotion of health through altering behavior,

especially using health education. Preventive health

services are sometimes categorized as primary,

secondary, or tertiary. Primary prevention is

aimed at reducing the incidence of a disease or

health problem; secondary prevention is aimed at

reducing the prevalence of a problem by shortening

the duration among those who have the problem;

and tertiary prevention is aimed at reducing

complications.

Provider: See health care provider,

Randomized trial: An experiment (e.g., Rand Health

Insurance Experiment) designed to test the safety

and efficacy of a health technology or the effects of

a financing or other intervention in which people

are randomly assigned to experimental or control

groups, and outcomes are compared.

Single Payer approach: An approach to health care

reform that would provide tax-financed universal

coverage with government as the sole purchaser of

services. A single entity, usually government-run,

reimburses all medical claims. Consumers typically

pay a uniform tax rather than premiums. Money

goes to a single health care trust fund, used only for

health care expenditures.

Staff-model HMO: In this type of HMO, the majority

of health plan enrollees are cared for by physicians

who are typically salaried staff of the HMO.

Traditional indemnity plan: A conventional or

fee-for-service health plan that typically reimburses

the health care provider on a “reasonable and

customary’ basis or as billed.

Utilization: Use; commonly examined in terms of

patterns or rates of use of a single service or type of

service (e.g., hospital care, physician visits). Measures of utilization of all medical services in any

given period are sometimes done in terms of dollar

expenditures. Use is also expressed in rates per unit

of population at risk for a given time period (e.g.,

number of admissions to a hospital).

Well-child care: Preventive health care for children,

including immunizations, health education, parental guidance, physical examinations, and other tests

that screen for illness or developmental problems.
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Index

Administrative cost issues, 9-10

Anemia, cost-sharing effects on, 7, 32

Annual limits on out-of-pocket expenses, 2, 17, 27

Average to above-average income persons, 29

Background on cost-sharing

definition of cost-sharing, 2-3

effects of cost-sharing, 10-11, 13-14

issues, 4-10, 13

out~f-pocket costs, 14-21

Balance billing, 9, 15, 16

Benejit Design in Health Care Reform series, 2,3,38

California Medicaid program, 45

Children

cost-sharing effects on, 11

equity in health coverage, 10

Group Health Cooperative of Puget Sound findings,

46

HIE health effects findings, 6-8,32, 35-36

HIE limitations, 26, 33

utilization of services, 27, 29

Chronically ill persons, 10, 26, 33. See aZso Lowerincome persons, in poor health

Coinsurance, 2, 17, 18

Consumer perceptions of cost-sharing, 10

Consumer spending. See Out-f-pocket costs

Copayments

cost-shtig elements, 2

Group Health Cooperative of Puget Sound, 4546

health maintenance organizations, 14-15, 18

Medicaid, 20-21,45

Medicare, 19

Costs of health care. See Expenditure controls; Out-ofpocket costs

Coverage of Preventive Services: Provisions of

Selected Current Health Care Reform

Proposals, 38

Deductibles

cost-sharing elements, 2

fee-for-service health plans, 17

health maintenance organizations, 18

HIE description, 25

HIE findings, 27

Medicare, 19

Diagnostic services, 27. See also Preventive services

Differential cost-sharing, 14

Does Health Insurance Make a Deference?, 37

Effectiveness of treatments, 7,29,30,32

Efficiency of health care system, 10

Elderly persons, 19, See aZso Medicare costs

Elements of patient cost-sharing, 2-3

Employment-based health plan costs. See Private

health insurance costs

Equity in health coverage, 10

Exemptions from cost-sharing, 9

Expenditure controls, 8,34

Eye examinations, 6,32

Fee-for-service health plans. See also Balance billing;

Health Insurance Experiment

annual expenditure limits, 17

coinsurance rates, 17
58 I Benefit Design: Patient Cost-Sharing

cost-sharing background, 2, 13-14

deductibles, 17

maximum lifetime benefit, 17-18

Palo Alto Medicd Clinic study, 4344

Findings SUIIllTlary

background, 1-2

conclusions, 10-11

cost-sharing elements, 2-3

cost-sharing issues, 4-9

policy questions and issues, 9-10

Group Health Cooperative of Puget Sound, 45-46

Health care providers

HIE findings, 9, 36

preferred provider organizations, 19

referrals from, 46

UMWA health plan findings, 45

utilization of services and, 4-5, 11

Health effects of cost-sharing, 5-8, 11, 29,31-35

Health Insurance: The Hawaii Experience, 38

Health Insurance Experiment

children, findings on, 35-36

conclusions, 10-11

description, 23-26

episode of care probabilities, 28

expenditure control findings, 8, 34

findings SUIIMIlary, 3-10

health effects findings, 29,31-34

health status information sources, 31

limitations of, 4,6-7, 26, 33

lower-income persons, findings on, 34-35

preventive services findings, 35-36

utilization findings, 26-27, 29

Health insurance premiums. See Premiums

Health maintenance organizations, 2,14-15,18,4546

HIE. See Health Insurance Experiment

HMO Act of 1973, 18

HMOS. See Health maintenance organizations

Hospitalizations, 8, 27, 29, 35

Hypertension, cost-sharing effects on, 6,29,31-32

Immunizations, 7-9, 35-36

Income-based coverage, 8,9, 17,25,34

An Inconsistent Picture, 37-38

Indemnity health care plans. See Fee-for-service health

plans

Independent Practice Associations, 18

Infants, 35

Inpatient services. See Hospitalizations; Utilization of

health care services

insurance Status and Health Care Utilization, 39

IPAs. See Independent Practice Associations

Kaiser Foundation of Northern California, 44

Lusers in Health Care: Coverage Decisions, 39

Lower-income persons

health effects findings, 5-7,29,31-35

HIE limitations, 26, 33

policy questions and issues, 9-10

in poor health, 6, 8, 11, 34-35

utilization findings, 26-27, 29

Managed care plans, 14,45. See also Health Maintenance Orgtitions

Maxirqum amual dollar amount. See AMual limits on

out-of-pocket expenses

Maximum lifetime benefit, 17-18

Maximum out-of-pocket expenses. See Out-of-pocket

maximums

Medicaid costs, 20-21,45

Medicare costs, 16, 19

Methods of studies, 23-26,32-33,40,4346

National Medical Expenditure Survey, 15

National Technical Information Service, 38-39

Nonfinancial Barriers to Access to Health Care, 39

Out-of-pocket costs

cost-sharing elements, 2-3

fee-for-service health plans, 14

health maintenance organizations, 14-15, 18

private health insurance trends, 3,4, 15-18

publicly funded plans, 19-21

Out-of-pocket maximums, 2,9, 17,25,27

Outpatient services. See Preventive services; Utilization of health care services

Palo Alto Medical Clinic study, 43-44

Papanicolaou (Pap) smears, 7-9,33,35

Pediatric preventive services, 8,35

Physicians. See Health care providers

Point of Service plans, 19

Preferred provider organizations, 19

Premiums, 2-3,9, 15
Index 159

Preventive services, 7-9, 33, 35-36,46

Primary Care for the Uninsured, 38-39

Private health insurance costs, 3,4, 14-21

Providers. See Health care providers

Publications availability, 2,3,37-39

Publicly funded plan costs, 19-21

Rand Health Insurance Experiment. See Health Insurance Experiment

The Relationship among Insurance Coverage, Access

to Services and Health Outcomes: Case Study of

Depression, 39

Research on cost-sharing effects. See Studies on

cost-sharing effects

Risk of dying, cost-sharing effects on, 6,32,33

Russelton Medical Group, 45

Staff-model health maintenance organizations, 18

State Medicaid programs requiring copayments, 20-

21,45

Studies on cost-sharing effects, 23,24,43-46

Technology, Insurance, and the Health Care System,

1,37-39,40

Treatment effectiveness, 7,29, 30, 32

United Mine Workers of America health plan, 44-45

Utilization of health care services

conclusions, 10-11

cost-sharing issues, 4-5, 8

Group Health Cooperative of Puget Sound, 46

HIE findings, 26-27, 29

Palo Alto Medical Clinic study, 44

UMWA health plan, 4445

Vision correction, cost-sharing effects on, 6,32

Women

Group Health Cooperative of Puget Sound findings,

46

HIE utilization findings, 9,27,33,35