Co-pays and deductibles don’t work (except to make you pay more)

This is not really surprising to me. People obsessed with so-called “market solutions,” which often should better be called “artificial market solutions,” are always trying to devise clever incentives to accomplish desired outcomes. The notion is that everyone is selfish, and will do certain things if there is a monetary reward for doing it. A classic timely example is merit pay for teachers, which is based on the premise that without monetary incentives, teachers are fat and lazy doing less than their best work. The advocates, of course -- think Bill Gates, Michelle Rhee, Barack Obama, Arnie Duncan and the guy who prodcuced the manipulative propaganda film “Waiting for Superman” -- know virtually nothing about teaching or or the people who choose it as a career. Sure, everyone likes money and all other things being equal, more is better. But how many teachers do you know who chose to teach in order to make a lot of money? We know the answer, which destroys the heart of the merit pay advocates’ argument.

But I digress (and merit pay is a topic that deserves a lot of skeptical attention in its own right). This post is supposed to be about how co-pays and high deductibles, instead of discouraging people from over-using medical services) end up having the opposite effect from what the so-called “market solution” was intended to accomplish -- building in monetary incentives not to use the services. In fact, where its effect was studied, costs went up.

I have never been one who thinks our cost problems come from patients constantly seeking medical attention -- how many more people like to stay as far away from doctors as they can except when they shouldn’t -- or from doctors cavalierly ordering tests they don’t think are necessary. Here is what blogger James Kwak at Baseline Scenario had to say about the observations of an expert, Atul Gawande, who reported on this on NPR:

One refrain you heard incessantly during the health care reform debate was that we have high health care costs because of overconsumption and we have overconsumption because people don’t bear a high enough share of their marginal health care costs, so the solution is to increase copays and deductibles. This is what Economics 101 would tell you: people respond to incentives. But Gawande discussed one large company that tried this year after year, but only saw their costs going up. The problem was that while most members responded to the higher copays and kept their costs more or less steady, the 5 percent of members who generated 60 percent of the costs behaved differently. Or, rather, they also reduced consumption (of doctor’s visits and prescription medications), but as a result they often had catastrophic outcomes. These were people with heart disease on cholesterol-lowering medications, and when they went off their medications they ended up in the hospital with heart attacks and then with congestive heart failure.

If incentives worked on this level, we should have solved the problem already. Employers all want to bring health care costs down, so if any insurer could bring health care costs down they would have a competitive advantage, and so insurers should be trying to bring health care costs down. But it’s not working. . . .

Another way of looking at the problem is to note that there is no one who is trying to brings costs down directly. Sure, insurers try to do it, but they do it through the types of monetary incentives that economists love: higher copays, lower payments for various procedures, etc. But that’s not actually what most companies do when they have a cost problem. . . . You go and figure out what the problem is and you engineer a solution, whether by redesigning the manufacturing process, reengineering the product to use cheaper parts, negotiating lower wage costs, negotiating lower input costs, or something else. That’s how you solve most problems in the business world — not by tweaking some clever incentive scheme. . . .

In the few examples that Gawande discusses, it results in cost reductions on the order of 20 percent with better outcomes. It seems that for the people who consume the most health care dollars, you can save money simply by focusing on giving them better care — because right now their big problems are things like coverage gaps that prevent them from getting basic care, not being on the right medications, and ending up in the emergency room for catastrophic problems. . . .

That certainly makes sense to me. As soon as you hear someone trying to inject “market principles” through money incentives, watch your wallet. Chances are, it’s an artificial market solution that is more problem than solution.