Game Changers: Consumerism and Price Sensitivity Are Set to Change the Health Care Marketplace

Troy Trygstad, PharmD, PhD, MBA
Published Online: Thursday, January 7, 2016
Price Sensitivity: A Fundamental Economic Principle
Consider 3 patients coming to the pharmacy, each with a generic prescription retailing for $100. The first has a $10 co-payment, the second has 10% coinsurance, and the third has a high-deductible plan with a health savings account. The first patient pays $10 and happily leaves the pharmacy. The second patient pays $10, but only after asking the pharmacist if he thought the medication worked well. The third patient, after finding out that the prescription will cost him $100 out-of-pocket, asks the pharmacist if there are cheaper alternatives.
 
In all 3 circumstances, the cost of the medication to the combined insurer–patient purchaser is $100. However, in the first 2 cases, the cost was shared by the insurer. In the third case, the patient was bearing the full cost (prior to meeting a deductible that can be $3000 to $7000 for high-deductible family plans).
 
Now consider if the prescription had cost $200. The first patient would still pay $10 and go on his way. The second patient would wince at an out-of-pocket cost of $20 and ask if there were cheaper alternatives. The third patient would demand that the pharmacist call the physician to find a replacement on a discount drug list or would simply walk away without buying anything.
 
Due to some unique aspects of health insurance that have historically provided some level of coverage for “first dollars in,” price sensitivity (more specifically, price elasticity of demand) is a fundamental economic principle that has, to date, played a more minor role in health care compared with other goods and services. Price sensitivity is measurable, represented by the percentage reduction in demand owed to a percentage increase in price/cost. “Elastic” goods and services experience a large decrease in demand when subject to a price increase, whereas “inelastic” goods or services experience less reduction in demand at higher prices.
 
Modern Health Care Financing in the United States: A History of Masking Actual Cost
Unlike health care systems in many industrialized countries with nationalized medicine or single-payer constructs, the US health care system relies on markets to function. For the greater part of 100 years, the insurance marketplace has functioned to pool risk on behalf of employers, individuals, and states through managed Medicaid offerings. However, health insurance has evolved in a distinctly different manner than other types and forms of insurance. Unlike car accidents, house fires, and accidental deaths that have decreased per capita over time and remain relatively rare events, use and demand for health care goods and services continue to rise as the population ages and gets sicker (more chronic disease), and treatment options become more plentiful.
 
The majority of health insurance enrollees will access their health benefits over the course of a year. That reality flies in the face of the most basic of insurance principles: the whole idea of insurance is to pool risk across many individuals that may have a low risk (but high consequence) for a certain event. If everyone in the risk pool needs to tap into the dollars that were collected from premiums over the course of a year, the insurance is acting more like a group-contracting entity than an insurance company that predicts events and posts premiums based on the frequency and severity of those events.
 
What is the result? A reliance on insurance premiums to pay for noncatastrophic care and a subsequent reduction in price sensitivity creating inelasticity by limiting the exposure of the patient-consumer to increases in costs of a medication, visit, or procedure. For the patient with the $10 co-payment in the above example, there is no sensitivity (in fact, there may be the opposite: if the patient-consumer is aware of a cost increase, this may increase demand due to the perception of more value). For the patient-consumer with 10% coinsurance, a doubling of the total cost from $100 to $200 may double his out-of-pocket payment from $10 to $20, but he is still only exposed to an increase of 10 cents on every dollar in actual cost. For the third patient-consumer, full exposure to the actual cost increase is felt and this scenario is likely to create far greater elasticity (reduction in demand from increase in price), driving him to seek alternative treatments or give up on treatment altogether.
 
Ever since wage controls during World War II (which catalyzed the proliferation of employer-sponsored health plans by incentivizing employers to provide a health benefit in lieu of an increase in salary) and the ensuing economic boom that resulted in a substantial growth in the labor force, the size and financing of our privatized health care system has steadily grown, increasing our dependence on classic marketplace and insurance principles. However, despite reliance on marketplace principles to function correctly, health care has, for the most part, grown under conditions of relatively low deductibles compared with total average expenditures, often with “first dollar in” coverage for many health care goods and services (outpatient physician visits, prescription drugs, etc), leading insurers to rely on supply side or access-limiting cost-containment strategies (aka, prior authorization) since patient-consumers were generally not exposed to the actual costs for their care or medications for noncatastrophic circumstances.
 
Insurance Reform Driving Patient Exposure to Actual Cost of Care
Throughout the 1980s and 1990s, as the US population aged and became sicker and innovation resulted in more choices of therapies, pharmacy benefit managers (PBMs) were created and began using tiering systems to introduce some price sensitivity to the patient-consumer, often represented by a single, low out-of-pocket rate for all generics, a medium out-of-pocket rate for formulary-friendly branded drugs, and a high out-of-pocket rate for brands that were deemed too expensive or of low value compared with alternative therapies deemed equivalent by a PBM.
 
In the early 2000s, Chernew, Rosen, and Fendrick introduced the notion of value-based insurance design (V-BID) in Health Affairs. “[V-BID] encourages the use of services when the clinical benefits exceed the cost and likewise discourages the use of services when the benefits do not justify the cost.”1 At the core of the V-BID concept is price sensitivity; this works in both directions, depending on the drug and even the patient circumstance or the severity of the condition. In other words, health care goods and services may be inherently more cost-effective and/or of more benefit in some patients compared with others, so it makes sense to use a nuanced insurance design and cost-sharing increases and decreases based on the projected benefit of a product or service to a patient (and a plan).
 
Currently, due to multiple factors, quite likely including health care reform, we are seeing a wholesale shifting of cost-sharing across the board toward patient-consumers. High-deductible health plans (HDHPs) are also called consumer-directed health plans (CDHPs) for a reason: patient-consumers play a much bigger role in the selection of goods and services and are much more likely to behave like shoppers than beneficiaries of “first dollars in” spend. The growth of HDHPs and CDHPs, and the increase in their memberships over the past few years, has been staggering. In the past 7 years, the percentage of employees enrolled in an HDHP has tripled,2 with 83% of employers now offering them.3
 
When an HDHP is paired with a health savings account (HSA), the employer will often contribute (87% of the time)3 to the HSA, often with the dollars saved from the premium reduction by enrolling in the HDHP versus the traditional plan. This creates a strong incentive for many employees to enroll in an HDHP, particularly the young and healthy who are eyeing the growth of that savings account over time (as well as the tax deduction). If they are fortunate enough to make it to Medicare age without a catastrophic event, they may add substantially to their retirement nest egg since HSA money is penalty-free at that point. An HSA essentially acts as a 401k, but without tax on health care expenditures throughout the life of the account holder.
 



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