‘Double Jeopardy’ In American Health Insurance

By Dana P. Goldman and Tomas J. Philipson

Forbes, April 1, 2014

Health insurance markets allow people to share risks; those lucky enough not to need health care pay premiums to cover care for the unlucky ones who do. This risk-sharing—which most of us are very willing to purchase — amounts to a modest income loss through our premiums when we are healthy to avoid serious financial trouble when we are sick.

However, a disturbing trend has emerged over the last few years. As health care costs have risen, many insurance companies have responded by starting to increase cost-sharing on to patients when they get sick, sometimes dramatically. This has occurred particularly for the unlucky patients who are the sickest and who need highly specialized therapies. Such so called “specialty drugs” are different than standard prescription drugs and often cost substantially more, many times because they are harder to manufacture. For example, the Centers for Medicare and Medicaid Services, the agency that implemented the Medicare Part D prescription drug benefit, allowed plans to create a ‘formulary tier’ specifically for drugs costing $600 or more per month—and about 90 percent of plans use them. And, among the plans who use the tier, more than half require patients to pay 25% or more of costs. The drugs on this tier are those of patients faced with many difficult conditions – it includes medications for rheumatoid arthritis, osteoporosis, MS, and even cancer.

This insurance design often means that the sickest patients also take the largest financial hits; what we argue amounts to a “double jeopardy” of current health insurance. Consider the case of cancer care which is a relatively rare event compared to diseases like hypertension or diabetes, but often leads to a cascade of high expenses. Insurance companies are now pushing those expenses on patients at the time of care, rather than covering them through premiums paid before illness. Ironically, this has led to outrage against manufacturers of cancer treatments rather than payers, For example, oncology specialists have often criticized the manufacturers for the high prices involved because their patients can’t afford the treatments. The irony is that other forms of care are much more expensive — such as the use of intensive care units (ICUs) — yet there is no outcry by physicians against the device manufacturers concerning these costs. The reason is that ICU care–which often costs about $4,000 per day in the most futile cases–is fully covered (as it should be), whereas the specialty treatments remain only partially covered.

Pushing these costs onto the patient at the time of sickness not only distorts treatment patterns, but also leads to inequity. One common strategy to manage these specialty products is to force patients to try cheaper treatments before insurers will cover more expensive ones – a practice euphemistically called ‘step therapy.’ For those who respond to the cheaper therapy, they get better and pay very little. But for those who are unlucky enough not the respond to the first treatment, they move to the next therapy, often at much higher cost. The result is both worse health prospects but also a larger financial burden for the same but more severe form of the same disease, another form of double jeopardy. The high out-of-pocket costs of second-line therapy may also encourage patients and their physicians to retry ineffective, first line therapies, sometimes at great risk to the patient. Patients with more recalcitrant disease are being asked to pay more—the opposite of what we want insurance to do.

Since the 1960’s, economists have noted that cost-sharing at the time of illness for medical services is a way to balance the financial risks of health care spending against improper incentives for care when sick. On the one hand, full coverage eliminates all financial risks to patients, but it provides no incentive to economize on care when sick. On the other hand, no insurance imposes too much risk on a patient while it provides better incentives to economize on care. Thus, economists agree that the optimal cost-sharing should strike a balance between financial protection and proper incentives to economize on care. In particular, when treatments are valuable and patients are willing to seek them at very high prices, economists recognize there is little value to high copayments because they would just impose financial risks through care that would have been undertaken anyway. However, double jeopardy of American insurance imposes financial risk on the patient at precisely the moment when it is likely least appropriate. A cancer patient is willing to pay large sums to cling on to life, but is hit with both the dreaded disease and a large medical bill at the same time.

What can be done to limit the damage of double jeopardy in insurance? In cases where treatment is effective, payers should provide real insurance and not impose substantial burdens on patients when they are sick—especially those who do not respond to conventional first line care. In face of market forces, we would expect patients or their benefit managers to sooner or later shun plans with double jeopardy designs. The second best alternative would be to encourage manufacturers to fix the insurance failure by providing copayment assistance for these patients. The analogy is Medigap coverage, which provides secondary insurance for costs that Medicare does not cover. In the private sector, such coverage is often outlawed on the grounds that it interferes with payer’s incentives to make patients economize on care.

The bottom line is that insurance that doesn’t cover the financial risks for the sickest seriously lowers the value of coverage to the insured pool, imposes the largest losses on the sickest even within the same diagnosis, and leads to finger-pointing at the wrong parties.

Dana P. Goldman is the Leonard D. Schaeffer Chair and Director of the Schaeffer Center for Health Policy and Economics at the University of Southern California. Tomas J. Philipson is the Daniel Levin Chair of Public Policy at the University of Chicago. Both are founding partners of Precision Health Economics LLC.

http://www.forbes.com/sites/tomasphilipson/2014/04/01/double-jeopardy-in-american-health-insurance/

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Comment:

By Don McCanne, MD

This is an important article. The topic is important because it represents one of the more serious flaws in recent trends of health care financing reform – a flaw which results in greater financial burdens being imposed on people with serious medical disorders. It is also important because it represents the views of two authorities in the health policy community who come from the “other side,” generally holding views at odds with the health care justice positions of PNHP. This time they are right.

Insurers are using several techniques that place patients in “double jeopardy” – facing both the burdens of serious illness and the high costs imposed on them by insurance plan design. When serious medical problems develop, the insurers impose higher cost sharing on patients through techniques such as ever higher deductibles, large coinsurance requirements (paying a higher percentage of costs rather than lower copayments), and tiering of drugs and specialized services with even higher coinsurance requirements for the most expensive tiers.

The authors note that, not only are the patients exposed to higher costs, but some insurers require less expensive treatments as a trial before high cost treatments will be authorized (stepped therapy). The risk of delay of definitive treatment is obvious in disorders such as cancer, not to mention that it introduces more inequity into health care.

Although they repeat the consumer-directed canard that cost sharing is essential to provide incentives to economize on care, they seem to express the opposite view when they state, “when treatments are valuable and patients are willing to seek them at very high prices, economists recognize there is little value to high copayments because they would just impose financial risks through care that would have been undertaken anyway.”

Further, they state, “double jeopardy of American insurance imposes financial risk on the patient at precisely the moment when it is likely least appropriate. A cancer patient is willing to pay large sums to cling on to life, but is hit with both the dreaded disease and a large medical bill at the same time.”

Their solution is even more interesting, considering where they come from. “In cases where treatment is effective, payers should provide real insurance and not impose substantial burdens on patients when they are sick — especially those who do not respond to conventional first line care. In face of market forces, we would expect patients or their benefit managers to sooner or later shun plans with double jeopardy designs.” Imagine that. They suggest that the markets will reject precisely those cost sharing plans that their colleagues on the “other side” are pushing – plans which have gained great traction in recent years, especially since the implementation of the Affordable Care Act.

An alternative proposal of theirs also seems to reject the concept of making the consumer a better health care shopper through cast sharing. “The second best alternative would be to encourage manufacturers to fix the insurance failure by providing copayment assistance for these patients. The analogy is Medigap coverage, which provides secondary insurance for costs that Medicare does not cover.” Wow. Right now their colleagues are recommending that Medigap be pared back to deliberately increase exposure of patients to the direct costs of health care.

We can be thankful that these authors have pointed out the perversities of cost sharing. They do speak of “balance” but not when the burden is significant. Although, what might seem to many to be modest levels of cost sharing, that balanced level has been shown to be a harmful burden for those of more modest means.

We should accept their principle that payers should provide real insurance without burdens or secondary insurance for uncovered costs. But far easier and much more efficient than altering the private insurance model would be to replace it with a universal prepaid health system with equitable public funding (i.e., single payer). Although Goldman and Philipson are not quite there, maybe we can coax them over.