The True Usefulness of Cost Sharing Is Misunderstood

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“Cost sharing” refers to people paying money out of their own pocket to receive healthcare services. There are lots of forms of cost sharing—the most common ones are deductibles, copays, and coinsurance.

When healthcare reformers talk about cost sharing, they are often arguing that we should increase cost sharing so that people will stop overutilizing health services (especially low value ones). They call it getting consumers to have some “skin in the game.” The Rand Health Insurance Experiment found that this works, although people decrease their utilization of high-value services as well.

But this isn’t the thing we need cost sharing to do for us. What we need it to do is get people to start considering prices when they choose where to get care.

If people don’t care what the price of a procedure is, there’s no reason they would go out of their way to find one that is less expensive (while being of at least equivalent quality). In fact, they probably wouldn’t bother checking prices at all.

But when they are forced to pay at least some part of the price, they will start asking questions to find out the price of their options. Not everyone will, of course. But some will start doing that, especially when they discover that they could potentially pay thousands of dollars less for no worse quality.

Trying to find prices is a frustrating endeavor in our healthcare system because prices are still hard to come by. And often even the quoted price is an estimation, or it doesn’t include the same bundle of services as another provider’s quoted price.

But if people can successfully find prices and choose ones that are lower priced, do you know what happens? Providers start to see that their prices actually do impact how many patients choose to receive care from them. And then the market actually starts to function because competition (at least over prices) has begun.

To summarize, we don’t need cost sharing for the sake of skin in the game; we need it so patients can be put to work searching for the best deals (trying to save their hard-earned money) because this searching effort is the main prerequisite for competition.

By the way, I am not saying people need to pay the full price of every service. The key is that they pay at least some amount of the price differential between options. So if one provider quotes $4,000 and another quotes $5,000, all we need is for them to pay is a little more if they choose the $5,000 one. This could be through reference pricing, where they pay the full $1,000 difference. Or through other methods that only have them pay part of that $1,000, such as high coinsurance or tiered networks. There are many ways to achieve this.

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