In this week’s JAMA Internal Medicine, Michal Horny, myself and Mark Fendrick argue that insurers should do a better job at doing their job.
Currently, patient cost-sharing expenses are determined after care is delivered based on the realized treatment intensity, which may vary due to circumstantial factors such as the occurrence of midprocedure complications that require unanticipated interventions. We propose that payers prospectively set patient cost-sharing obligations based on expected treatment intensity (Figure). As is the case with episode-based or bundled payments already in place, insurers could use their actuarial expertise to quantify the expected mean expenditures in patients undergoing a specific procedure and require all patients to equally share the financial risk associated with unpredictable deviations in treatment intensity.
Insurers are in the business of aggregating individual level variance into a far less variant communal pool. Bad luck that produces devastating costs to one person is barely noticeable if that bad luck event happens once in a few dozen times. Insurers are supposed to be sophisticated actuarial engines and bad lack redistribution systems. Cost-sharing is intended to act as a hedge against private information that an individual has which is not revealed to the insurer until after the contract is signed.
Episode-based cost sharing would be especially suitable for care situations during which many patients receive low-intensity treatment but some—by virtue of chance—receive high-intensity treatment, such as cardiac pacemaker implantation. The implantation procedure comes with some clinical risks, namely, a 2.5% chance of intraprocedural pneumothorax. In that situation, patients receive additional health care services that would not have been provided otherwise. This increased treatment intensity then leads to increased cost of care and thus increased patient cost sharing.
No one who needs a pacemaker wants complications. No one who needs a pacemaker knows at 8pm the night before the surgery that they are going to have complications. There is no private information. At this point, cost-sharing that is conditional on good luck (no complications) or bad luck (unforeseen complications) is merely risk shifting from the entity that should be able to absorb risk and bad luck (insurers) to the individual.
We propose that for well defined bundles, cost-sharing is fixed irregardless of luck.
Yes, this will increase cost-sharing for the lucky but decrease it for the few but very unlucky. That is a challenge on the politics and likely welfare implications of this proposal, but insurers are in the business of absorbing individual level bad luck and variance so they should do that more often.
Ohio Mom
Kudos on being published in JAMA!
Another Scott
I like it. You (and your fortunate colleagues) are great at cutting to the chase on this complicated stuff.
And Kudos++!
Cheers,
Scott.
TBone
You are speaking my language today 💙
Mousebumples
@Ohio Mom: agreed! Nicely done!
dnfree
Back in the 1980s, we had the defrost timing part on our refrigerator replaced by a repairman. He explained to us that when the part fails, about half the time it stops such that the refrigerator gets warm and the food thaws. The other half of the time, the entire refrigerator freezes up. The second repair takes a lot longer because the refrigerator has to thaw out before it can be fixed. The repair cost was a fixed amount (the average) regardless of which situation had occurred.
Your proposal sounds like it makes the same kind of sense.
BeautifulPlumage
Woe, I think I understood all of that! And it makes so much sense in terms of “insurance”. Good job, & congrats on publishing!
pluky
This is the problem with high deductible/out-of-pocket-maximum plans. Premium shopping for the lowest rate leads to selection of plans that, while preventing catastrophic loss to the insured, leave many exposed to the risk of more shock than they actually can handle. Capping these methods of cost-sharing (e.g. get rid of CoPays and set OOPmax equivalent to a low deductible) would result in (marginally) higher premiums, but better serve the ideal of pooled risk sharing.
Now a nod to the obligatory rant as to why we have such an asinine way of funding health coverage!!!
Cervantes
How about just no cost sharing, period? That would seem to solve the problem. After all, it’s not your fault that you need a pacemaker in the first place.
AlaskaReader
I’ve always viewed the insurance industry’s business plan as basically legalized and regulated extortion, soI can understand and even applaud the attempt to make dealing with the insurance industry more equitable and palatable for the end user.
Though what I’d rather like to see is the insurance industry excised from healthcare all together.
I still would rather have single payer, federalized healthcare that doesn’t have to compromise care to insurance industry profits.
TBone
@Cervantes: that’s not how the whole “you are responsible for your health” schtick works. Hubby and I have been beaten with that schtick many times. It’s why idiots buy supplements called “Fruits” and “Vegetables.”
Omicron
@AlaskaReader: Absolutely. I have long been of the view that the insurance model is the *wrong* model for paying medical costs.
David Anderson
@AlaskaReader: tell me how to assemble 218-51-60-5