How Cost-Sharing Works to Keep Health Care Costs in Check

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Your health plan requires cost-sharing such as the deductible, copayments, and coinsurance, for at least two reasons.

  • Every dollar you have to pay toward the cost of your own health care expenses is a dollar your health insurance company doesn’t have to pay on your behalf.
  • When you have to pay money from your own pocket, you’re more likely to make frugal or cost-effective choices than when the care costs you nothing.

    The second reason, incentivizing you to make cost-conscious choices, is how cost-sharing works to keep health care costs in check for everyone. Each time a health care consumer like you chooses a less expensive, but still effective, health care option over a more expensive option, it works to slow the rate of health care cost increases. In turn, this helps to keep health insurance premiums affordable.

    However, if you don’t have to shoulder even a small portion of the bill for your health care in the form of cost-sharing, you have very little incentive to keep costs in check. In fact, without cost-sharing, health care seems free.

    How Eliminating Cost-Sharing Can Cause Costs to Increase

    Perhaps the best way to illustrate how cost-sharing keeps health care costs in check is with an example of what happens when cost-sharing is eliminated. For that example, lets look at the effect of copayment assistance programs for specialty drugs.

    If a drug manufacturer agrees to pay all or part of a health plan member’s drug copayment for an expensive specialty drug, it can  lead to increasing health care costs and health insurance premiums.

    Let’s say a new wonder-drug costs your health plan $500 per day (that’s about $15,000 per month). Your health insurance put that expensive drug on the top tier of its drug formulary, so it requires you to pay a copayment of $250 per month for it.

    There’s an older drug that treats the same illness, but it’s only effective for about 85% of the people who try it, and it has a less convenient three-times-per-day dosing schedule. That older drug costs your health plan $300 per month. Your health plan charges you a $50 copayment per month for it.

    You’re incentivized by the $250 copayment to seek out that less expensive treatment option. You don’t want to pay $200 more per month than you have to.

    However, if the drug manufacturer agrees to pay $240 of your $250 copayment each month for the expensive drug, that incentive evaporates. You don’t bother looking for a less expensive treatment option because you’re only paying $10 per month out of your own pocket for the really expensive drug. Heck, the copayment assistance program results in the expensive new drug actually costing you $40 per month less than the cheaper, older drug would cost. It may not even occur to you that your health insurance company is paying $15,000 per month on your behalf to treat an illness that could be treated for $300 per month.

    By offsetting the cost of your drug copayment, the drug manufacturer has essentially paid you $240 to lock in a monthly income stream of $15,000. That’s a small investment on the part of the drug manufacturer to reap a very large profit.

    The presence of the copayment assistance program results in more people taking the drug than would have taken it if they’d have had to pay the entire copay themselves. The more frequently people choose an expensive treatment option over a cheaper option, the faster health care costs escalate. Additionally, health insurance premiums rise because every penny your health plan pays out in claims for that drug must first be collected in the form of monthly health insurance premiums from someone. Multiply this by thousands of people across the country taking the new, expensive drug instead of the older cheaper one, and the unintended consequence of the manufacturer’s copay-relief program is that everyone’s health insurance premiums increase.

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