What’s the theory of health care offsets?

by The Incidental Economist on July 13, 2012 · 2 comments

Imagine raising cost-sharing for a low income population. What will happen?

On the one hand, (1)  it is not unreasonable to think that if people cut back on health care utilization (e.g., due to less generous coverage) ultimately require more care later. On the other hand, (2) there is so much waste in the health care system that maybe cutting back somewhat doesn’t do any harm. Theory number 1 suggests that low-income individuals are unable to distinguish between helpful and wasteful care, or, alternatively, discount future disutility of illness so much that they are willing to forego care they know will be helpful if they have to pay more for it themselves. Theory number 2 suggests that low-income individuals can tell when care is really necessary and when they have to pay for more of their care themselves, they only use health-preserving services. Which theory is correct?

The balance of evidence that I’m aware of is on theory 1. A recent NBER paper by Chandra, Gruber, and McKnight includes a bit of a lit review.

The possibility of offset effects is real: in our earlier work (Chandra, Gruber and McKnight 2010a), we examined this question in a contemporary setting, and found evidence of hospitalization offsets in elderly who had been diagnosed with chronic diseases such as diabetes, hypertension, and hyperlipidemia. Tamblyn et al (2001) examined the effect of cost-sharing on prescription drugs in the poor and found a 13 percent increase in the probability of hospitalization, nursing home admission, or mortality. Similarly, Hsu et. al (2006) found that a cap on drug benefits was associated with lower drug consumption and poorer adherence poorer control of blood pressure, lipid levels, and glucose levels.

They also note that the RAND Health Insurance Experiment found that “for the chronically ill low-income population, there was a suggestion of a sizeable rise in blood pressure for those in the higher cost-sharing insurance plan (although the overall health results for this population were mixed, and the blood pressure result itself was not significant).” To all this we could add the excellent work by Joe Doyle showing that insurance and additional health spending lead to better outcomes or the work of Michael McWilliams that shows that individuals with cardiovascular disease or diabetes who were uninsured prior to Medicare eligibility consumed more health care once on Medicare than those who had been insured. (Other evidence related to increasing cost sharing found in here.)

However, few of these studies focused explicitly on a low-income population. Chandra, Gruber, and McKnight did. For a population ages 19-64 and with incomes no higher than 300% of the poverty line, they looked at changes in copayments in Massachusetts-subsidized health insurance.

Our results largely confirm the conclusions of the RAND Health Insurance Experiment. We find that health care demand is somewhat sensitive to copayments, but that the elasticity is small (-0.15 on average). We find that those who are chronically ill, and especially older individuals, have a higher elasticity of demand. But we also find no evidence for “offset effects” indicating that the reduced use of outpatient services has led to increased demand for hospital services. This is true even for the sickest patients in our sample, in contrast to our earlier study of elderly retired public sector workers in California. Our results suggest that concerns about ‘offset effects’ in poorer populations, while still possible, require substantially more evidence.

What’s going on here? What is the correct, full theory of health care offsets? I don’t know, but I will say this much: As the authors point out, it is possible the copyament changes were not large enough to stimulate a big response. Also, it is possible their study window, which included one year after copayment changes, was too brief, that offsets may occur later. It is virtually impossible for me to believe there will be no offsets ever for the chronically ill. Some of their health utilization is of value. This itself is demonstrated in randomized controlled trials (RCTs) of interventions for chronic diseases. If health care becomes too expensive relative to their incomes and the generosity of their insurance, some will stop using that valuable care and we really ought to see a downstream effect on hospitalization and emergency room visits. If that never happens, it means we don’t understand RCTs, which I highly doubt.

Nevertheless, I am also very willing to believe that (a) there is a lot of waste in the health system and (b) in the short term, people can cut back with relatively few measurable, ill effects (at a population level). I just don’t think we can bank on that holding forever. Moreover, we can do more about addressing the waste and inefficiencies directly, without relying entirely on individuals, particularly low-income and sick ones, to figure out what is and is not of value.

Austin Frakt is a health economist at the Department of Veterans Affairs and Boston University’s Schools of Medicine and Public Health. He blogs on health economics and policy at The Incidental Economist.

As part of our ongoing effort to raise awareness of health services research and increase its application in policy and practice, AcademyHealth has partnered with Austin Frakt, Ph.D., and Aaron Carroll, M.D., M.S., to contribute posts on the subjects of health care costs, delivery system transformation, and public and population health – areas AcademyHealth has identified as a priority in the current policy environment. As regular contributors, they’ll be discussing current events with an eye toward how new and existing research informs the issues.

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Dave July 16, 2012 at 8:35 pm

I work in healthcare, and have seen variations in utilization with changing copays. I think few people have any idea what quality care really is (as measured by compliance with published evidence-based clinical practice guidelines). They do whatever their doctor recommends, or ask for treatments they read about in magazines or see in an ad on TV. One problem is most doctors don’t know what quality care is, either (http://www.scientificamerican.com/rticle.cfm?id=demand-better-health-care-book). So if we don’t know what value we are buying with our HSAs and copays, how do we know if its worthwhile going in for care for a given problem? Another problem is healthcare isn’t a commodity like TVs where we can educate ourselves in an afternoon to compare values, and yet no one can have educated discussions about comparative effectiveness research informing payer coverage decisions in this political climate. We can’t make an educated purchase decision ourselves, but we won’t let the government tell us what one is either.

Shannon Brownlee argued persuasively in her 2007 book “Overtreated” that we spend somewhere between 1/3 and 1/5 of our health care dollars on care that does nothing to improve health. Certainly there is room to cut costs, but those who think just raising copays is the answer are ignoring the VA success story and findings like those you mention. For chronic medical conditions where we actually have good data on how to improve health outcomes, paying a little up front saves big bucks later on.

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