Supply- vs. demand-side cost sharing

A very important policy question today is, what exerts greater cost control, supply- or demand-side cost sharing? The former  puts the cost risk on providers (e.g., bundled payments, capitation). The latter on patients (e.g., higher deductibles and copayments). Think ACOs vs. “skin in the game.” Studying the Swiss system, Maria Trottmann, Peter Zweifel, and Konstantin Beck examined this question. (The pdf at the link is ungated.)

This research measures and compares the impacts of demand-side cost sharing (through voluntary deductibles) and supply-side cost sharing (through prepaid IPA plans) on individual health care expenditure (HCE), controlling for risk-selection effects. The data comes from a large panel of Swiss adults covering the years 2003–2006. […]

Higher annual deductibles and IPA plans are both found to achieve marked reductions of moral hazard. An increase in the annual deductible by CHF 200 (some EUR 133, from minimum to medium) is estimated to decrease the probability of positive HCE by almost 1 percentage point, while the IPA alternative might even be associated with an increase. In return, it achieves a reduction of positive HCE by some 12 percent, compared to only 7 percent of the medium deductible. Increasing the deductible by CHF 700 (some EUR 466) reduces the probability of reporting HCE by about 3.7 percent and the amount of positive HCE by about 18 percent.

However, this effectiveness of demand-side cost sharing comes at the price of substantial risk-selection effects. Because voluntary cost sharing plans are especially attractive to low risks, such plans might lead to market segmentation and hence higher premiums for high risks. The most favorable ratio of moral hazard attenuation over risk selection is achieved by the IPA with the minimum deductible. […] According to this criterion, supply-side cost sharing is somewhat more effective than the demand-side alternative. […]

The findings of this study permit one to draw the conclusion that allowing insurers to offer plans with both demand-side and supply-side cost sharing does generate ‘true’ savings in Swiss social health insurance. After controlling for risk selection effects, both variants are estimated to achieve marked reductions in moral hazard that can be passed on to consumers in the guise of premium reductions without jeopardizing insurers’ solvency. [Bold added.]

So, the answer according to this work is, both types of cost sharing are effective, but supply-side cost sharing is a bit more attractive if one is concerned about risk selection.

My view at the moment is that both supply- and demand-side cost sharing are appropriate, but for different types of care. To the extent care is supply sensitive, provider induced, not delivered via a shared decision making process, and/or eminence based, supply-side cost sharing would seem to deliver the right incentives. To the extent care reflects patients’ values and especially when it is based on evidence, demand-side cost sharing to signal relative costs and/or effectiveness of care to patients may be appropriate.


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