An alternative framework for evaluating welfare losses in the health care market

Differential Cost-Sharing Undermines Treatment Adherence to Combination Therapy: Evidence from Diabetes Treatment

INTRODUCTION

The objective of this study was to measure the influence of differences in out-of-pocket (OOP) costs for type 2 diabetes (T2D) medications on within-patient adherence behavior towards combination drug therapy regimens.

METHODS

This was an observational, retrospective, paired sample study in patients with T2D using longitudinal pharmacy data from the 2009-2014 Medical Expenditure Panel Survey (MEPS) augmented with socio-demographic factors. We took a within-patient approach to minimize confounding effects by including patients who maintained the same number of diabetes drug classes over 2 years of MEPS. For each patient, we selected the most and least costly drug classes in the second year and examined their corresponding adherence behavior measured by medication possession ratio. The primary hypothesis tested the significance of the correlation between magnitude of the OOP cost difference and behavioral response in adherence.

RESULTS

Analysis included 1189 patients representing over 4.2 million US residents with T2D. A significant negative correlation (p < 0.001) was observed between the differences of OOP costs and adherence to the most and least costly medications compared within patients. Reduction in adherence to the most costly medication was generally observed when the difference in OOP costs was greater than $33/month. A greater variability in adherence was observed when the cost difference exceeded $2.39/month as compared to other cost difference ranges (p < 0.001), indicative of choices being made.

CONCLUSIONS

As OOP costs increased, adherence variability increased initially until a cost threshold, beyond which the adherence to the more costly medication decreased. In addition to OOP cost, adherence was also influenced by type of medication and self-perception of health. Given the complex correlation between OOP costs and adherence to medication, we suggest a careful approach to cost-sharing in the current insurance drug design and relevant insurance policies.

Incentivizing efficient utilization without reducing access: The case against cost-sharing in insurance

Cost-sharing is regarded as an important tool to reduce moral hazard in health insurance. Contrary to standard prediction, however, such requirements are found to decrease utilization both of efficient and of inefficient care. I employ a simple model that incorporates two possible explanations-consumer mistakes and limited access-to assess the welfare implications of different insurance designs. I find cost-sharing never to be an optimal solution as it produces two novel inefficiencies by limiting access. An alternative design, relying on bonuses, has no such side effects and achieves the same incentivization. I show how the optimal design can be deduced empirically and discuss possible impediments to its implementation.

The economics of moral hazard revisited

Pauly's (1968) [Pauly, M., 1968. The economics of moral hazard, Comment, American Economic Review 58, 531-537.] analysis of the welfare loss from insurance assumes that medical care consumption is not determined by income, but recent studies suggest it is. This study argues that (1) Pauly's analysis overstates the welfare loss because it includes the effect of income on consumption, (2) the relevant income effect is derived from income transfer from the healthy to the ill that occur when the probability of illness is less than 1, and (3) the welfare loss can be considered the transaction cost of insurance.

Where are we now in British health economics?

Health economics took off in 1970 or thereabouts, just after the take-off date for the economics of education. Although early health economics made use of human capital theory as did the economics of education, it soon took a different route inspired by Arrow's work on medical insurance. The economics of education failed to live up to its promising start in the 1960s and gradually ran out of steam. The economics of health, however, has made steady theoretical and empirical progress since 1970, principally in coming to grips with the implications of supplier-induced demand and the difficulties of evaluating health care outcomes. Some of the best work on British health economics has been in the area of normative welfare economics, defining more precisely what is meant by equity in the delivery of health care and measuring the degree of success in achieving equity. Recent efforts to reform the NHS by the introduction of 'quasi markets' have improved the quantity and quality of health care in Britain. In short, British health economics has been characterised by the use of Pigovian piecemeal rather than Paretian global welfare economics, retaining a distinctive style that sets it apart from American health economics.

Economists, public provision, and the market: changing values in policy debate

Among health services researchers, an "economizing model" of health care has eclipsed two traditional models, "social conflict" and "collective welfare." The older models emphasized social solidarity and distributive justice, but the newer one focuses on improving efficiency, minimizing risks borne by third-party payers, constraining cost increases, and improving the functioning of markets. This article examines one source of the economizing model, the work of several early and persistently prominent economists of health care, especially Mark Pauly, Martin Feldstein, and Joseph Newhouse and his colleagues at the Rand Corporation. In particular, it explores their role in transforming perceptions of health care from a set of special services into an ordinary commodity, in giving currency to apparently dispassionate as opposed to overtly value-laden analysis, and in according priority, among health services researchers and policy makers, to economists' traditional interest in fostering smoothly functioning markets. It exhibits their principal policy recommendation-income-graduate cost sharing-the sources and character of their modes of analysis, and the character of their influence on policy makers. The article concludes that the supposedly value-free economic analysis of health care rests on a cluster of values that inhibit the expression of social solidarity and the formulation of policies intended to foster distributive justice.

Can markets give us the health system we want?

The purpose of this article is to reconsider the foundations of health economics as applied to the study of competition. It shows that conclusions concerning the purported desirability of competitive markets are based on a number of assumptions--many of which have heretofore been ignored--that typically are not fulfilled in the health care area. Once this is recognized market mechanisms no longer necessarily provide the best way to improve social welfare. The article is divided into two parts: competition and demand. Each of these sections presents and then critiques key assumptions of the conventional economic model, and then provides a number of health applications. It concludes that by not considering the validity of these assumptions in health care applications, researchers and policy analysts will bind themselves to policy options that may be most effective in improving social welfare.

A problem with consumer surplus measures of the cost of practice variations

Estimates of the surplus loss due to physician practice variation measure the area under the 'shifted' demand curve. This method is valid only if the unshifted demand curve is derived form the distribution of true(ex post) values of care. If the unshifted demand curve does not reflect the true value of care, then the traditional methods of measuring surplus loss can be seriously biased.

The cost of rationing medical care by insurance coverage and by waiting

This paper raises the question of the least-cost institutional mechanism to secure the value of certainty by reducing risk over the purchase of medical care. Two methods of reducing risk are evaluated: financing medical care with 'complete insurance', that is, ready access to medical care that is free at the point of purchase; and rationing by waiting time in a national health service that supplies a limited volume of medical care. The first system corresponds to the type of insurance held by most people in the United States, while the latter represents a stylized model of a national health service. The cost of over-utilization of services by insured consumers in the U.S. is substantial--larger on a per-family basis, and far larger for the nation, than the cost of under-utilization by those who lack insurance. The cost of rationing by waiting is estimated to be between $541 and $828 per family (in 1984 dollars). Thus, both systems involve costly mis-allocation of resources.

Evaluating welfare losses in the health care market

According to traditional welfare analysis, consumers facing a price increase forego consumption of the least valued units of a commodity. Studies, such as the Rand HIE, show that patients decrease their consumption of all types of health care when faced with a price increase for health care. From this observation, Thomas Rice (1992) concludes that traditional welfare analysis is inadequate for evaluating insurance-related welfare losses in health care. In this note, I argue that it is not traditional welfare analysis which is inadequate, but the method of assigning marginal valuations to units of health care.

What does the demand curve for medical care measure?

In summary, we stand by our method of using the consumer's willingness to pay for medical care to measure consumer surplus. We have not doubt that consumers' decisions will change as the science of medical effectiveness improves and results are disseminated to consumers and physicians. However, we never expect to see an exact correspondence between consumers' decisions and experts' advice. We believe that measurement of consumer welfare should be based on the consumer's valuation of the advice, not the advice itself. Finally, we note that if there is an inefficiently low level of information in medical care markets, the solution is to inform consumers, not to insure them fully.