IHP 620 Module 2 Demand and Cost-Sharing Paper Example

What a $2,500 Deductible Would Do: Demand and Cost-Sharing at Granite Peak Health

[Student Name]

Southern New Hampshire University

IHP 620: Economic Principles of Healthcare

Module Two Paper

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

What a $2,500 Deductible Would Do: Demand and Cost-Sharing at Granite Peak Health

Granite Peak Health's leadership is considering a high-deductible plan for its 9,800 employees: the deductible would rise from $500 to $2,500 for individual coverage, and the system would contribute $750 a year to each employee's health savings account. Supporters expect employees to use less unnecessary care and shop for better prices. This paper uses economic theory and evidence to estimate what the change would do to spending, to the care employees receive and to who pays.

Demand and Price Elasticity

Economists describe how much the quantity of a good demanded changes when its price changes using the price elasticity of demand: the percentage change in quantity divided by the percentage change in price. A value of minus 0.2 means that a 10% increase in the price a patient pays reduces use by about 2%. For insured patients, the relevant price is not the full cost of care but the share they pay out of pocket, which is exactly what a deductible changes.

The RAND Experiment

The best evidence on how cost-sharing affects demand comes from a RAND Corporation study run between 1974 and 1982, the Health Insurance Experiment, in which a lottery placed households into plans ranging from free care to high coinsurance. Aron-Dine et al. (2013) revisited its results three decades later. Families facing higher cost-sharing used substantially less care than those with free care, and the commonly cited elasticity of about minus 0.2 has held up reasonably well, although the authors cautioned that a single number simplifies behavior that varies with plan design. For the average participant, reduced use had little measurable effect on health, but some benefits of free care appeared for low-income people with conditions such as high blood pressure.

What Patients Cut

A key lesson from RAND is that patients facing higher prices did not cut only unnecessary care. They reduced care that clinicians judged effective and care judged less effective by similar proportions, because patients often cannot tell in advance which visit or test will matter. This undercuts the assumption that cost-sharing trims waste while leaving valuable care intact.

A Modern High-Deductible Switch

Brot-Goldberg et al. (2017) studied a large self-insured firm that required all employees to leave a plan without any deductible for one with a large deductible paired with a tax-favored savings account. After the switch, the firm spent somewhere between 12% and 14% less on care. The reduction came almost entirely from using fewer services; employees did not shift to cheaper providers, even when price information was available. Employees cut back on both potentially valuable care, such as preventive visits and some chronic disease medications, and less valuable care. Strikingly, spending fell even among employees who were likely to exceed the deductible and so faced little real change in the price of additional care.

Targeted Cost-Sharing

Cost-sharing aimed at a specific service can work differently. Selby et al. (1996) studied members of a large health maintenance organization who became subject to an emergency department copayment and found that emergency visits fell by about 15%, with the decline concentrated in conditions that are not always emergencies, and without detectable adverse effects among the outcomes tracked. Targeted charges, set where lower-cost alternatives exist, may reduce low-value use more selectively than a broad deductible.

Why Employees Did Not Shop

The absence of price shopping in the Brot-Goldberg study deserves attention because Granite Peak's leaders expect it. Several features of health care explain it. Much spending is concentrated in a small number of high-cost episodes, such as hospital stays, where patients have little ability to compare options and often exceed the deductible quickly. Price information, even when available, is hard to interpret for bundles of services whose content is uncertain in advance. And referrals steer patients toward particular providers. For Granite Peak, an added complication is that most employees receive care in the system's own facilities, where the plan already pays negotiated internal rates, leaving little room for savings from switching providers.

Estimating the Effect at Granite Peak

Total spending under the current plan, including what employees pay, is about $158 million: $142 million from the plan and $16 million out of pocket. Applying a 12% reduction, the lower end of Brot-Goldberg and colleagues' estimate, total spending would fall to about $139 million, a reduction of $19 million. Employee out-of-pocket costs would rise to about $27 million. The plan would pay about $112 million, plus $7.4 million in account contributions, for a total of $119.4 million, saving the employer about $22.6 million.

Table 1. Estimated Annual Effects of the High-Deductible Plan

Note. Composite estimates assuming a 12% reduction in total spending.

Who Bears the Change

Of the employer's $22.6 million in savings, about $19 million reflects less care used and $3.6 million reflects costs shifted to employees after account contributions. But averages hide the distribution. Healthy employees may come out ahead because the $750 contribution exceeds their spending. Employees with chronic conditions or a hospitalization would pay up to the full deductible, and for lower-wage staff such as environmental services and food service workers, $2,500 is a large share of income.

Clinical Risks

The evidence suggests some employees would skip care that matters. For a health system whose own employees include many with diabetes, hypertension and depression, reduced use of chronic disease medication could lead to complications that cost more later and conflict with the organization's mission. RAND's finding that low-income people with hypertension fared worse without free care is especially relevant.

Design Implications

If Granite Peak adopts a higher deductible, the evidence points to three safeguards: exempt preventive services, which federal rules already allow, and extend the exemption to chronic disease medications; scale the deductible or the account contribution by wage band; and pair any change with targeted copayments for services where cheaper alternatives exist, such as emergency visits for minor conditions. These ideas will be examined in Milestone Two.

Conclusion

A $2,500 deductible would likely cut total spending by about $19 million and save the employer more than $22 million, but mostly by reducing care across the board rather than by encouraging price shopping, with costs falling hardest on sicker and lower-wage employees. Economics supports cost-sharing as a lever, and the evidence argues for using it selectively.

References

Aron-Dine, A., Einav, L., & Finkelstein, A. (2013). The RAND Health Insurance Experiment, three decades later. Journal of Economic Perspectives, 27(1), 197-222. https://doi.org/10.1257/jep.27.1.197

Brot-Goldberg, Z. C., Chandra, A., Handel, B. R., & Kolstad, J. T. (2017). What does a deductible do? The impact of cost-sharing on health care prices, quantities, and spending dynamics. The Quarterly Journal of Economics, 132(3), 1261-1318. https://doi.org/10.1093/qje/qjx013

Selby, J. V., Fireman, B. H., & Swain, B. E. (1996). Effect of a copayment on use of the emergency department in a health maintenance organization. New England Journal of Medicine, 334(10), 635-642. https://doi.org/10.1056/NEJM199603073341006