Cost-Sharing and Utilization

It is standard economic theory that if people have to pay more a health care service they will likely use less of it, especially if it is perceived as discretionary.  The obvious corollary is that if people have to pay less for a service they will likely use more of it.  A paper from Japan uses the structure of Japan’s health insurance program for the elderly to estimate the effect of varying levels of cost-sharing on service utilization.  (NBER Paper)   At age 70, cost-sharing for outpatient visits and inpatient services drops dramatically–by as much as 60-80%–for those persons covered by the Japanese national insurance system.  This large difference at a very specific age that affects all people creates a good natural experiment to study the utilization, and potentially, outcome, effects of cost-sharing.  Japanese insurance below age 70 typically has no deductible, no limits on provider choice but a 30% coinsurance rate.  At age 70, the coinsurance generally declines to 10%.

The author finds that the reduced cost-sharing increases use of services for both serious and non-serious diagnoses, with a modest level of elasticity.  The number of first-time and repeat visits increased, each by over 10%.   And inpatient admissions increased by around 8%.   The author acknowledges that one factor at work  is the likelihood that Japanese physicians are aware of the lower cost-sharing and therefore suggest more frequent outpatient visits for people who have turned 70, but he does not discuss the corresponding likelihood that while reimbursement per visit is the same, the physician gets more total revenue if he or she encourages more visits.  But the lower cost-sharing and consequent higher utilization do not appear to have affected some outcomes, such as mortality and self-reported health status.  One interpretation is that higher cost-sharing does not necessarily lead to worse outcomes or worse health.  Patients do end up with significantly lower out-of-pocket spending, because the decline in cost-sharing is much greater than the increase in utilization spurred by that lower cost-sharing.  If patients are going to have benefit plans with very low cost-sharing, it appears that some form of close management of utilization will be needed to avoid inappropriate spending.