Game Changers: Consumerism and Price Sensitivity Are Set to Change the Health Care Marketplace

Price Sensitivity: A Fundamental Economic Principle

Consider 3 patients coming to the pharmacy, each with a generic prescription retailing for $100. The first has a $10 co-payment, the second has 10% coinsurance, and the third has a high-deductible plan with a health savings account. The first patient pays $10 and happily leaves the pharmacy. The second patient pays $10, but only after asking the pharmacist if he thought the medication worked well. The third patient, after finding out that the prescription will cost him $100 out-of-pocket, asks the pharmacist if there are cheaper alternatives.

In all 3 circumstances, the cost of the medication to the combined insurer—patient purchaser is $100. However, in the first 2 cases, the cost was shared by the insurer. In the third case, the patient was bearing the full cost (prior to meeting a deductible that can be $3000 to $7000 for high-deductible family plans).

Now consider if the prescription had cost $200. The first patient would still pay $10 and go on his way. The second patient would wince at an out-of-pocket cost of $20 and ask if there were cheaper alternatives. The third patient would demand that the pharmacist call the physician to find a replacement on a discount drug list or would simply walk away without buying anything.

Due to some unique aspects of health insurance that have historically provided some level of coverage for “first dollars in,” price sensitivity (more specifically, price elasticity of demand) is a fundamental economic principle that has, to date, played a more minor role in health care compared with other goods and services. Price sensitivity is measurable, represented by the percentage reduction in demand owed to a percentage increase in price/cost. “Elastic” goods and services experience a large decrease in demand when subject to a price increase, whereas “inelastic” goods or services experience less reduction in demand at higher prices.

Modern Health Care Financing in the United States: A History of Masking Actual Cost

Unlike health care systems in many industrialized countries with nationalized medicine or single-payer constructs, the US health care system relies on markets to function. For the greater part of 100 years, the insurance marketplace has functioned to pool risk on behalf of employers, individuals, and states through managed Medicaid offerings. However, health insurance has evolved in a distinctly different manner than other types and forms of insurance. Unlike car accidents, house fires, and accidental deaths that have decreased per capita over time and remain relatively rare events, use and demand for health care goods and services continue to rise as the population ages and gets sicker (more chronic disease), and treatment options become more plentiful.

The majority of health insurance enrollees will access their health benefits over the course of a year. That reality flies in the face of the most basic of insurance principles: the whole idea of insurance is to pool risk across many individuals that may have a low risk (but high consequence) for a certain event. If everyone in the risk pool needs to tap into the dollars that were collected from premiums over the course of a year, the insurance is acting more like a group-contracting entity than an insurance company that predicts events and posts premiums based on the frequency and severity of those events.

What is the result? A reliance on insurance premiums to pay for noncatastrophic care and a subsequent reduction in price sensitivity creating inelasticity by limiting the exposure of the patient-consumer to increases in costs of a medication, visit, or procedure. For the patient with the $10 co-payment in the above example, there is no sensitivity (in fact, there may be the opposite: if the patient-consumer is aware of a cost increase, this may increase demand due to the perception of more value). For the patient-consumer with 10% coinsurance, a doubling of the total cost from $100 to $200 may double his out-of-pocket payment from $10 to $20, but he is still only exposed to an increase of 10 cents on every dollar in actual cost. For the third patient-consumer, full exposure to the actual cost increase is felt and this scenario is likely to create far greater elasticity (reduction in demand from increase in price), driving him to seek alternative treatments or give up on treatment altogether.

Ever since wage controls during World War II (which catalyzed the proliferation of employer-sponsored health plans by incentivizing employers to provide a health benefit in lieu of an increase in salary) and the ensuing economic boom that resulted in a substantial growth in the labor force, the size and financing of our privatized health care system has steadily grown, increasing our dependence on classic marketplace and insurance principles. However, despite reliance on marketplace principles to function correctly, health care has, for the most part, grown under conditions of relatively low deductibles compared with total average expenditures, often with “first dollar in” coverage for many health care goods and services (outpatient physician visits, prescription drugs, etc), leading insurers to rely on supply side or access-limiting cost-containment strategies (aka, prior authorization) since patient-consumers were generally not exposed to the actual costs for their care or medications for noncatastrophic circumstances.

Insurance Reform Driving Patient Exposure to Actual Cost of Care

Throughout the 1980s and 1990s, as the US population aged and became sicker and innovation resulted in more choices of therapies, pharmacy benefit managers (PBMs) were created and began using tiering systems to introduce some price sensitivity to the patient-consumer, often represented by a single, low out-of-pocket rate for all generics, a medium out-of-pocket rate for formulary-friendly branded drugs, and a high out-of-pocket rate for brands that were deemed too expensive or of low value compared with alternative therapies deemed equivalent by a PBM.

In the early 2000s, Chernew, Rosen, and Fendrick introduced the notion of value-based insurance design (V-BID) in Health Affairs. “[V-BID] encourages the use of services when the clinical benefits exceed the cost and likewise discourages the use of services when the benefits do not justify the cost.”¹ At the core of the V-BID concept is price sensitivity; this works in both directions, depending on the drug and even the patient circumstance or the severity of the condition. In other words, health care goods and services may be inherently more cost-effective and/or of more benefit in some patients compared with others, so it makes sense to use a nuanced insurance design and cost-sharing increases and decreases based on the projected benefit of a product or service to a patient (and a plan).

Currently, due to multiple factors, quite likely including health care reform, we are seeing a wholesale shifting of cost-sharing across the board toward patient-consumers. High-deductible health plans (HDHPs) are also called consumer-directed health plans (CDHPs) for a reason: patient-consumers play a much bigger role in the selection of goods and services and are much more likely to behave like shoppers than beneficiaries of “first dollars in” spend. The growth of HDHPs and CDHPs, and the increase in their memberships over the past few years, has been staggering. In the past 7 years, the percentage of employees enrolled in an HDHP has tripled,² with 83% of employers now offering them.³

When an HDHP is paired with a health savings account (HSA), the employer will often contribute (87% of the time)³ to the HSA, often with the dollars saved from the premium reduction by enrolling in the HDHP versus the traditional plan. This creates a strong incentive for many employees to enroll in an HDHP, particularly the young and healthy who are eyeing the growth of that savings account over time (as well as the tax deduction). If they are fortunate enough to make it to Medicare age without a catastrophic event, they may add substantially to their retirement nest egg since HSA money is penalty-free at that point. An HSA essentially acts as a 401k, but without tax on health care expenditures throughout the life of the account holder.

Recent Evidence of the Powerful Effects of Consumerism and Price Sensitivity

It is highly unlikely that HDHPs and CDHPs will go away, as they are popular with employees and employers that want to get out of the employee health care space. In addition, with every passing year, there is more evidence that silver plans (the most popular type) and bronze plans (which have a lower premium and a higher “first dollars in” cost share) are much preferred to gold and platinum plans (which have higher premiums and lower deductibles and cost share). The same seems to apply to private exchanges.

As the number of plans with no “first dollars in” coverage for medications grows, some are concerned with the effects on medication adherence. The results of a study by Fronstin et al⁴ suggests that patient-consumers who experience dramatic changes in their exposure to actual cost (moving from a conventional plan to an HDHP or a CDHP) are much more likely to become nonadherent to medications for diabetes, hypertension, and depression.

We also know from the Asheville Project,⁵ in which co-payment assistance was provided alongside pharmacist-provided medication optimization services that included aspects of regimen review and adherence coaching, that reducing exposure to the cost of medications under the right circumstances can substantially reduce the total cost of care (Sidebar^6-8). And this is where things get interesting.

Studies Associating Targeted Co-payment Assistance with Reductions in Total Cost of Care

• Some cohorts of patients with complete co-payment assistance for beta-blockers following a heart attack had 70% less total cost of care than patients without co-payment assistance.⁶
• Connecticut has a broad-based program of co-payment assistance for certain office visits and medications that has led to reduced overall spending on emergency department visits.⁷
• In The Asheville Project, cardiovascular medication use increased nearly 3-fold, but cardiovascular-related medical costs decreased by 46.5% (directionally similar results have also been found with diabetes-related medical costs).⁸

New Threats (and Opportunities) for Pharmacy

Remember the third patient, the consumer with the HDHP and HSA who is exposed to the full cost of the $200 prescription? When that level of exposure to cost is combined with VBID concepts, a powerful set of incentives and disincentives can be simultaneously deployed. Such a plan could create high exposure to the costs of drugs and patient conditions that have a low health outcomes return on investment while also creating a scenario of low-cost exposure for drugs and patient circumstances that generate a high health outcomes return on investment. In other words, for plans with a high deductible and full exposure to medication cost prior to meeting the deductible, the insurer or sponsor has a powerful mechanism for keeping low-value drug/patient circumstances at high levels of elasticity (price sensitivity) and providing targeted co-payment assistance for high-value drug/patient circumstances (eg, beta-blockers after myocardial infarction), perhaps alongside pharmacist-provided services, as in the Asheville Project.

Consumerism May Become the New Norm

As Eagle et al mentioned in their article “Value-Based Insurance Design: Improving Adherence Through Shifting Benefit Designs” (Directions in Pharmacy, December 2015), the Centers for Medicare & Medicaid Services will be engaging in a 5-year VBID study to test these types of models and their effects on the Medicare population. It is hard to imagine that we will not begin to see price/cost exposure discrimination emerge in the pharmacy space as 2 megatrends continue: (1) the proliferation of HDHPs and CDHPs, and (2) the inevitable blurring of lines between the PBM industry and the conventional medical insurance industry as accountable care, pay-for-performance, and quality ratings evolutions continue unabated and require more attention to the optimal use and access to medications in order to achieve better patient outcomes.

Also emerging as threats to, and opportunities for, pharmacy due to more patient exposure to “first dollars in” cost of care are direct-pay models that flip the current health care insurance model on its head. Cash-paying customers who may be able to use HSA funds for payment (regardless of insurance coverage) enable access to markets that have been historically difficult to penetrate for companies, such as PediaQ,⁹ that combine cost-effective clinician home visits with Uber-like mobile search and real-time marketplace technology. That could be a boon for business models (and professions such as pharmacy) that have historically struggled to gain insurance coverage for services. After all, the only reason that insurance coverage of a service offering, such as a comprehensive medication review, is necessary is to reduce or eliminate price sensitivity to the patient, right?

These sorts of models are already active in eye care and dental care, often when buying insurance is only sensible for the tax advantage and offers no real actuarial benefit to the patient relative to the premium rate, with coverage caps and high-dollar procedure limitations. For providers heavily invested in preventive care—such as dentists, optometrists, and primary care providers—in which regular or annual visits are the standard of care, conventional insurance as we know it does not necessarily make sense for the patient-consumer. For all intents and purposes, the patient is paying full price (whether or not a claim is filed) for most or all of the services at the end of the day because most or all patients are (or should be) accessing the service. Perhaps direct pay or cash pay using HSAs, rather than insurers, will emerge as the first scalable mechanism to fund pharmacist-provided services in the end.

Direct-pay models may even emerge as complimentary to rare-event, risk-pooling insurance by requiring a monthly fee for regular access to a primary care physician, for instance, without the use of insurance, but with the backstop of a catastrophic plan if the rare event occurs, in which maximum out-of-pocket costs (per Affordable Care Act [ACA] regulations) are currently $6450 for individuals and $12,900 for families.¹⁰

Therein lies the net effect of the ACA to date: millions more US citizens have coverage (often catastrophic and subsidized) and millions more have additional out-of-pocket exposure, simultaneously reducing the likelihood of bankruptcy (or major financial loss) while creating incentives for patients to act more like discriminating consumers and allowing more creative insurance designs that attempt to optimize patient outcomes for every dollar received.

This article is published in collaboration with the Directions in Pharmacy CE Conference program.

Troy Trygstad, PharmD, PhD, MBA, is the director of the Network Pharmacist Program and Pharmacy Projects for Community Care of North Carolina (CCNC), a parent organization of 14 regional care-management networks. These networks bring together medical practices, county health departments, hospital systems, and mental health providers to integrate care delivery for Medicaid, Medicare, private plans, employers, and the uninsured. CCNC and its networks are responsible for developing and evaluating accountable care systems in North Carolina. Under his direction at CCNC, the Network Pharmacist Program has grown to include pharmacists who are involved in a number of diverse activities including medication reconciliation, e-prescribing facilitation, and management of pharmacy benefits. He has also been involved in novel adherence implementations, as well as the development of adherence technologies that use administrative claims data to predict, intervene, and triage adherence interventions and coaching opportunities. Dr. Trygstad received his PharmD and MBA degrees from Drake University and a PhD in pharmaceutical outcomes and policy from the University of North Carolina. He is co-editor-in-chief of the Pharmacy Times series’ Directions in Pharmacy.

References

• Chernew ME, Rosen AB, Fendrick AM. Value-based insurance design. Health Aff (Millwood). 2007;26(2):w195-w203.
• 2015 employer health benefits survey: section seven: employee cost sharing. The Henry J. Kaiser Family Foundation website. kff.org/report-section/ehbs-2015-section-seven-employee-cost-sharing. Published September 22, 2015. Accessed January 4, 2016.
• Health care benefits cost increases to hold steady in 2016, National Business Group on Health survey finds [press release]. Washington, DC: National Business Group on Health; August 12, 2015. businessgrouphealth.org/pressroom/pressRelease.cfm?ID=263. Accessed January 4, 2016.
• Fronstin P, Sepulveda M-J, Roebuck MC. Medication utilization and adherence in a health savings account-eligible plan. Am J Manag Care. 2013;19(12):e400-e407.
• The Asheville Project. National Business Coalition on Health website. nbch.org/The-Asheville-Project-Case-Study. Accessed January 4, 2016.
• Choudhry NK, Bykov K, Shrank WH, et al. Eliminating medications copayments reduces disparities in cardiovascular care. Health Aff (Millwood). 2014;33(5):863-870. doi: 10.1377/hlthaff.2013.0654.
• V-BID in action: a profile of Connecticut’s Health Enhancement Program. The University of Michigan Center for Value-Based Insurance Design website. vbidcenter.org/wp-content/uploads/2014/10/V-BID-brief_CT-HEP-final.pdf. Published January 2013. Accessed November 24, 2015.
• Bunting BA, Smith BH, Sutherland SE. The Asheville Project: clinical and economic outcomes of a community-based long-term medication therapy management program for hypertension and dyslipidemia. J Am Pharm Assoc (2003). 2008;48(1):23-31. doi: 10.1331/JAPhA.2008.07140.
• Pedia Q website. pediaq.care. Accessed January 4, 2016.
• State actions on health savings accounts (HSAS) and consumer-directed health plans, 2004-2015. National Conference of State Legislatures website. ncsl.org/research/health/hsas-health-savings-accounts.aspx. Updated October 2015. Accessed January 4, 2016.