Study: Higher Cost Sharing Saves Employers More
Than Benefit Cuts

But Health Affairs Article Warns of Potential Market Disruption,
Consumer Backlash, and Harm to the Low-Income Chronically Ill

BETHESDA, MD.–As employers look for new ways to control rising health insurance premiums, a new study published today on the Health Affairs Web site shows that switching from a traditional PPO to a group-model HMO or increasing employee cost sharing is likely to save employers as much as or more than cutting benefits.

However, the authors strongly caution that a trend toward increased cost sharing may disrupt insurance markets. As the healthiest people favor less costly plans with higher cost sharing, it drives up premiums in plans with lower cost sharing and fuller benefits. This disruption is especially problematic for the most vulnerable members of the population - those who are poor and/or chronically ill.

Using an actuarial model, the study finds that raising coinsurance from $15 a visit with no deductible to 20% coinsurance and a $250 deductible saved employers about 22%. That's roughly the same savings as if the employer had placed a $100,000-a-year limit on coverage and eliminated coverage for such services as prescription drugs, hearing and vision care, durable medical equipment, and mental health and substance abuse care.

The study, authored by Jason Lee, a senior research manager with the Academy for Health Services Research and Health Policy, and Laura Tollen, a senior policy consultant with the Kaiser Permanente Institute for Health Policy, quantifies the options faced by employers at a time when many are trying to rein in health care cost growth by asking enrollees to pay more of the bill to offset premium increases. Premiums are on the increase because managed care plans have reacted to a consumer backlash by relaxing their traditional cost control mechanisms and by giving enrollees greater access to services.

The authors acknowledge that higher cost sharing and reduced benefits may reduce health care costs by making enrollees more aware of their health care use and thus smarter shoppers. But they note that there is not enough comparative quality information available to help consumers make good health care choices. In addition, they caution that higher cost sharing could trigger another consumer backlash that results in a greater stratification of the health insurance marketplace as wealthy people buy their way out of managed care altogether and others return to plans that control costs through managed care strategies.

Health Affairs, published by Project HOPE, is a bimonthly multidisciplinary journal devoted to publishing the leading edge in health policy thought and research.

©2002 Project HOPE–The People-to-People Health Foundation, Inc.