Think about it: Co-insurance is a way for the employee and employer to share the actual cost of a medical service. Rather than have a fixed co-pay of $20, an employee pays a percentage—say 20 percent—of the total cost. In the end, the cost to an employee may be the same, but the difference is transparency. An employee will know that if he or she paid $20 to see the doctor, the total cost was $100.
This makes employees better consumers, because their health care costs are directly related to the choices they make.
A co-insurance model also protects the plan from bearing the full burden of health care inflation.
Deductibles, co-payments, and co-insurance are all means to "share" the cost of health care at the point of service (be it a doctor’s office, pharmacy or outpatient facility). Fixed-dollar deductibles and co-payments are staples of historical plan designs that were effective when health care inflation was significantly lower than today. But when health care costs increase significantly year after year, and employers don’t increase fixed dollar co-payments and deductibles, employers absorb any cost increase.
For example, health insurance Plan 1 covers an urgent care visit with a $15 co-payment. Plan 2 covers the same visit with a 20 percent co-insurance provision. The eligible charge for this visit is $75. In both examples, the plan covers 80 percent of the eligible charges. Three years later, the cost of an urgent care visit is $100. Fearing employee backlash if co-payments were increased, Plan 1 maintains the co-payment at $15; Plan 2 continues to require a 20 percent co-insurance payment for eligible charges. Plan 1 is now funding 85 percent of the urgent care’s eligible charges while Plan 2 continues to fund 80 percent.
In times of inflation, the fixed co-payment model works in favor of plan participants and particularly favors those with high utilization rates. In contrast, a co-insurance model serves as a hedge in the plan’s favor during a period of rapidly escalating price increases.
Co-insurance also encourages employees to shop for the best services at the best price by giving employees a financial incentive to ask about the actual cost of health care. Without an incentive to save money, why would we expect employees to make an appointment with their primary care physicians when there is an urgent care facility across the street and the co-payment for both treatments is identical or only slightly higher at urgent care?
Employees don’t need to think about the best—and in many cases, most cost-effective—medical option because they aren’t footing the majority of the bill. Most people don’t even read the explanation of benefits because their financial obligation is essentially fulfilled when they write the check for their co-payment.
But under a co-insurance model, employees need to review their explanation of benefits to understand how their obligations are determined. Doing so may make them more motivated to seek lower-cost alternatives if they are faced with paying more.
Obviously, co-insurance designs bring both promise and risk. The promise is that employees are now aware of the price point and are more willing to shop for alternatives. The risk is that employees become noncompliant with their medication regimen because they can no longer afford prescriptions or check-ups. This is particularly worrisome in today’s economy, when we know more employees are forgoing the cost of care because they can’t afford it.
But addressing the compliance challenge can be overcome—if employers put measures in place to encourage the right behaviors and discourage the wrong ones. Some ideas include capping the employee’s co-insurance obligation, providing prescriptions at no cost if the employee is enrolled in a disease management program for their condition and/or covering preventive services at 100 percent.
Any change to the system will require both upfront and ongoing communication to help employees understand their responsibilities and encourage more responsible consumer behavior when it comes to health care decisions.
Because health care costs will continue to rise, we’ll continue to spend a larger portion of our benefit budgets here until price discipline is injected into the health care market. My position is that co-payments should go the way of the dinosaur before health care as we know it today has the same fate as Tyrannosaurus rex.