Helping People Find the Best Medicare Insurance
A fee-only financial advisor


Contact us by e-mail

Managing Medicare's Costs

Medicare meets value-based insurance design (1 of 2)

In the late 1990s, Dr. Mark Fendrick and his colleagues began promoting the idea that traditional health insurance has design flaws that increase healthcare costs. Fendrick, a physician and healthcare policy expert at the University of Michigan, was the lead author of an important 2001 American Journal of Managed Care article suggesting that co-payments for prescription drugs should not be tied to their costs, as is usually the case, but to their benefits. The authors maintained that regardless of their actual costs, the drugs with the greatest clinical benefits should have the lowest co-payments.

This type of benefit design came to be known as “Value-Based Insurance Design,” or V-BID, and it applies not only to prescription drugs but to medical services. It has been adopted by a number of employers, including such large companies as Procter & Gamble and Eastman Chemical. Earlier this year the Center for Health Value Innovation published a survey of 176 businesses which found that more than one-half of them have V-BID types of plans.

V-BID also has implications for retirees, and last year’s Health Reform law made important changes that in coming years will likely have substantial impacts on Medicare beneficiaries’ cost-sharing. By and large, these changes are consistent with V-BID’s thesis: valuable medical services and drugs should have low or zero cost-sharing, while less valuable ones should cost more.

One example that’s often used to show how V-BID works involves diabetes medications. When cost-sharing for diabetes drugs is zero or near zero, people tend to take the drugs regularly. But as co-payments increase, even slightly, some people stop taking their diabetes drugs. By so doing, they increase the probability that they will have later expensive complications, including emergency room visits and hospital admissions. And so from the perspective of both the patient and the insurer, there is long-term financial value in having zero co-pays for diabetes medications.

What’s true for diabetes medications also applies to drugs used to treat other chronic conditions. Over the longer term, insurers may lose money by charging high co-pays for maintenance medications, since doing so will encourage people to stop taking them regularly and increase their health risks. Yet there are undeniably short-term added costs for an employer or insurance company that switches to low or no co-pays for certain drugs. First, the insurer sacrifices the revenue from the 90% of patients who will continue to take the drugs even with higher co-pays; second, the benefits are hard to quantify and may be not be realized for several years.

Dr. Fendrick describes in this video a 2008 study he co-authored, one which sought to demonstrate that V-BID could likely save costs. The study compared two companies that were similar in many respects including the types of insurance plans they used. One of the companies reduced or eliminated co-pays for certain drugs used to treat chronic diseases. The other company continued with its regular cost-sharing for these drugs. Not surprisingly, the workers at the company with the low co-pays had better medication adherence, thereby reducing their chances of later serious complications.

V-BID increases short-term costs for employers and insurers, and there need to be short-term offsets if insurance premiums are not to rise even more sharply than they do now. Because the most valuable medical services and drugs have little or no cost-sharing in value-based insurance design, the least valuable ones can make up the difference with high cost-sharing. In an ideal V-BID world, people are prompted by their co-pays to use the most valuable services all of the time and the least valuable ones occasionally, rarely, or never.

Last week a New York Times op-ed article by Dr. Rita Redberg, a cardiologist, identified several procedures covered by Medicare that at best have marginal health benefits. Among her examples: routine screening colonoscopies for people over 75 and two popular procedures for vertebral fractures. If Medicare fully adopts a V-BID approach, retirees could still choose to use these services but would pay more. And since many retirees would defer if they had to pay more, Medicare would save millions it would otherwise spend on treatments of questionable value.

Assuming they remain intact, at least three provisions in the new Health Reform law will nudge Medicare toward a value-based design approach. One of these – Medicare’s 100% coverage of all recommended preventive tests – went into effect this year. The other two are potentially more far reaching, involving a) comparative effectiveness research, and b) the creation in 2014 of the Medicare Independent Payment Advisory Board .

The provision for comparative effectiveness research enables the government to fund studies which can be used to distinguish the medical treatments that work best from those that work poorly or not at all. If Medicare and other insurers can separate the good from the not-so-good treatments, they can reward the good treatments by making them free or low-cost and penalize the ineffective ones by requiring high co-payments or by refusing to cover them. Dr. Fendrick co-authored an article last year in Health Affairs, which is abstracted here, emphasizing the importance of comparative effectiveness research as a way to identify low-value services.

The third provision creates an Independent Payment Advisory Board (IPAB) with the ability to alter Medicare’s benefit design if spending exceeds target growth rates. To bring Medicare’s costs in line, IPAB might reduce coverage for treatments and services that comparative effectiveness research had determined to be of little value. As it is now, Congress must approve changes in Medicare’s benefit design, and over the years it has been largely unwilling to make changes that reduce payments to providers.

In the meantime, retirees can do more to reduce their own healthcare costs than simply stand and watch Health Reform’s provisions and challenges play themselves out. V-BID’s long-term cost effectiveness is now supported by several studies, and retirees should remember its central tenet: skimping on preventive care and medications for chronic diseases is usually cost-ineffective in the long term.

© 2010-2018 Dover Healthcare Planning, LLC | Contact Us