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April 04, 2013 10:35 AM Copayments Are Stupid

By Austin Frakt

Let’s make a deal. You shell out just $500 and I’ll pick up the tab for any automobile you care to buy. I’d better protect myself a little, so the deal is only good for Honda, Toyota, and Hyundai. Are you going to get the base model Yaris ($14k)? I seriously doubt it. You’ll probably get something nicer, maybe a souped up Land Cruiser ($80k+). I’m going to pay an awful lot.

Having learned my lesson, let me make a smarter deal. I’ll give you $15k toward a car, any car on the planet. If you want something more expensive, you pay the difference.

Which deal will lead to more prudent shopping, less wasteful car spending? Which will incentivize the market to be more efficient and consumer friendly?

I can think of a few reasons why we don’t see the latter deal in health care, known as reference pricing. I bet you can too. But I’m not convinced those reasons outweigh all the problems we have with conventional copayments, akin to the first deal.

Coinsurance — you pay 20% of the car, I pay 80% — is not quite as stupid as copayments, but it doesn’t make the consumer as sensitive to price as reference pricing. Note, one can combine reference pricing and coinsurance. I pay in full the first $X and you pay some percentage beyond that.

Should we have more reference pricing in health care? Why or why not?

More about reference pricing on TIE here.

@afrakt

[Originally posted at The Incidental Economist]

Austin Frakt is a health economist and an assistant professor at Boston University's School of Medicine and School of Public Health. He blogs at The Incidental Economist.

Comments

  • Julie on April 04, 2013 5:30 PM:

    Yeah. Health can be compared to cars. That's awesome.

    You can do without a car - get a motorcycle, a bike, use a bus, walk.

    Health care is far, far, far less elastic.

    If that $15k gets used up with my first hip replacement, I'm out of pocket or out of luck with the second.

    BIG BUZZER

    Thanks for playing - try again!