Copayments Are Stupid

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.


[Originally posted at The Incidental Economist]

Support Nonprofit Journalism

If you enjoyed this article, consider making a donation to help us produce more like it. The Washington Monthly was founded in 1969 to tell the stories of how government really works—and how to make it work better. Fifty years later, the need for incisive analysis and new, progressive policy ideas is clearer than ever. As a nonprofit, we rely on support from readers like you.

Yes, I’ll make a donation

Austin Frakt

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.