Health Insurance Medical Studies

Can varying co-payment rates by risk reduce cost and improve health outcomes?

A RAND study published in the American Journal of Managed Care (“Varying Pharmacy Benefits With Clinical Status: The Case of Cholesterol-lowering Therapy“) claims that managed care administrators may be able to vary pharmaceutical co-payment amounts by risk group in order to reduce cost and improve health outcomes.  Thus study looks at Cholesterol-Lowering pharmaceuticals. 

Co-payments are both a blessing and a curse.  If a policy-maker’s goal is to reduce the cost of health care, drug co-payments work well.  Consumers become more price sensitive when faced with an out-of-pocket payment.  On the other hand, if the co-payment is sufficiently high so that a patient decides to forgo the medication, this can be more costly for the insurance company; with the medication the patient may need hospitalization or emergency department care at a later date. 

The RAND study says that co-payments should be targeted by risk group.  High risk people should have a low (or zero) co-payment in order to induce them to take their medication and avoid costly hospitalization.  Low risk patients–by definition–have a lower probability of being admitted into the hospital and thus will have to pay a higher co-payment. 

RAND Conclusions and my Interpretation:

1. Higher co-payments decrease pharmaceutical usage.  This believe this is a robust finding.

2. Patients in each risk group characterized as ‘full compliance’ had better health outcomes than those who did not comply with the doctor’s complete prescription.  One would guess that “following the doctor’s orders” would lead to better health outcomes.  However, it is likely that the ‘full compliance’ effect is overstated in this study.  Patients who follow their doctor’s orders exactly may have a healthier life style, be more risk averse, or may be better able to afford the the cost of the drug.  If this is the case, part of the health outcome is due to the fact that those who follow their doctors orders completely are generally healthier people.  While the estimates may be exagerated, I do not argue with the fact that following a physicians orders exactly does lead to beneficial outcomes for those patients. 

3. Lowering co-payments for high risk groups was cost effective.  It seems to be the case Cholesterol Lowering (CL) drugs are a more cost effective manner of treating patients than either hospital or emergency department admission.  This finding may not be generalizable for other diseases. 


  1. Accuracy of Risk Grouping.  It is unclear whether or not people self selected into co-payment groups.  If those who knew themselves to be low risk (which may be different than the classification researchers gave them) decide always comply with the doctor’s exact wishes; the ‘compliance’ level may be a proxy for risk instead of a measure of the effectiveness of the treatment.
  2. Dynamic Effects: It is possible that if Insurance Company A increases co-payment amounts to low risk patients, these healthy individuals may switch to Insurance Company B which will not charge high co-payments.  This would leave the company A with the sicker, high risk individuals. 
  3. Informational Requirements: In order for this procedure to function in other cases, one must be able to order clients as low, medium, or high risk.  For many diseases, risk groups are not so clearly defined and this procedure may not be applicable.
  4. Unintended consequences.  People may change behavior in order to move into the high risk group and receive a lower co-payment.  If someone has quit smoking, but then learns that smokers are in the ‘high risk, low co-payment’ category.  This may induce the individual to return to smoking.  Individuals may have an incentive to lie about their health risk to change the amount of their co-payment. 
  5. Causality.  The authors admit that the study may not prove causality.  They state:

One limitation of this study is that the relationships observed here among compliance, copayments, and service use may not reflect true causal effects. For example, patients who develop new comorbid conditions may be reluctant to continue their medications, and they also are more likely to be hospitalized…Poor compliance often can be attributed to perceived ineffectiveness, side effects, high costs, and simple forgetfulness.

On the positive side, this study is very intriguing since it mixes medical effectiveness and cost efficiency analysis.  More insurance companies should be conducting these types of evaluations in order to create effective policy.