To wrap things up less than neatly: Why do cost sharing practices and outcomes in health insurance appear to diverge so much from the predictive observations of sophisticated economic tools and theory?

Most recent academic work in this realm seems focused on chipping away, if not fully reversing, the older seminal findings of the RAND Health Insurance Experiment of the 1970s.

How might health policy theory and practice be reconciled, or at least explained, better?

A different investigative approach might involve moving beyond massaging the econometric tools of incomplete data sets, instrumental variables, and simplifying assumptions. Instead, try interviewing business practitioners in the field to ask them why they keep making profits and retaining customers in ways that work better in practice than in theory.

Given that many employer sponsors of group health plans keep purchasing insurance coverage with less-sophisticated forms of cost sharing, insurers keep selling it, and most providers continue to participate in networks utilizing it, there is always a chance that those parties are seeing their opportunities and constraints a little differently.

One rebuttable presumption is that most health care payers, providers, and purchasers are revenue maximizers, even if actually improving health outcomes must be sacrificed along the way as secondary business goals (if not selective loss leaders).

Another is that business practices actually eroding bottom lines would have more limited life expectancies.

So, most health care operators and customers sticking to annual deductibles, instead of more sophisticated, value-based-care (VBC) models, either don’t know what they are doing as well as a coterie of outside academics and policy advocates do, or they may be playing different games by different rules.

Consider some of the following hypotheses that might be at work:

1. Health insurance often is not that easy to sell, particularly in newer and more complicated forms.
2. Selling and purchasing decisions may look quite different under ex ante uncertainty than when reviewed years later after the fact.
3. The constraints of bounded rationality extend beyond just buyers and sellers in private markets and include policy makers and their advisers, too.
4. Theoretical best practices can diverge greatly from regular operations that can be communicated, understood, executed, and repeated.
5. Longer memories of the managed care political backlash of the 1990s and continued provider resistance since then keep health insurers from asserting a more visibly accountable role in managing care too directly.

Hence, the optimum is not necessarily optimal. All things are never equal, given other tradeoffs and limiting factors in the operational side of health insurance.

For example, it’s rather difficult to construct alternative cost-sharing designs that are actuarially equivalent in swapping out deductible-incentive dollars for copayment ones that operate differently. Deductible-limit levels can extend higher because the likelihood of exceeding them for most individuals is far less likely than that of paying the full amount of a given per-item copayment at the point of service. Even triggering a number of discreet copayment charges would far fall short of the cost-sharing-tier maximums subject to many deductible incentives in current policies.

One alternative is an older hybrid approach that might instead utilize income-related coinsurance to extend the corridor of consumer cost-sensitivity while capping maximum exposure more sensitively.

Of course, if one’s policy preferences are just to minimize the scope and scale of cost sharing as much as possible, relying solely on copayment incentives is a way to do so.

Aside from practical limits on the available and usable range of value-based health care evidence, several other factors may help balance out the shortcomings of seemingly crude cost-sharing deductible practices:

• Producing more net revenue from particular sets of payers and customers paying higher insurance reimbursement rates,
• Expanding bid-ask spreads and price discrimination yields for deductible-based charges (i.e., price discrimination for marginal revenue gains), or
• Dressing up balance sheets for other reporting purposes.

Ultimately, the hypothetical construct of a much wider array of different levels of evidence-based, service-specific copayment amounts remains challenged by sellers and buyers lacking the time and patience, let alone artificial intelligence shortcuts, to sign up for such coverage. As even one deductible cost-sharing critic acknowledged, “If consumers have difficulty responding to complex plan designs, as this paper indicates, value-based cost-sharing may not be able to target the particular types of spending plan designers intend.”

This does not preclude far more modest, targeted use of VBC copayment incentives when there is sufficient evidence to support. But in the meantime, we will need to cultivate our cost sharing design gardens more carefully, in this less-than-best of all possible health policy worlds.

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