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    The Health Costs of Cost-Sharing
    15 Mar 2021Working Paper Summaries

    The Health Costs of Cost-Sharing

    by Amitabh Chandra, Evan Flack, and Ziad Obermeyer
    Small increases in cost cause patients to reduce their use of drugs with major benefits, ultimately causing their death. Since patient cost-sharing introduces large and deadly distortions into the cost-benefit calculus, payers should evaluate the merits of policies in light of their impact on health, not just on health care costs.
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    Author Abstract

    We use the design of Medicare’s prescription drug benefit program to demonstrate three facts about the health consequences of cost-sharing. First, we show that small increases in out-of-pocket prices (11.0 percentage points (p.p.) change in coinsurance, or $10.40 per drug) causes a 22.6% drop in total drug consumption ($61.20), and a 32.7% increase in monthly mortality (0.048 p.p.). Second, we trace this mortality effect to cutbacks in life-saving medicines like statins and antihypertensives, for which clinical trials show large mortality benefits. We find no indication that these reductions in demand affect only ‘low-value’ drugs; on the contrary, those at the highest risk of heart attack and stroke, who would benefit the most from statins and antihypertensives, cut back more on these drugs than lower risk patients. Similar patterns exist for other drug-disease pairs, and irrespective of socioeconomic circumstance. Finally, we document that when faced with complex, high-dimensional choice problems, patients respond in simple, perverse ways. Specifically, price increases cause 18.0% more patients to fill no drugs, regardless of how many drugs they had been on previously, or their health risks. This decision mechanically results in larger absolute reductions in utilization for those on many drugs. We conclude that cost-sharing schemes should be evaluated based on their overall impact on welfare, which can be very different from the price elasticity of demand.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: February 2021
    • HBS Working Paper Number: NBER Working Paper Series, No. 28439
    • Faculty Unit(s): Technology and Operations Management
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    Amitabh Chandra
    Amitabh Chandra
    Henry and Allison McCance Family Professor of Business Administration
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