Value Based Insurance Design Michael Chernew Feb 22, 2008 Portions of this research were funded by Pfizer and GSK.

Two Concerns High (and rising) Costs Poor Quality Premiums rose 87% since 2000* Response: Raise Copays Up 70% 2000 to 2005 About 50% of time appropriate care is not delivered** Response: Disease Management P4P *Kaiser Family Foundation/HRET: **McGlynn et al The quality of health care delivered to adults in the United States. N Engl J Med 2003;348(26): ***

Cost sharing reduces use Ellis JJ. J Gen Intern Med 2004;19: $0 to <$10 $10 to <%20 >%20

Consumers do not respond to cost sharing as economists would like Reductions in appropriate use same as for inappropriate use (Sui et al. 1986) –Lack of coverage is associated with worse outcomes Effects concentrated on poor and chronically ill –Copays reduce use of preventive services –Copays reduce use of ‘valuable’ pharmaceuticals

Value Based Insurance Design Reduce (or keep low) copays for high value services –For high value patients Sources: Fendrick, et. al American Journal of Managed Care, 2001 Chernew. et al. Health Affairs Chernew. et al. Health Affairs. 2008

Source: Chernew, M.E., Rosen, A.B., Fendrick, A.M. “Rising out-of-pocket Costs in Disease Management Programs”. American Journal of Managed Care :

VBID Merits Increase benefit per dollar spent in the health care sector Use insurance design to make consumers behave as if they were better informed Allows more efficient subsidization of low income patients –Not all care is subsidized, only valued care

Types of VBID Targeting –By service Pitney Bowes –Targeted service AND patient group University of Michigan Scope –Lower copays only –Lower high value, raise low value

Financial Costs of VBID Greater use of high value services Greater employer share of spending for high value services –Including the services that would have been used anyway Administrative costs –Depends on design

Financing VBID Target better –high risk patients –highly effective services with low baseline use –price responsive services Offsets –Lower costs due to fewer adverse events –Productivity gains Increase costs for other services –Low value –All others Pass costs to employees in other ways

Saving money is not main objective How do we finance health? How do we enhance value?

Results from literature Pitney Bowes –6% decrease in overall diabetes costs –Savings exceeded $1 million Asheville –Reduced annual, per participant, total cost for diabetes by $1,200 to $1,872 Retired public employees in CA –20% offset overall –50% in highest spenders Source: Mahoney AJMC 2005; Cranor et al 2003; Gruber and Chandra, 2007

Evaluating a VBID Program

Intervention A large employer lowered copays for selected medications in January 2005: –Ace/ARBs –Beta Blockers –Glucose control –Statins –Steroids Copay reductions: –Generic: $ 5.00  $0 –Preferred Brand: $25.00  $12.50 –Non-Preferred Brand: $45.00  $22.50

Implementation Implemented by an integrated care management firm Activehealth Management (AHM) –Identify consumers that would benefit but were not using meds and inform them –Exclude individuals with contra-indications

Adherence

Effects size for MPR analysis Effect size (% points)Base MPR% increase*Take-up %** Ace/Arb %8.2% Beta Blockers %9.5% Diabetes %13.2% statins %7.1% steroids %2.7%

Expenditures

Perspective is key Societal –Treat greater employer share for inframarginal prescriptions as a transfer (zero cost) –Appropriate for cost effectiveness analysis –Distributional issues dealt with separately Firm –Treat greater employer share for inframarginal prescriptions as a cost

Financial impact How much must compliance reduce non- RX costs to completely offset extra RX spending –Aggregate perspective: 17% –Employer perspective: 48% Could break even with less effectiveness if: –Add in productivity gains –Add in disability savings –Target more effectively

VBID Summary Higher copays lead to lower spending (even with offsets) –Because of this copays will rise VBID allows firms to mitigate deleterious consequences –Allow firms to hit a cost target in a more efficient manner –Part of any strategy to improve quality or decrease costs Targeted copay reductions will generate offsets –May offset some or all of increased drug use VBID cannot be perfect, but imperfect may be better than non-existent

END