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Value-Based Insurance Design & Utility Maximization

[The following post was written by Erica Brode, ITUP intern]

When designing systems or developing policies, economists make the assumption that people make optimal decisions that lead to the best outcomes or maximized utility. That is, each industry actor or other stakeholder will strive to make him- or herself as happy, wealthy, healthy or successful as possible given budgetary and other constraints. As such, consumers will seek the best value possible when purchasing goods, even healthcare.
Insurance companies understand this desire for utility maximization and, therefore, will vary co-payments to induce certain behavior. For instance, if an insurer has a contract with a certain “in-network” provider for a decreased rate, they will encourage a patient to choose that provider by offering an associated lower co-payment.

Value-based insurance design (VBID) uses this same concept, but instead of cost, bases the co-payment structure on value. There are two ways in which this approach is implemented. One targets clinically valuable services or products and has a reduced co-payment for all patients. Alternatively, plans could reduce the co-payment for medication for certain indications (e.g. patient with heart disease, but not patients with performance anxiety). Both of these strategies place the incentive on the patient to demand the more valuable product.

In general, consumers dislike others (e.g. insurance companies or provider groups) determining the level of care that they receive. Under a VBID system, this decision remains in the hands of the patient, but VBID incentives gently guide them toward the more valuable, high-yield services. VBID also creates the opportunity to increase prevention by reducing or even eliminating the cost-sharing associated with these services. It can be used to lower the expense of high-cost specialty drugs, medical devices, imaging, and major surgeries.

Some are concerned that VBID comes with the potential to increase health spending or health investment by decreasing cost-sharing. However, over the long run, the use of high-value services, such as preventive care, should improve the health of the individual and save on future healthcare costs. Another notable limitation with VBID is the lack of research on the quality and value of different health care services. This does not mean we should not pursue the integration of VBID techniques; rather, it supports efforts like the creation of a national body to produce evidence-based research on the value of healthcare services, such as Cost Effectiveness Analysis Research.

For more on the basic concept, read Value-Based Insurance Design by Michael Chernew, Allison Rosen, and Mark Fendrick featured in Health Affairs in 2007. And for a current look at how VBID could be used to further reform efforts, see The Impact of Value-Based Insurance Design on Health Spending, featuring my Health Economics Professor at U.C. Berkeley, James C. Robinson.