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Co-payments and price or value signals

By March 30, 2015 No Comments

Recent policy proposals in Australia regarding the introduction of co-payments for GP services were poor, both from an economics perspective and, as it turns out, politically. It is good news that the co-payment proposals are now “dead, buried and cremated” (although, how to cremate something once it’s buried remains unclear).

Universal access to healthcare is fundamental for a healthy society and a well-functioning economy, no matter which ideological standpoint you take. While it is clear that to achieve universal access the health service needs to be run efficiently, creating financial barriers to access to general services is unlikely to result in efficiency gains.

Co-payments act as blunt instruments in healthcare

Research has shown that price acts as a blunt instrument in healthcare; changes in price affect both essential and non-essential use, to roughly the same extent. This means that a co-payment for services in general is likely to result in decreased use of services in general; it will not target only inappropriate use.

Because price signals in healthcare act bluntly, they are only useful when highly-targeted and the value of the good or service is well-understood. For example, a policy designed to reduce use of a service which is known to be low-quality, like homeopathy, could set a higher price to discourage people from using the service.  Similarly, a policy designed to increase uptake of high-value healthcare, such as immunisation, could use a lower price, or even a payment, to encourage people to be immunised. Payments have been shown to increase uptake of immunisation.

These two examples are clearly different from increasing the price to access a general healthcare service, the value of which is not known in advance and may or may not be high, depending on an individual’s circumstances. Therein lies the fundamental flaw in such a policy that aims to reduce unnecessary use, but will actually reduce all use. Further, co-payments disproportionately affect those in lower income groups, who are statistically more likely to need healthcare, but are more sensitive to small changes in price.

The risk is that more people with potentially serious conditions will not be caught early, their health will deteriorate and it will end up costing more to treat them. These costs are likely to be greater than the costs associated with seeing a larger number of patients who don’t really need healthcare. Increasing the cost of seeking advice early simply does not target inappropriate use of services.

Market failure and information problems

The reason price signals act so bluntly in healthcare is due to the same information problems that cause market failure in healthcare . In most cases people don’t know the value (or utility) of seeing a doctor and therefore can’t determine whether the price represents good value for money. Adding to this, an increase in price

will make some people think twice about seeking care even when they need it, but

it won’t always deter others who don’t.

What it comes down to (and I’m not the first to say this) is that people usually need to see a doctor, to find out whether they need(ed) to see a doctor. From then, what healthcare they receive is largely driven by the doctor, not the patient, at which point price signals become mostly irrelevant. Once we understand the implications of that, it’s easy to understand why price signals for general healthcare are typically unhelpful.

Sidenote – lessons from private health insurers

It’s interesting to note that at the same time as the government was proposing to target use of GP services, private health insurers were doing the opposite; seeking to give their members increased and expedited access to GP services. If private health insurers, who have an incentive to keep their members healthy and costs down, see increased access to GP services as key to this, perhaps the government could learn something here?

It’s all politics

Attempts to raise tax revenue by taxing healthcare, to make up for any shortfalls from other sectors, are misguided. In fact, the GP is the best place to go if you’re not sure. GPs direct patients to appropriate care and away from inappropriate care and they do this much more effectively than a price signal can. Any policy aimed at taxing use of GP services is not evidence-based; it is purely political.

Victoria McCreanor

AusHSI Health Economics Research Associate