The $0.00 Copay: How the Industry Disassociated Cost from Care

By Douglas Tardio, HealthCost Founding Partner

Enacted in the 70s – and catching on in metropolitan areas by the early 80s – copays, a component of health maintenance organizations (HMOs), may have been a leading factor in the destruction of our health insurance system. 

So why are insurance companies trying them again?

Prior to the HMO, most indemnity insurance plans offered through employers had some type of cost sharing between the employee and the employer. Typically, the employer covered the total cost of the insurance premium and paid for 80 percent of the cost of care and the employee paid the remaining 20 percent. Services were rendered, bills submitted to consumers were laid out on the kitchen table, reviewed and paid. Then, as employee benefit costs started to make the American worker too expensive against global competition, new plans emerged to manage costs…welcome the HMO. 

To incentivize participation, a carrot was offered to the consumer. It was called a copay. This dramatically altered a consumer’s out-of-pocket expense from a percentage of the bill to a fixed amount. Typical HMOs would charge $5 or $10 for an office visit and typically $50 for an ER visit. The result was improved access to care but also a complete disassociation by physicians and consumers alike for what the actual costs of care were. 

Fast forward a decade to the early 90’s. While consumers liked their copays, they did not like the ever increasing “managed” part of their care. Consumers didn’t like being told which doctors they could and could not see. So, the industry responded (with a little help from our government) and “open networks” – or POS (point of service) – replaced the limited-network HMO model.

Life was good again and consumers were happy. But something began to change. The costs for services and premiums began increasing. How could this be? 

Well, when you separate the 100 million consumers of healthcare from the actual costs of that care, there is no longer a system of checks and balances. So, without transparency and oversight, costs started on an ever-increasing trend line upward. It wasn’t all at once; there were good years with little upward trending, followed by bad years of significant increases. But one thing you could count on—healthcare costs were outpacing average salary increases.

Sure, consumers saw technology improvement, new medications, etc., but they also saw a bed in a hospital that went from $400 per day to $800 to $2,000. All paid for with a $50 copay. But not really. 

Finally, the weight was too much to bear and costs were out of control so the healthcare industry made the desperate shift back to HMO benefit designs from the 80’s but with a twist—adding an out-of-pocket component of a few thousand dollars that a consumer needed to pay first. 

The government thought this might be a good idea so they jumped in with the Affordable Care Act and offered similar products on these “revolutionary” exchanges.  I even think a few government health administration leaders stated openly that consumers liked being told which doctors to see. 

Let’s make one thing clear…most people I know don’t like being told what to purchase and from whom – especially when it comes to who they see from a healthcare perspective. Being forced into purchase decisions is considered, well, un-American. 

The result for consumers was a double whammy of expenses—paying for health insurance and out-of-pocket expenses.  This cost shifting has caused consumers to have no voice and no choice. We all swallowed hard and took whatever we could get with whatever restrictions were with it.

And just as health insurance started to bring back this cost-shifting (and so called cost-sharing to the consumer), another player took a page out of the HMO book: Big pharma with the $0 copay card. Drugs were now free for me and you! Well, at least that was the argument. Why should the average consumer care what the actual price of the drug is or who is actually paying for it? Again, disassociation for the consumer. Simply put, the pharmaceutical industry is playing a marketing game – attempting to buy off the American consumer and about every politician in the process.

I’m not suggesting all consumers should pay the full load of all their medical costs. But the only way anyone sees value of a product or service is to understand the true cost of that service before discounts or subsidies. Through negotiated reimbursement rates between health insurers, hospitals, doctors and pharmaceutical manufactures, consumers are left in the dark on the cost of care and where the tremendous swings in drug and hospital costs occur.

As humorist, P.J. O’Rourke once said, “If you think health care is expensive now, wait until you see what it costs when  it’s free.”

It’s time for open and free market pricing. 


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