Does differentiated cost-sharing reduce healthcare costs?

The purpose of health insurance is to cushion the financial consequences of illness. It is therefore the basic idea of insurance that patients do not bear the full cost of their medical services themselves. However, this principle can have undesirable side effects. If patients only pay a small proportion of the price of services themselves, if at all, they may have little incentive to look for cheaper alternatives. At the same time, service providers and manufacturers of medical goods may know that they can therefore impose higher prices. In other words, the high costs in the healthcare system may also be a consequence of the fact that price competition is restricted. So can regulatory market mechanisms lead to patients choosing cheaper alternatives, manufacturers setting lower prices and overall costs falling? We have analysed whether this actually happens on the basis of the differentiated co-payment for medicines. This ensures that patients pay different prices for medically equivalent medicines. It therefore provides an ideal case study for investigating the behaviour of patients and pharmaceutical manufacturers.

Cost sharing in Switzerland consists mainly of two elements, the deductible and the excess. Until the deductible is reached, patients pay the full cost of the services utilised themselves. After that, they generally contribute ten per cent of the costs (deductible) until the annual maximum amount of currently CHF 700 is reached. However, there is one exception: if several medicines with the same active ingredient composition are available, the co-payment may be higher than ten per cent. The higher deductible of 20% is applied if expensive medicines within a group with the same composition of active ingredients have a price above a threshold value calculated for this group. The differentiated co-payment has two objectives. Firstly, it is intended to incentivise patients to switch to cheaper medicines. Secondly, it is intended to encourage manufacturers to lower their prices. Before the differentiated co-payment is applied, manufacturers are informed and thus have the opportunity to adjust their prices. We look at a reform from 2011, which resulted in significantly more medicines being affected by the higher co-payment than before.

If an expensive medicine is at risk of falling under the higher deductible, its manufacturer is faced with a decision. They can lower the price, which will probably lead to lower sales. Or they can keep the price the same but expect patients to switch to cheaper alternatives, which will also reduce sales. The decision is made more difficult by the fact that the behaviour of other manufacturers also has an influence on how many patients may switch medicines. If other manufacturers lower their prices in order to avoid the higher co-payment, their medicines become more attractive to patients. A manufacturer's pricing therefore depends on how strongly patients react to price changes and what behaviour it expects from its competitors. Since the prices for medicines are public and we also know which medicines were threatened with a higher co-payment, we can analyse the producers' price reaction. Because the cheapest medicines were not affected by the higher co-payment, we also have a comparison group for which we do not expect any price reaction at all. Our analyses clearly show that expensive medicines became cheaper when the reform came into force. Prices fell on average by around CHF 12.40 or about 9.9 per cent. On the other hand, there was no price reduction for low-cost medicines. However, not all manufacturers lowered their prices: While generic manufacturers reduced the price in over four out of five cases, just under half of the manufacturers did so for original preparations. Overall, however, there was a considerable price adjustment - the differentiated co-payment therefore had the desired effect on manufacturers.

As not all manufacturers have lowered their prices, we can analyse how the differentiated co-payment affects patient behaviour. Specifically, we ask ourselves whether patients switch from medicines that are now noticeably more expensive for them to cheaper ones. To answer this question, we use data from two health insurance companies that contain information on the medicines dispensed and the cost sharing charged. As can be seen from the figure, the probability of purchasing an expensive drug decreases by around 1.5 percentage points after the reform. In other words, patients will switch medicines if they have to pay a higher co-payment. At 1.3 percentage points, the effect is significantly lower for original preparations than for generics, where there is a decrease of 4.3 percentage points. This means that patients who buy generics react much more strongly to the higher co-payment than those who buy original preparations. This pattern is also found in other studies. It is therefore not surprising that manufacturers of original medicines reduced their prices less frequently than generic manufacturers. Considering that the higher co-payment only applies if the deductible has already been exceeded but the maximum amount has not yet been reached, the reaction of patients is nevertheless remarkable. The differentiated co-payment is therefore also having the desired effect on patients.

Extrapolated to the whole of Switzerland, almost CHF 20 million was saved on medication costs in the first year after the reform. The majority of these savings are based on price reductions by manufacturers. However, it must be borne in mind that the price reductions were intended to prevent patient migration. If the manufacturers had not adjusted their prices, the reaction of patients would probably have been even stronger. The fact that manufacturers react to the expected behaviour of patients is an example of how market mechanisms can work in the healthcare sector. While cost sharing is often an imprecise instrument, here it is used in a targeted manner to create competition and thus make medicines cheaper. It would therefore be worth considering differentiated cost sharing not only for medicines.