First-Dollar Coverage

Almost 90% of Medicare enrollees have supplemental insurance that pays their 20% co-insurance when they see a physician. Thus, for almost 90% of 46 million Americans, health care is basically “free.”


Source: Medicare Payment Advisory Commission analysis of MCBS, Cost and Use Files, 2005.

HT to James Capretta via Galen study.

Comments (18)

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  1. Larry C. says:

    Thanks for this post. No wonder Medicare can’t control its costs. You have 90% pf 46 million people with no incentive whatever to economize and 800,000 doctors who are more than willing to give them whatever they want.

  2. Vicki says:

    I agree with Larry. Is there any wonder why Medicare (and don’t forget Medicaid) is going to bankrupt us?

  3. artk says:

    Larry, I’ve always wondered about the idea that if you don’t pay for medical care, then you’ll use more of it. It’s a vision on medical care that imagines it to be some sort of amusement park that people go to because it’s both optional and fun. I for one don’t know a single person who goes to a doctor because it’s fun. I do know many people who avoid going to doctors because its inconvenient or they are afraid of what the doctor will find or they can’t afford to. The idea that patients act like rational economic actors to me completely without merit. And the idea that 10 minutes on web md or wikipedia can make any difference in the information asymmetry between you and a physician is a fantasy.

  4. Bruce says:

    Artk, every economic study that has ever been done on this question has shown that the demand curve for medical care is downward sloping. I don’t know of a one that shows that demand is completely insensitive to price. (Of course, I haven’t read them all, but if someone found that the demand for care — especially primary care — were completely inelastic, I’m sure I would have heard about it.)

    What if there were no time or money cost of consulting a physician? All you have to do is use your cell phone. Would you do it, every time you had a medical question? If not, why not?

    Suppose you are having your blood tested for, say, 5 or 6 problem areas. If the cost of doing 900 additional tests were zero, would you order them up? And if not, why not?

    Suppose you were having a brain scan. If the cost of continuing with a full body scan were zero would you do it? If not, why not?

    I could go on.

  5. Devon Herrick says:


    The idea that medical care isn’t a typical consumer service from which patients derive pleasure; and patients don’t know enough to participate in care decisions, is what prompted the Rand Health Insurance Experiment in the 1970s. Joseph Newhouse and his colleges at Rand began testing cost-sharing from the premise that patients should not control any of their medical dollars. The results from the decade-long experiment surprised them. When faced with significant cost-sharing, patients consumed about 30% less health care – the vast majority of which didn’t suffer ill effects from the experience.

    In economics this phenomenon is known as the elasticity of demand. If I’m paying only one-tenth of my bill directly, I only care about the price one-tenth as much what the bill is. If my doctor is afraid of being sued for a missed diagnosis (and maybe has a Mercedes payment due a week later), there is little incentive not to order an MRI or a battery of blood tests. If, over time, fewer and fewer patients ask about the price or question treatments, doctors begin to assume aggressive diagnostics tests are the norm. If patients are insulated from the cost they too begin to think of aggressive treatment or excessive diagnostic testing as better care than not getting aggressive treatments or numerous tests. There was a blog post on KevinMD on July 24, where a physician describes how doctors treat cash-paying patients differently than those covered by insurance. An inelastic demand effect everything from what patients will accept without question; to how likely a doctor is to suggest an test; to how much drug makers decide to charge for a therapy.

  6. Nancy says:

    Bruce’s examples are interesting. It looks like you could spend an enormous amount of money on otherwise healthy people if the services were free and convenient.

  7. Don Levit says:

    Devon makes a lot of sense.
    Having to pay effects what we purchase, whether it is fun or not.
    The key points are “How necessary is this puchase” (necessity versus luxury), and “how much will it cost?”
    I find it incredible with all this first dollar coverage, that the same is slowly happening with the donut hole.
    What happened to common sense?
    Even I can see that is a stupid policy!
    Don Levit

  8. Hannah Cryne says:

    My husband and I have medigap insurance that pays the 20%. Between what we pay the government ($1090 taken from our social security) and what we pay for insurance we pay about $5880 a year. Then we pay about $652 a year for prescription drug Plan D. Even with the drug insurance we buy some of the drugs out of pocket since they are cheaper than the co-pay. As a high income earner he paid the maximum tax for medicare for several years. During the 8 years since his retirement we have paid a total amount of about $52,000 not counting his previous working contributions.During that time we maybe went to the Dr. 2 or 3 times a year. This year my husband had a stroke, actually ,the first not diagnosed as he was in kidney failure from taking an over the counter pain killers for the pain of an injury from a car crash in 2001. The bills haven’t come in yet but do you think anyone is qualified to criticize us for his getting treatment.? I think that we could have probably covered this care if we could have saved the money we have had to pay the government during the working years and what we have paid the government since then. But we had no choice. Also I don’t think we are responsible for the failure of Medicare. The government is for creating it and then wasting the money by misusing the money . This is what will happen on a large scale with ” Obamacare”.

  9. artk says:

    Details count, you need to reread the Rand study. First, they found that among poor populations, cost sharing caused worse outcomes. Then again, since the reimbursement schedule for Medicaid providers are so inadequate, that’s our way of saying we don’t think the poor are entitled to good health care. Second, cost sharing didn’t change quality of care or appropriateness of treatments. That goes to my point about information asymmetry, real consumer choice in health care can only exist if we’re all doctors, and that’s not going to happen.

  10. Bruce says:

    If “real consumer choice” means that patients must be doctors, then I suppose there isn’t real consumer choice in any market — because there is always asymmetry of information. Even so, we seem to do quite well in the market for cameras, automobiles, cell phones, personal computers, etc., where the asymmetries are at least as large as they are in medicine.

    These markets are not perfect. But they serve consumer needs a lot better than if we had a Blue Cross-type entity making decisions for us.

  11. Bart Ingles says:

    Artk seems to base his argument on two questionable beliefs: (1) that no level of cost sharing is appropriate, and that any resulting cost savings can only come at the expense of having worse outcomes; and (2) that the people he’s debating are assumed to believe cost sharing is everything and should be imposed without regard to ability to pay.

    Perhaps there are people who believe (2), but it’s not very evident here. But it seems clear to me from personal experience that awareness of cost can reduce waste. It’s caused me to raise questions with my physician that resulted in prescription changes. And doctors will try to save a patient money if they know that patient is going to be impacted.

    But cost-sharing does need to be at a level appropriate to the patient’s financial situation. A $5 co-pay may cause a poor person to forgo needed treatment, while being too small an incentive for wealthier patients.

    Also, I have a problem with John Goodman’s equating “free at point of sale” with “free”. It seems to me that charging high premiums for supplemental coverage with zero co-pays is actually worse than free: individuals may actually try to over-consume in order to recoup the overly-high premium. Co-pays need to be in balance with premiums; to incent savings, you need to increase co-pays and reduce premiums.

  12. John Goodman says:

    I actually don’t believe in copays — especially copays adjusted for income. I believe in paying market prices, which are determined by providers competing for patients based on price and quality. It’s just as easy to establish a Health Savings Account for poor poeple as it is to give them a Blue Cross card. (Well, maybe not as easy, but certainly worth doing.)

    We do this in the Cash and Counseling program for the Medicaid disabled and it works like a charm.

  13. steve says:

    Private insurance costs have gone up just as fast.

    “We do this in the Cash and Counseling program for the Medicaid disabled and it works like a charm.”

    Have you published this somewhere?


  14. Bart Ingles says:

    Point taken about copays. I really meant any point-of-sale liability, including deductibles and coinsurance. Coinsurance– an amount proportional to actual cost– would be an improvement over flat-rate copayments.

    Whether paying full price using an HSA is be more effective than, say, 20% coinsurance would depend on whether the HSA is regarded as the same as cash, or merely as “Monopoly money” with discounted value.

    Also, I didn’t mean to suggest that insurance terms should be tailored to individual income levels; rather that any external subsidies should be applied so as to have this effect.

  15. Devon Herrick says:

    Here is a blog post that discusses the trend of allowing patients to control more of their dollars like is the case with Cash & Counseling.

    Despite the problem of asymmetric information that artk speaks of, I believe patients controlling some of their own medical dollars provides them with an incentive to ask pesky question (like “how much does this cost?” or “do I really need this?”). It also goes a long way towards inducing providers to act more competitive (or at least act more attentive).

  16. steve says:

    Devon- Maybe it could. I would say that in over 37 years, I have had maybe 3 or 4 patients ask what something would cost. You are proposing a major cultural change.

    Query- If we want docs to be more competitive, is it ok if I charge more when I am able to do so? Are we only going to allow negotiations in one direction? How would you accomplish this?


  17. steve says:

    Oops, thx for the SDC piece. By OECD standards, we underspend on long term care. Overall spending in this area is not our major spending source. Having read on this particular area before, I would prefer the no strings attached approach used by the Europeans. Still not sure how this translates to more acute care.


  18. Devon Herrick says:

    Steve, I definitely agree doctors should be allowed (i.e. encouraged) to look for patient-pleasing services for which patients are willing to pay a premium. This might include phone calls, remote monitoring, email consults, etc. If health care is to be competitive it has to be a two-way street. I’ve heard many discussions — albeit anecdotal — of physicians that help cash-paying patients receive efficient care, yet had no incentive to act the same for insured patients.