Effect of Ambulatory Surgery Policy Provisions on Medical Expense Insurance claims
From 1965 to 1987 national medical expenditures rose at an annual rate of approximately 10 percent. (1) The proportion of Gross National Product spent on national medical care increased from about 6 percent to more than 11 percent. In 1987 private health insurance funds paid for 32 percent of national medical care; 39 percent of national health dollars went to hospital care alone (U.S. Department of Health and Human Services, 1988). These figures demonstrate the continued real growth of health care costs in the United States, the large absolute dollar amounts associated with providing medical services, the importance of the private sector's role in funding care, and the effect of hospitalization costs on total medical spending.
Economic theory and empirical evidence indicate that costsharing by insureds decreases total medical claim costs. (2) Traditionally insurance plans have required insureds to share the cost of medical services through policywide deductible and coinsurance provisions, up to a designated out-of-pocket maximum amount. Since the early 1980's insurers also have offered policies with specific surgical costsharing provisions in addition to those in effect policywide. Higher deductible or coinsurance requirements for inpatient surgery relative to outpatient surgery are expected to induce the substitution of outpatient for inpatient surgery, and decrease surgical claim costs and in turn total medical costs. This study examines policies which encourage use of ambulatory surgery and investigates the effectiveness of policy design in reducing surgical and total medical care claim costs.
The Rand Health Insurance Experiment offers the most comprehensive evidence to date on the effect of insurance policy design on the demand for medical services (Manning et al., 1987). The Rand experiment finds that policywide costsharing decreases demand for total medical services. Evidence also indicates that lower costsharing requirements for outpatient care, surgical and nonsurgical, does not decrease total medical expenditures by reducing inpatient expenditures. However, neither the Rand experiment nor nonexperimental demand studies address the effect of policy design which encourages usage of ambulatory surgery on insurer claim costs.
Anecdotal evidence is not conclusive on the effect of policy design which encourages use of ambulatory surgery on insurer claim costs. Most reports exhibit little economic and statistical rigor. Many use firm or area specific data insufficient for producing results which may be generalized to a larger population. The study here improves on previous non-experimental demand analysis through use of a large data base covering 197,911 insureds from across the nation.
The article begins with the theoretical model that provides the basis for the empirical work. The model considers the insured's demand for medical and surgical services, both outpatient and inpatient, as a function of policy design and demographic characteristics. The econometric model and the data set used for testing are described, and the empirical results are reported. The study concludes with a brief summary of the major findings.
Theoretical Model of Demand
In Grossman's (1972) model of the demand for health, individuals inherit an initial stock of health which depreciates over time. Health stock is treated as a durable commodity produced by consumers which may be increased through investment of monetary resources and time in medical services. The model implies that individuals partly determine the length and quality of their lives through their health investment decisions. That is, the insured chooses or demands quantities of health (and medical care) in order to maximize utility, subject to budget constraints. …