From an economic perspective, one of the fundamental features of a well-designed insurance plan is financial protection against catastrophic loss.Yet, while the United States has the most expensive health insurance in the world, health insurance in the United States offers less financial protection against catastrophic loss than public or private insurance plans in other markets. The experience of cancer and the cost of cancer care rise to the level of a catastrophic event, and thus, patients with cancer disproportionately suffer from this fundamental failure of health care cost containment. In fact, the failure of health insurance to provide this basic financial protection in the setting of these rising costs has generated its own characterization, financial toxicity.
While much has been written about the impact of financial toxicity on patients, there has been less exploration of why health insurance fails so often for our patients. We believe that it is time to deconstruct this issue to better understand pathways to a solution.
At a high level, insurance is a relatively simple product. Actuaries estimate the total financial exposure for those seeking coverage, add in the administrative costs of running the health insurance plan, and then divide this total amount by the population size to arrive at an annual premium. There are uncertainties in this estimation, so this estimate is easier for larger pools. Uncertainty can also be managed financially through reinsurance that protects the health plan from expenses much greater than those predicted.
So, one basic question is whether health insurance fails because of some systematic error in this calculation and whether this failure directly affects patients.
Since the RAND Health Insurance experiment of the 1970s, health economists in the United States have been concerned with the concept of moral hazard. On the basis of the seminal work of economist Kenneth Arrow, this theory examines how the behavior of health care markets is shaped by health insurance. Addressing the question of demand for health care services, the theory suggests that patients purchase more goods and services (and lower value goods and services) when they have insurance. Thus, it might be hard to estimate the costs of care for newly insured populations. However, health insurance is now well established in the United States, and, thus, difficulty in estimating the costs of care for newly insured populations is much less likely to occur.
One protection against moral hazard has been to include a provision for patient cost-sharing to reduce the impact of moral hazard on utilization. While these cost-sharing provisions were modest in the 1970s, they are extreme today for most patients and the concept of cost-sharing has not been updated to cover truly necessary care without payment. In 2023, health insurance costs through employer plans rose by 7%, the steepest rate in years, costing premiums of $23,968 US dollars for a family plan in 2023; many states now charge premiums and fees for children in Medicaid or CHIP; and Medicare enrollees are spending more of their savings on premiums and health care. However, ever more aggressive cost-sharing provisions have not blunted the cost of health care in the United States, which has risen from 13% of median family household income in 2000 to 25% in 2021. More recently, prominent health economists have argued that while moral hazard is an important empirical finding, it should not be the basis for a well-designed health plan. Thus, some aspect of financial toxicity is designed into a flawed concept of our health insurance plans.
For patients with cancer, this issue of moral hazard and financial toxicity is even more problematic. The RAND experiment, a large-scale randomized trial conducted between 1971 and 1982, in which people were assigned to one of five types of health insurance, examined the issue of general medical care, not the issue of cancer care. More recent work on behavioral economics has led to new insights into patient decision making. Through this work, we can now understand that there are many factors that influence patient decision making for cancer treatment (such as the role of loss and emotion). The most important result of this work, however, is that moral hazard, a notion that medical insurance increases the demand for medical care, is not a significant component of treatment choice for patients. So, in the end, health insurance for cancer care suffers from an outdated (and inappropriate) economic model of financial protection for patients with cancer.
Going back to the basic insurance model, a question here is our ability to improve financial protection by better estimating the cost of cancer care at a population level and building this cost into the premium. The incidence of new cancer diagnoses is well established, so the challenge is assessing the future resources and cost of cancer care (in the US market, since health plan contracts are renewed annually, this prediction is really for a period of 12-24 months). While affording greater financial protection for patients, this approach could increase premiums for everyone in the health insurance pool.
Models of health insurance are not the only contributors to financial toxicity. Features of how we deliver cancer treatment directly contribute to financial toxicity. Importantly, the theory of moral hazard does raise significant concerns about the supply of health care services. Going back to Kenneth Arrow, under conditions of insurance, we would expect an increase in the provision and/or cost of medical services since suppliers know that patients are shielded from the full economic impact of the cost through insurance. In his analysis (on the basis of the health care market of the early 1960s, before the Medicare and Medicaid programs were implemented), several features of the supply side of the market assuaged his concerns—the absence of advertising and price competition, the predominance of not-for-profit hospitals in the market, and a strong ethical foundation underlying the profession of medicine. As a result, there is an extensive literature on moral hazard on the demand for services, but less so, relatively speaking, on the impact of moral hazard on the supply of medical services.
In his assessment, Arrow was not able to anticipate the evolution of the health care market we have observed. But supply-side moral hazard has extensively shaped the provision of cancer therapy, from the ever-increasing quantity of services delivered to the seeming indifference to the cost or as a profit-generating or other motive. Hospital consolidation has driven up the price of services for commercially insured patients, most dramatically for hospital outpatient services such as cancer treatment. This pricing leverage has been augmented by more than a decade of Federal policies driving up the cost of cancer care for patients by moving treatment from physician offices to hospital outpatient facilities. An obscure Federal program, 340B, offers hospitals significant financial benefits from ever-more-costly cancer therapies, making hospital outpatient infusions the largest profit center for most health care systems. Hospitals eligible for 340B discounts (which are secret but are estimated at 25%-50% of the list price of the drugs) charge private insurers 289% above those charged by physician practices; those ineligible for 340B discounts charge 276% above those by physician practices. Interestingly, behavioral economics also contributes to these supply-side factors, where cancer communications, including advertising, present cancer as an emotional disease. Under conditions of emotion, patients can be more risk-seeking in making treatment choices. In addition, pervasive perverse incentives reward intensive care at the end-of-life, resulting in expensive treatments and interventions that may offer limited benefit and subject some patients with cancer and other serious illness to harm. In the end, patients are offered no protection from this onslaught of factors driving up the supply and price of cancer services.
In this framework, addressing the issue of financial toxicity entails two concurrent approaches. The first is an effort to improve financial protection provided by health insurance plans. Health plans can provide greater transparency around coverage, for example, at annual enrollment, we should all understand the expected costs of care for a set of prespecified services so that we can better understand the financial protection afforded by the health plan. In the private health insurance market, employers have new responsibilities under ERISA to serve as fiduciaries for employees in offering coverage. One test of their fulfillment of this obligation could be the risk of financial toxicity under the plan.
But the supply side of the market has its own set of obligations. Frankly, the delivery system in the United States is built off of a framework of supply-side moral hazard and price-inelastic demand for services for patients with life-threatening conditions. These strategies drive financial toxicity for individual patients, and as we improve insurance coverage, they will raise health insurance premiums for all of us. If we are serious about the issue of financial toxicity, we must understand the role of the delivery system strategy in harming our patients (and everyone else in the insurance pool through premium increases). Approaches that can align market share and financial incentives for provision of value-based care can successfully improve patient and clinician experiences with care and clinical outcomes and reduce total health care spending. At a minimum, cancer centers, especially 340B facilities, need to be held accountable for their cost of cancer care. Policymakers could also limit reimbursement to average sales price or require that profits from 340B-related infusions be specifically used for the care of underserved populations, address health disparities, and prohibit referral of patients with cancer at these sites to debt collectors.
Mandating that health insurance provides financial protection for patients with cancer is one of multiple levers that can reduce financial toxicity of cancer care. However, such an effort will place the cost of cancer care directly into the broader conversation around overall health care costs and could put pressure on the services provided to these patients and most importantly on the price of these services. Moving the debate about the cost of cancer care to this system level can remove individual patients from this discussion but will put pressure on all of us to better understand and justify how we provide these services today.