Copayments and Consumer Search: Increasing Competition in Medicare and Other Insured Medical Markets

Between 1950 and 1980, the physician fee component of the Consumer Price Index (CPI) rose 488 percent. In contrast, an index of physician fees adjusted for 1) overall inflation, and 2) the declining proportion which is paid out-of-pocket by the patient, declined over the same 30-year period. This last observation, pointing to the erosion of the market, is important for structuring price competition for physician services. For insured patients, out-of-pocket payments arise from deductibles, coinsurance and limits, each of which is briefly discussed in this article. Following a review of Medicare Part B physician reimbursement, the paper shows that limits can be used to strengthen the incentive which insured patients have to search for less expensive medical care.