Coverage Churn and Incentives for Prevention and Innovation

John A. Graves, Ph.D.
john.graves@vanderbilt.edu

Professor of Health Policy and Medicine, Vanderbilt University School of Medicine

Professor of Management, Vanderbilt Owen Graduate School of Management

Director, Vanderbilt Center for Health Economic Modeling

Expected years insured and uninsured before age 65

Based on coverage dynamics in 2021 and 2022. Source: Vanderbilt Lifetime Insurance Simulation Model

Medicare Part D & Innovation

Source: Blume-Kohout and Sood (2013) and Gross and Notowidigdo (2024)

2. Traditional explanations focus on patient (demand-side ) explanations





  • Behavioral biases
  • Access/price
  • Low valuation of preventive services.

3. Most prevention strategies are not cost-saving.

Idea: Insurance churn creates a temporal externality.



  1. The U.S. relies on a toolkit of implicit mechanisms to sort out cost-effectiveness & coverage determinations.
  2. The competitive time horizon for insurers is measured in plan-years, not lifetimes.



  1. Insurers cannot internalize all downstream benefits, creating efficiency losses & fiscal externalities for Medicare.
  2. Churn & lack of reimbursement also dilutes incentives for innovation in preventive care.
  3. A range of policy options can help address these issues.

Source: Graves, J, “Saying No: Explicit and Implicit Mechanisms for Coverage Determinations,” Work in progress.

Source: Graves, J, “Saying No: Explicit and Implicit Mechanisms for Coverage Determinations,” Work in progress.

Source: Graves, J, “Saying No: Explicit and Implicit Mechanisms for Coverage Determinations,” Work in progress.

Source: Graves, J, “Saying No: Explicit and Implicit Mechanisms for Coverage Determinations,” Work in progress.

Source: Graves, J, “Saying No: Explicit and Implicit Mechanisms for Coverage Determinations,” Work in progress.

Source: Graves, J, “Saying No: Explicit and Implicit Mechanisms for Coverage Determinations,” Work in progress.

Source: Graves, J, “Saying No: Explicit and Implicit Mechanisms for Coverage Determinations,” Work in progress.

Source: Graves, J, “Saying No: Explicit and Implicit Mechanisms for Coverage Determinations,” Work in progress.

Source: Graves, J, “Saying No: Explicit and Implicit Mechanisms for Coverage Determinations,” Work in progress.

Source: Graves, J, “Saying No: Explicit and Implicit Mechanisms for Coverage Determinations,” Work in progress.

Source: Graves, J, “Saying No: Explicit and Implicit Mechanisms for Coverage Determinations,” Work in progress.

Source: Graves, J, “Saying No: Explicit and Implicit Mechanisms for Coverage Determinations,” Work in progress.

Source: Graves, J, “Saying No: Explicit and Implicit Mechanisms for Coverage Determinations,” Work in progress.

Explicit Mechanisms (e.g., NICE)

Source: Graves, J, “Saying No: Explicit and Implicit Mechanisms for Coverage Determinations,” Work in progress.

Implicit Mechanism: Prior Authorization

Source: Graves, J, “Saying No: Explicit and Implicit Mechanisms for Coverage Determinations,” Work in progress.

Implicit Mechanism: Step Therapy

Source: Graves, J, “Saying No: Explicit and Implicit Mechanisms for Coverage Determinations,” Work in progress.

Implicit Mechanism: Step Therapy

Source: Graves, J, “Saying No: Explicit and Implicit Mechanisms for Coverage Determinations,” Work in progress.

Implicit Mechanism: Cost-Sharing

Source: Graves, J, “Saying No: Explicit and Implicit Mechanisms for Coverage Determinations,” Work in progress.

For more, see Pauly (2015)

Optimal Coverage for Preventive Care

Source: Graves, J, “Saying No: Explicit and Implicit Mechanisms for Coverage Determinations,” Work in progress.

A temporal externality emerges ..

Source: Graves, J, “Saying No: Explicit and Implicit Mechanisms for Coverage Determinations,” Work in progress.

Policy Options

  1. Preventive care mandates
  2. Quality measures
  3. Lengthen contracts
  4. Retention policies (e.g., auto-enrollment)
  5. Universal prevention benefit (Medicare Part “P”)
  6. Jettison employer-based insurance in favor of individually-purchased.
  7. Shift incentives to providers, who have longer-term clinical relationships.
  8. Single Insurer/Payer

Extra Slides and References

Quantifying the Externality

Quantifying the Externality

Quantifying the Externality

Metric Value Units
Incremental cost (ΔC) 2,000 $
Incremental effect (ΔH) 0.09 QALY
WTP threshold (λ) 25,000 $/QALY
Welfare loss if not adopted (NMB) 250 $
Welfare loss if not adopted (NHB) 0.01 QALY

References

Blume-Kohout, Margaret E., and Neeraj Sood. 2013. “Market Size and Innovation: Effects of Medicare Part d on Pharmaceutical Research and Development.” Journal of Public Economics 97: 327–36. https://doi.org/10.1016/j.jpubeco.2012.10.003.
Gross, Tal, and Matthew J Notowidigdo. 2024. Better Health Economics: An Introduction for Everyone. University of Chicago Press.
Li, Anran. 2024. “Commitment, Competition and Preventive Care Provision.” https://www.dropbox.com/scl/fi/pjvt5fmycql5nnizsj43i/JMP_Anran_Li.pdf?rlkey=ajstyui4ttg3dgkpc4vas2zpy&e=1&dl=0.
Pauly, Mark. 2015. “Cost‐effectiveness Analysis and Insurance Coverage: Solving a Puzzle.” Health Economics 24 (5): 506–15. https://doi.org/10.1002/hec.3044.