A major company drops the copayment for primary care physician visits

The Wall Street Journal reported this week that IBM was dropping the copayment for primary care visits.  In other words, employees (and their insured family members) who had to pay $20 to go to a primary care physician now have to pay nothing.  The goal is to save costs.  What is the logic here?

Step 1: Decreasing the cost of primary care visits will lead to greater use of primary care providers.  In some ways this is a "no brainer".  Make something less costly and people will use more.  One question is whether they will use it well.  Another question is just how much more.  From a back of the envelope calculation approach, we can take one estimate of physician visit elasticity (by what percentage the quantity of something changes relative to the change in price).  A 100% decrease in price could result in a 20% increase in utilization. 

Step 2: What does the increase in utilization mean for IBM?  Well, it now has 20% more visits and it (or its insurer, although it is likely self-insured) is paying for the entire visit rather than the visit cost less $20.  So far, this means that the company (or the employees through premiums) are paying more--not less.

Step 3: What happens to the demand for ER care and hospitalizations?  We hope that those are substitutes for primary care--in other words when the price of primary care goes down the demand for ER care and hospital care goes down.  Technically, this is just trying to keep people out of the hospital by getting them better primary care.  Economically, the question is what is the "cross price elasticity of demand".  In other words, when we change the price of one service (primary care) how does it affect the demand for others.  So, it all depends on how good primary care is as a substitute for ER and hospitalization.  That will depend on the quality of the primary care provider and the decision by the patients to use primary care.

Step 4: Assess overall economic effects.  Once we know something about how good primary care is as a substitute for other forms of care, we can project whether IBM will save money or whether paying $20 extra for all the visits that were happening already plus the entire cost for each extra visit as demands change will simply be too expensive to offset with the hoped for avoided hospital and ER care.

Step 4: