Supply-Side and Demand-Side Cost Sharing in Health Care

In health markets, the price paid by insured consumers when health care services are demanded can be set separately from the price paid to providers when services are supplied. This fact suggests two alternate strategies for controlling the costs of health care: demand-side cost sharing, where patients must pay more in co-payments or deductibles, and supply-side cost sharing, which seeks to alter the incentives of health care workers to provide certain services. We review the rationale, limits, and comparative advantage of demand- and supply-side cost sharing in health care while primarily focusing on the short-run pursuit of consumer financial risk protection and efficiency. We then turn briefly to the long-run issue of technology adoption, as well as the how supply- and demand-side cost sharing may affect the fairness of the health system.