Consumer-directed health plans and the RAND health insurance experiment

Health Affairs

Volumn 23, Issue 6, 2004, Pages 107-113

  Newhouse, Joseph P ^a,b,c,d  

^a HARVARD UNIVERSITY   (United States)

^b Div of Hlth Plcy Res and Educ   (United States)

^c Comm Higher Degrees in Hlth Plcy ^*  (United States)

^d Medicare Payment Advisory Commission   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

CHRONIC DISEASE; HEALTH CARE; HEALTH CARE COST; HEALTH CARE MANAGEMENT; HEALTH CARE PLANNING; HEALTH CARE POLICY; HEALTH CARE UTILIZATION; HEALTH INSURANCE; HUMAN; MEDICARE; REVIEW;

CONSUMER PARTICIPATION; COST CONTROL; COST SHARING; HUMANS; INSURANCE, HEALTH;

EID: 8844274883     PISSN: 02782715     EISSN: None     Source Type: Journal    
DOI: 10.1377/hlthaff.23.6.107     Document Type: Review

References (27)

1. For a summary of the results of the RAND Health Insurance Experiment, see J.P. Newhouse and the Insurance Experiment Group, Free for All? Lessons from the RAND Health Insurance Experiment (Cambridge, Mass.: Harvard University Press, 1993).
2. Families were randomized to plans with a stop-loss feature of 5, 10, or 15 percent of income or $1,000, whichever was less; most families had a stop-loss of $1,000.
3. A more traditional conversion would use the medical care component of the Consumer Price Index, which increased by a factor of 4.8 between 1978 and 2003, but that would not account for the cost of new medical treatments when they were first introduced. Further, there are severe methodological difficulties with historical medical care price indices. See E.R. Berndt et al., "Medical Care Prices and Output," in Handbook of Health Economics, ed. A.J. Culyer and J.P. Newhouse (Amsterdam and New York: Elsevier, 2000), 119-180; and J.P. Newhouse, "Medical Care Price Indices: Problems and Opportunities," Academia Economic Papers 29, no. 1 (2001): 1-65.
4. A more traditional conversion would use the medical care component of the Consumer Price Index, which increased by a factor of 4.8 between 1978 and 2003, but that would not account for the cost of new medical treatments when they were first introduced. Further, there are severe methodological difficulties with historical medical care price indices. See E.R. Berndt et al., "Medical Care Prices and Output," in Handbook of Health Economics, ed. A.J. Culyer and J.P. Newhouse (Amsterdam and New York: Elsevier, 2000), 119-180; and J.P. Newhouse, "Medical Care Price Indices: Problems and Opportunities," Academia Economic Papers 29, no. 1 (2001): 1-65.
5. The poor and sick were those in the lowest 20 percent of both the income and health distributions.
6. Initial results on utilization were published in J.P. Newhouse et al., "Some Interim Results from a Controlled Trial of Cost Sharing in Health Insurance," New England Journal of Medicine 305, no. 25 (1981): 1501-1507; and on health outcomes, in R.H. Brook et al., "Does Free Care Improve Adults' Health? Results from a Randomized Controlled Trial," New England Journal of Medicine 309, no. 23 (1983): 1426-1434. The substantial variation in the use of services across areas at a point in time with little or no observable effects on health outcomes is consistent with the HIE findings. See E.S. Fisher et al., "The Implications of Regional Variations in Medical Spending, Part 1: The Content, Quality, and Accessibility of Care," Annals of Internal Medicine 138, no. 4 (2003): 273-287, and "The Implications of Regional Variations in Medical Spending, Part 2: Health Outcomes and Satisfaction with Care," Annals of Internal Medicine 138, no. 4 (2003): 288-298.
7. Initial results on utilization were published in J.P. Newhouse et al., "Some Interim Results from a Controlled Trial of Cost Sharing in Health Insurance," New England Journal of Medicine 305, no. 25 (1981): 1501-1507; and on health outcomes, in R.H. Brook et al., "Does Free Care Improve Adults' Health? Results from a Randomized Controlled Trial," New England Journal of Medicine 309, no. 23 (1983): 1426-1434. The substantial variation in the use of services across areas at a point in time with little or no observable effects on health outcomes is consistent with the HIE findings. See E.S. Fisher et al., "The Implications of Regional Variations in Medical Spending, Part 1: The Content, Quality, and Accessibility of Care," Annals of Internal Medicine 138, no. 4 (2003): 273-287, and "The Implications of Regional Variations in Medical Spending, Part 2: Health Outcomes and Satisfaction with Care," Annals of Internal Medicine 138, no. 4 (2003): 288-298.
8. Initial results on utilization were published in J.P. Newhouse et al., "Some Interim Results from a Controlled Trial of Cost Sharing in Health Insurance," New England Journal of Medicine 305, no. 25 (1981): 1501-1507; and on health outcomes, in R.H. Brook et al., "Does Free Care Improve Adults' Health? Results from a Randomized Controlled Trial," New England Journal of Medicine 309, no. 23 (1983): 1426-1434. The substantial variation in the use of services across areas at a point in time with little or no observable effects on health outcomes is consistent with the HIE findings. See E.S. Fisher et al., "The Implications of Regional Variations in Medical Spending, Part 1: The Content, Quality, and Accessibility of Care," Annals of Internal Medicine 138, no. 4 (2003): 273-287, and "The Implications of Regional Variations in Medical Spending, Part 2: Health Outcomes and Satisfaction with Care," Annals of Internal Medicine 138, no. 4 (2003): 288-298.
9. Initial results on utilization were published in J.P. Newhouse et al., "Some Interim Results from a Controlled Trial of Cost Sharing in Health Insurance," New England Journal of Medicine 305, no. 25 (1981): 1501-1507; and on health outcomes, in R.H. Brook et al., "Does Free Care Improve Adults' Health? Results from a Randomized Controlled Trial," New England Journal of Medicine 309, no. 23 (1983): 1426-1434. The substantial variation in the use of services across areas at a point in time with little or no observable effects on health outcomes is consistent with the HIE findings. See E.S. Fisher et al., "The Implications of Regional Variations in Medical Spending, Part 1: The Content, Quality, and Accessibility of Care," Annals of Internal Medicine 138, no. 4 (2003): 273-287, and "The Implications of Regional Variations in Medical Spending, Part 2: Health Outcomes and Satisfaction with Care," Annals of Internal Medicine 138, no. 4 (2003): 288-298.
10. See, for example, Congressional Budget Office, Changing the Structure of Medicare Benefits: Issues and Options (Washington: CBO, 1983); CBO, Effects of Managed Care: An Update (Washington: CBO, 1994); and CBO, The High-Deductible/MSA Option under Medicare: Exploring the Implications of the Balanced Budget Act of 1995 (Washington: CBO, 1996). Already in 1983 the Xerox Corporation cited the HIE results in a brochure to its employees explaining a rise in the deductible in the company's insurance plan; the relevant portion of the brochure is quoted in Newhouse et al., Free for All?, 341.
11. See, for example, Congressional Budget Office, Changing the Structure of Medicare Benefits: Issues and Options (Washington: CBO, 1983); CBO, Effects of Managed Care: An Update (Washington: CBO, 1994); and CBO, The High-Deductible/MSA Option under Medicare: Exploring the Implications of the Balanced Budget Act of 1995 (Washington: CBO, 1996). Already in 1983 the Xerox Corporation cited the HIE results in a brochure to its employees explaining a rise in the deductible in the company's insurance plan; the relevant portion of the brochure is quoted in Newhouse et al., Free for All?, 341.
12. See, for example, Congressional Budget Office, Changing the Structure of Medicare Benefits: Issues and Options (Washington: CBO, 1983); CBO, Effects of Managed Care: An Update (Washington: CBO, 1994); and CBO, The High-Deductible/MSA Option under Medicare: Exploring the Implications of the Balanced Budget Act of 1995 (Washington: CBO, 1996). Already in 1983 the Xerox Corporation cited the HIE results in a brochure to its employees explaining a rise in the deductible in the company's insurance plan; the relevant portion of the brochure is quoted in Newhouse et al., Free for All?, 341.
13. See, for example, Congressional Budget Office, Changing the Structure of Medicare Benefits: Issues and Options (Washington: CBO, 1983); CBO, Effects of Managed Care: An Update (Washington: CBO, 1994); and CBO, The High-Deductible/MSA Option under Medicare: Exploring the Implications of the Balanced Budget Act of 1995 (Washington: CBO, 1996). Already in 1983 the Xerox Corporation cited the HIE results in a brochure to its employees explaining a rise in the deductible in the company's insurance plan; the relevant portion of the brochure is quoted in Newhouse et al., Free for All?, 341.
14. The percentage of insurance plans requiring a front-end deductible for hospital costs rose from 30 percent in 1982 to 63 percent in 1984. Data are from Hewitt Associates, cited in J. Goldsmith, "Death of a Paradigm: The Challenge of Competition," Health Affairs 3, no. 3 (1984): 5-19. Between 1982 and 1988, admission rates excluding normal deliveries among those ages 15-44 fell 34 percent, and among those ages 45-64, 28 percent. Data are from the National Center for Health Statistics, "Utilization of Short Stay Hospitals," cited in Newhouse et al., Free for All?, 341-344.
15. The percentage of insurance plans requiring a front-end deductible for hospital costs rose from 30 percent in 1982 to 63 percent in 1984. Data are from Hewitt Associates, cited in J. Goldsmith, "Death of a Paradigm: The Challenge of Competition," Health Affairs 3, no. 3 (1984): 5-19. Between 1982 and 1988, admission rates excluding normal deliveries among those ages 15-44 fell 34 percent, and among those ages 45-64, 28 percent. Data are from the National Center for Health Statistics, "Utilization of Short Stay Hospitals," cited in Newhouse et al., Free for All?, 341-344.
16. The proportion of major medical policies with a stop-loss feature rose from 78 percent to 98 percent between 1980 and 1984, according to data from the Health Insurance Association of America, cited in ibid., 342.
17. Similarly, a later analysis of the effects of medical savings accounts on spending showed that relative to current policies, their more generous back-end coverage would approximately offset their much larger initial cost sharing. E.B. Keeler et al., "Can Medical Savings Accounts for the Nonelderly Reduce Health Care Costs?" Journal of the American Medical Association 275, no. 21 (1996): 1666-1671.
18. J.P. Newhouse, Pricing the Priceless: A Health Care Conundrum (Cambridge, Mass.: MIT Press, 2002).
19. For the standard economic theory that changes in employer health care costs will be reflected in changes in other compensation, see L.H. Summers, "Some Simple Economics of Mandated Benefits," American Economic Review 79, no. 2 (1989): 177-183; and M.V. Pauly, Health Benefits at Work: An Economic and Political Analysis of Employment-Based Health Insurance (Ann Arbor: University of Michigan Press, 1997).
20. For the standard economic theory that changes in employer health care costs will be reflected in changes in other compensation, see L.H. Summers, "Some Simple Economics of Mandated Benefits," American Economic Review 79, no. 2 (1989): 177-183; and M.V. Pauly, Health Benefits at Work: An Economic and Political Analysis of Employment-Based Health Insurance (Ann Arbor: University of Michigan Press, 1997).
21. The HIE had hold-harmless side payments that somewhat resemble health savings accounts; in particular, the side payments could be used for any purpose, not just health care.
22. If funds are withdrawn for nonhealth purposes before one is eligible for Medicare, not only are they not taxable, but there is also a 10 percent penalty, similar to the penalty for withdrawal from a 401(k) plan before age fifty-nine and a half. The penalty is waived for those eligible for Medicare.
23. Newhouse et al., Free for All?, Tables 4.3, 4.5, 4.7, and 4.8.
24. M.V. Pauly and S. Ramsey, "Would You Like Suspenders to Go with That Belt?" Journal of Health Economics 18, no. 4 (1999): 443-458; and M.B. Rosenthal and J.P. Newhouse, "Managed Care and Efficient Rationing," Journal of Health Care Finance 28, no. 4 (2002): 1-10.
25. M.V. Pauly and S. Ramsey, "Would You Like Suspenders to Go with That Belt?" Journal of Health Economics 18, no. 4 (1999): 443-458; and M.B. Rosenthal and J.P. Newhouse, "Managed Care and Efficient Rationing," Journal of Health Care Finance 28, no. 4 (2002): 1-10.
26. On other countries' being willing to pay see J.P. Newhouse, "Medical Care Costs: How Much Welfare Loss?" Journal of Economic Perspectives 6, no. 3 (1992): 3-21. On medical advances' being worth their cost, see D.M. Cutler, Your Money or Your Life: Strong Medicine for America's Health Care System (New York: Oxford University Press, 2004).
27. On other countries' being willing to pay see J.P. Newhouse, "Medical Care Costs: How Much Welfare Loss?" Journal of Economic Perspectives 6, no. 3 (1992): 3-21. On medical advances' being worth their cost, see D.M. Cutler, Your Money or Your Life: Strong Medicine for America's Health Care System (New York: Oxford University Press, 2004).