NCPA - National Center for Policy Analysis


January 15, 2008

In many ways, the RAND Health Insurance Experiment confirmed what common sense would have predicted, says John C. Goodman, president of the National Center for Policy Analysis.

The study found:

  • Patients are responsive to out-of-pocket costs; if people face a high deductible, rather than first-dollar coverage, they will reduce their health care spending by about 30 percent.
  • This reduction in health care spending has no effect on the patient's health care in most cases.
  • Patients reduce their spending not by comparing the marginal value of various medical services with other uses of money; rather, they reduce their spending by deciding not to initiate care in the first place.
  • Once patients enter the health care system they tend to get the same care, regardless of the size of their deductible (reconfirmed in a more recent RAND study).
  • Unfortunately, once patients enter the system they receive effective (appropriate) care only 62 percent of the time (the more recent estimate is 55 percent).
  • Partly as a result of the above, patients with high deductibles reduce their spending on more effective care about as much as the reduction in less effective care.

The first two results are understandable, but how can we explain the rest?  The explanation seems to be that the health care system is a bureaucratic, institutionalized structure, in which normal market processes have been systematically suppressed.  Since most people pay with time, not money, when they buy care, providers are not competing on price or quality.  And since price and quality data are not available, patients find it impossible to trade off money against health services the way they would do in a normal market.  Hence, their only real choice is whether to enter the system at all.  And the higher the expected cost of entry, the less likely they are to do so, says Goodman.

Source: John Goodman, "The RAND Experiment: Still Apologizing After All these Years, Part II." National Center for Policy Analysis, January 14, 2008.

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