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Solution Framework of Market Forces

Rand Study on Effects of Co-Pay on Outcomes and Cost    2006

Evaluating this tradeoff requires addressing several questions.  First, to what extent do higher patient co-insurance charges reduce use of medical care? Second, to what extent is that reduction harmful in terms of personal health? Third, how do these effects vary by patient characteristics such as income and health status? To obtain answers to these questions, researchers typically turn to the results of one of the most ambitious and important social experiments in U.S. history, the RAND Health Insurance Experiment (HIE). In the 1970s, the HIE randomly assigned several thousand families to insurance with varying levels of patient co-insurance, and then followed them over a five-year period to evaluate the effect on their medical utilization and health. The results of that study are still the gold standard for evaluating the answers to these questions.


In summary, the lessons from the HIE are very clear: higher co-insurance rates, with an out-of-pocket limit, can significantly reduce health care use without sacrificing health outcomes for the typical person.  The results are surprisingly robust and hold across many subsamples of the data: rich and poor, sick and healthy, adult and child. The one clear negative impact on health occurs only for those who are at high medical risk, particularly if they are also of lower income. This effect, while not statistically significant, is very large, and suggests the value of considering targeted co-insurance approaches that minimize the costs to this group. Such approaches are described further below. Of course, the HIE evidence is subject to at least three important limitations.

First, this was only a short run study. Within the 3 to 5-year time frame of the study, free care did not produce measured benefits relative to the co-insurance plans, but for children in particular a longer follow-up may be required to find health effects (particularly given the reduction in preventive care in the co-insurance plans).  Second, these effects only hold in a world of (often quite low) maximum limits to out-of-pocket medical exposure. There is now a large literature which consistently documents the enormous negative implications of being uninsured on health care outcomes. Uninsured individuals who face unlimited exposure to medical costs are no longer on the “flat of the curve”: they are clearly forgoing care which matters in a real way for health care. The HIE also varied out-of-pocket limits by income, a feature typically not found in private insurance policies today.

Finally, the nature of medical care in the era of the HIE was very different than it is today. The past 30 years have seen enormous advances in treatment effectiveness for a variety of conditions, ranging from heart attacks to depression. This may imply that the care that is reduced in today’s medical environment is more important for health outcomes than in the 1970s.  At the same time, however, treatment in general has become much more expensive and intensive, so it could also be that the care that is reduced by cost sharing is still on the flat of the effectiveness curve. Thus, there is substantial uncertainty in extending the results of the RAND study to the 21st century.