What's Wrong With Rand

Ever since the health reform debate was transformed from a discussion of universal coverage to a discussion of the cost of health insurance all of the "serious" folks in Washington have been arguing from a text by Jason Furman of the Brookings Institution. Which text asserts that:
The RAND experiment found that cost sharing, if related to a family's income, could reduce health spending by an average of 31 percent without any worse health outcomes. Subsequent research finds that the savings could be even greater.
This has become rather a rallying point for the moderate faction in the health care debate: If we limit luxury health plans  by taxation and regulation, if we force people to pay more out of pocket for their own health care, we will get control of this cost thing and everyone will be happy. We don't even need a public option.

So here is the original, link above. Based on one clinical trial and some studies of consumer response to various real world health plans Furman has a very nice little proposal:
This paper proposes a template for a progressive cost sharing plan that would require typical families to pay half of their health costs until they reached 7.5 percent of their income; low-income families would not have any cost sharing. The analysis shows that this template could reduce total health spending by 13 to 30 percent, reducing premiums by 22 to 34 percent without hurting health outcomes. Moreover, low- and moderate-income families would face less cost sharing than they do under typical plans today while the premium savings would be more than enough to compensate middle- and upper-income families for the modest increase in their exposure to small risks. Every family would have an affordable limit on their out-of-pocket payments, in contrast to the situation today, where many families have insurance policies that expose them to unlimited cost sharing.
Which proposal is long, subtle and complex enough to warm the heart of any economist. All the more so because it applies price incentives to individuals. It would be just grand if it were supported by substantial evidence and if we might actually see it implemented.

But evidence, even in Mr Furman's presentation, has problems. First because the Rand experiment has yet to be repeated or expanded. Second because the findings themselves are not entirely favorable. Spending was reduced because of:
reduced contact with health providers: people who went to a doctor or entered a hospital at all during the experimental period had relatively similar spending, regardless of the level of cost sharing.
. . .
One important and much noted finding is that the RAND group found that people in the experiment cut back just as much on care that was deemed necessary as they cut back on care that was deemed unnecessary, casting doubt on the proposition that people were making completely rational decisions.
As with everything else, some are more equal than others. The poor seem to have saved less from these plans despite the fact that out of pocket payment structures were carefully calibrated to income.
As coinsurance rates rose, both higher- and lower-income participants became increasingly unlikely to use any medical services, and the gap (between the amount spent by high and low income groups spent on care WA) groups widened relative to free care. But in dollar terms, low-income households reduced their spending by less than high-income households, with families in the bottom third of the income distribution cutting their health spending by 26 percent when they switched from free care to 95 percent coinsurance, compared to a 35 percent reduction for families in the top third of the income distribution.
Health outcomes did not change - for most people:
According to the RAND team, the answer for a large majority of adults is clearly no: “Our results show that the 40 percent increase in services on the free-care plan had little or no measurable effect on health status for the average adult” (Newhouse and the Insurance Experiment Group 1993, p. 243). This conclusion applied to all middle- and high-income people and to low-income people in initially normal or good health. However, for an important minority of the population—the 6 percent of people who had both low incomes and initially poor health—shifting from free care to cost sharing did come at the expense of health outcomes.
The RAND evidence finds that the relatively The important exception to the generally favorable results in the RAND study was the subgroup consisting of low-income people in initially poor health (see Ku 2003, Hudman and O’Malley 2003). The 6 percent of people in this category fared worse with cost sharing in some important dimensions. One was that people in this group were less likely to receive a diagnosis of hypertension and less likely to have the condition treated when they were subject to cost sharing. Because of this difference alone, members of this group who were in cost-sharing plans had a 10 percent higher rate of expected mortality.
This result occurring after 5 years of study which as is noted later in the paper is too short a time to measure full health impacts.

The treatment tested in the Rand study, seems, in other words, to have done no great harm to the largely healthy population that it was tested on. There was no real indication that waste was reduced and there is some disturbing indication that elective medical contacts were reduced. Because healthy people can get along for years without much contact with medicine - Wonks Anonymous can testify to this -  no great harm was done over 5 years.

Except that sick poor people economized on medical care and got even sicker. But this was only 6% of the population and they really don't vote. So there.

Now this glorious evidence is currently being used not to promote a carefully crafted, income based, public insurance plan which proposal would be hopelessly utopian. Rather it is being used to promote general limits on the allowable cost of health insurance policies.

If we put a ceiling on the cost of health insurance plans, the argument goes, then insurers will respond by offering cheap plans with high out of pocket costs. Which is true in Wonks Anonymous experience. These high out of pocket plans will provide financial incentives to consumers which will drive down the cost of medical care. No on, we are assured will be hurt.

Except for the 6% and then some because:

RAND health plans linked maximum out-of-pocket payments to incomes, capping them at 5, 10, or 15 percent of income—or a fixed maximum amount. Thus, low- and middle-income families were subject to less cost sharing than were high-income families. The RAND results do not support the claim that a fixed deductible, such as in an HSA-qualified plan, would leave health outcomes unchanged.
But private insurers do not consider the income of the insured - they are not charities - and the standard deductible plan is the same for the laborer and the CPA. Nor is there any particular move in our moderate health reform community to offer subsidies for out of pocket health expenses based on income.

You be the judge:

We have one limited clinical trial of a new treatment. The trial showed that the treatment did no detectable harm to the healthy but it raised serious concerns about the impact of the treatment for a significant group of unhealthy individuals.

On the basis of this trial we are now being asked, not to approve the original treatment but to approve a much more intensive and less calibrated treatment.

Maybe the moderates are moving way too fast.


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