Relative value health insurance

In our post on The Upshot last week, Amitabh Chandra and I discussed an idea proposed by Professor Russell Korobkin, relative value health insurance (RVHI, though we didn’t use that term in the piece). In a market for RVHI, plans would be transparently ranked according to the value (degree of cost effectiveness) of services they covered. We wrote

[A] bronze plan could cover hospitalizations and visits to doctors for emergencies and accidents; genetic diseases; and prescription drugs that keep people out of hospitals. A silver plan could cover what bronze plans do but also include treatments a large majority of physicians find useful. A gold plan could be more inclusive still, adding coverage, for instance, for every cancer therapy shown to improve patient outcomes (no matter the cost) as long as it was delivered at a leading cancer center. Finally, a platinum plan could cover experimental and unproven cancer therapies, including, for example, that proton beam.

Though Korobkin’s paper is, perhaps, the most thorough consideration of this idea, it’s not the first to propose it. Mark Pauly raised it in his Wussinomics paper (covered on TIE here).

In particular, one could imagine (as I have suggested before) that insurers offer different plans choosing different cost effectiveness thresholds for new technology, and then consumers could pick the plan with the premium and technology level and growth rates that matched their preferences (Pauly 2005). Not gold, silver, and bronze, but slow-mo versus everything latest. This is Enthoven’s ideal model of managed competition, but it has never really happened. To be sure, there are bargain basement HMOs that will give you a modestly lower premiums than the slap-on-the-wrist PPO but, apart from varying the size of networks, plans have never systematically varied other dimensions of care, like the amount and form of new technology, and competed vigorously on that basis. Instead they waste their time trying to get people to exercise and eat less.

Pauly (2005) is titled “Competition and New Technology” and says a bit more.

Plans can thus adopt different policies toward new technologies, and consumers who have a choice among plans can select them based on differences in coverage (broadly defined to include not only reimbursement but also rules, limits, and incentives) of new technology, the implied differences in the growth of premiums, and the value that the consumer places on one relative to the other. As long as consumers face premium differentials that reflect cost, they can in principle choose the optimal plan to limit (or not) the use of new technology. Some plans might permit all new technologies to be used without limit; others might limit them. […]

For example, [] a consistent strategy would be to set a benchmark value of dollars per QALY and then adopt all new technologies with costs below that level and none above. Setting a lower threshold would yield a lower rate of growth in spending; plans could therefore vary based onwhat level they chose for their threshold. […] An alternative would be a bottom-up strategy in which the plan set a target level for spending growth and then used cost-effectiveness analysis to choose the set of new technologies whose cost fit within the limit and which maximized the number of new QALYs delivered. […]

Having to face trade-offs between better things is preferable to no trade-offs at all. But dealing in a forthright way with the future path of this effort is surely important, and rejuvenated markets with relevant health plan choices could help a lot.

Both of Pauly’s papers are worth reading in full.



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