The RAND Experiment: Still Apologizing After All these Years, Part II

In many ways, the RAND Health Insurance Experiment confirmed what common sense would have predicted in any event. That doesn't diminish its importance. Some of the most significant studies in economics have confirmed common sense. And in health policy – where common-sense thinking is such a rare commodity – these results were surely needed. Other findings, however, are more subtle. The study found:

  1. 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%.
  2. This reduction in health care spending has no effect on the patient's health care in most cases.
  3. 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.
  4. 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.)
  5. Unfortunately, once patients enter the system they receive effective (appropriate) care only 62% of the time. (The more recent estimate is 55%.)
  6. 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.

Results (1 and 2) are understandable, but how can we explain (3) – (6)? The explanation seems to be that then, as now, 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. 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.

Contrary to the impression left by universal care advocates, once people get into the health care system they tend to get the same care regardless of the kind of health insurance they have and regardless of whether they even have health insurance at all. Unfortunately, the care they get is often not recommended care.

In their recently published "Selective Memories" RAND researchers take the institutionalized, bureaucratized, highly regulated nature of our health care system as given. They then ask: Are high deductibles a good or bad thing? Unfortunately, they are still not certain what the right answer is.

After they spent $50 million ($350 million at today's medical prices) on this experiment, surely we deserve better than that. At a minimum can we not conclude that there is much more room for the economic model of resource allocation in health care? The fact that people are willing to make tradeoffs between health care and other uses of money means that those choices do not have to be made for them by government, managed care bureaucracies or even doctors.

If we combined the willingness of patients to make tradeoffs with price and quality competition on the provider side, the medical marketplace might exemplify many of the efficiencies found in other markets.


For some very, very "Selective Memories" by RAND researchers, Emmett B. Keeler, Joseph P. Newhouse and Robert H. Brook, go to:

Comments (8)

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  1. Jonathan Strong says:

    “After they spent $50 million ($350 million at today’s medical prices) on this experiment…”

    What do you mean by this? Do you mean $350 in today’s dollars? Or $350 million as $50 million increased over the timespan at the rate medical costs are increasing? If it is the latter, why is that a relevant way to measure the cost of the study?

  2. John Goodman says:

    The latter. How else would you measure the cost of the study?

  3. Gregory Isaacs says:

    The problem, of course, is access and cost. As a business broker, I constantly hear from executives that want to become business owners that it is insurance that keeps them at their old job. We need to do something about insurance companies denying insurance based on “pre-existing” conditions or jacking up the cost. It is not unusual for my clients to be paying $1,000 a month for high deductible coverage. When I hunted for individual insurance, I was granted it but had injured my shoulder (nothing serious – just a strain) at the time. Unbelievably, they have excluded my right shoulder from EVER being covered for ANYTHING. Lucky for me that nothing else was wrong – unlike many others my age. Catastrophic care is another big concern – something really serious could easily wipe out a lifetime of savings (which could affect generations). Until the industry finds a way to address these problems, we will continue to have a “hard sell” on keeping the government out of health insurance.

  4. Rick Maciorowski says:

    The points you make are interesting save it does not go far enough.

    In my MBA thesis I suggested that in order to be a fully competitive situation we MUST include the International market in health care. We in the US are to insular in our view of the world market. Competition means GLOBAL competition and we MUST apply this to Health Care; after all we spend nearly 20% of our GDP on this one item. We must bring to the consumer the global market in Health Care, we must ensure that our legislators open our options to fully embrace the global market, including the right to spend our health care dollars where ever we find value, obtaining our drugs abroad, our health care oversees with the sanction of our co partners (health insurance companies, the US government etc.) Here the Europeans have us beat, they already sanction such practices. It is time the US learned from others in this regard, realize that many of the best independent health care facilities world wide are staffed by US trained Health Care professionals, we deserve to reap the benefit of encouraging world class training facilities being in our boarders and should be able to seek care from such professionals. On the subject of prescription drugs we, the consumer should be allowed to spend our money where we get the most value for it. Let the suppliers work out how they should price their products to show a profit, but we the US consumer who for so long has paid a disproportionate share of drug development costs should have the RIGHT to buy the products we have supported the development costs of in any market we choose to purchase from. We MUST insist on value for our money and not the arbitrary prices being set by the suppliers in our inefficient market. If we are to buy the products of other countries that are completing with our domestic producers then the same argument holds for goods and services in the reverse direction. Let the competition begin and let it be unbounded.

    We insist on open markets and fair competition let us apply this to Health Care, our largest single expense and see how the market corrects for the creation of a level playing field!. It is my contention that our costs will really go down and our quality will really go up!

  5. Dr. Robert W. Geist says:

    # 5 is a compliance factor, not poor care.

    The data is from McGlynn’s study published in 2003. Incidentally, the stats are the identical in the UK (Asch, same RAND group. Asch SM et al. (RAND) Who Is at Greatest Risk for Receiving Poor-Quality Health Care? NEJM. 2006;354 (11):1147-1156). It is not that the pateints don’t get care, all these studies loooked at were reommended processes. The problem is compliance: those who really needed care got it (senile cataracts e.g., ~87% done) or if even seen on any routine basis (~70% compliance). So most of the “poor processes” problem is compliance complicated by many other factors, most of which are probably soiceconomic and cultural status in origin.

    Thanks for all your efforts

  6. Allan Shulkin says:

    Great analysis thanks.

  7. Frank Timmins says:

    “In their recently published “Selective Memories” RAND
    researchers take the institutionalized, bureaucratized, highly
    regulated nature of our health care system as given. They then
    ask: Are high deductibles a good or bad thing? Unfortunately,
    they are still not certain what the right answer is.”

    I think you have illustrated the basic problem in the healthcare reform process. Is this the classic example of “not thinking outside the box”? It is discouraging that so many of the presumably brightest thinkers have so little regard for (or ignorance of) the free market system. Thanks for the update.

  8. john says:

    great ideas john