Consumer-Directed Health Plans and the RAND Health Insurance Experiment

Joseph P. Newhouse


Health Affairs. 2004;23(6) 

In This Article


Higher cost sharing, the subject of the RAND experiment, could strengthen the newer tools of managed care in controlling costs.

The players may have changed over the years, but the game remains the same: how best to stem the persistent tide of rising health care costs. Whatever fleeting victories were achieved during the 1990s, through bread-and-butter managed care mechanisms, were blunted in the new decade by a massive backlash driven by consumer and provider discontent. Such resentment drove a wave of policy making that essentially defanged some of the most effective weapons in the managed care cost-cutting arsenal.

It came as little surprise to most when health care costs rebounded to account for a projected 15.2 percent of U.S. gross domestic product in 2004, driven in part by health insurance prices that have increased roughly 12.5 percent per year for the past three years. A measure of the desperation of policymakers, health plans, and employers in attempting to beat back this familiar fiscal behemoth is a willingness to revisit some of the most maligned elements of managed care utilization management. Decisionmakers have also increasingly sought to partner with employees to place greater financial responsibility for health care on workers, in a new health benefit design trend termed "consumer-driven health care."

In this paper economist Joe Newhouse draws parallels between today's consumer-directed health plans and the RAND Health Insurance Experiment (HIE) of the 1970s and 1980s. He points out that although HIE findings generally supported the utility of initial cost sharing (such as through high deductibles) in decreasing health care use, application of these principles to reducing costs per episode was less successful -- managed care being more effective on that terrain. Newhouse concludes that optimal results in controlling overall costs could be achieved by cost sharing and modern managed care mechanisms working in tandem.

Today's consumer-directed health plans, with their high deductibles, bear a strong resemblance to the high-deductible plan of the RAND Health Insurance Experiment (HIE), although they come into a post managed care world. The high deductibles and the tools of managed care should complement each other, the former directed primarily at the initiation of care for an episode of illness and the latter at the costliness of episodes, especially ongoing chronic disease episodes. Although the RAND experiment established the effects of varying prices to patients, future experiments with how physicians respond to the various tools of managed care may be useful.

It is not hard to draw a substantive link between the results of the RAND Health Insurance Experiment (HIE) and today's consumer-directed health plans.[1] Although such plans have numerous features, I focus here on their substantial cost sharing and in particular their high deductibles. I first describe some principal results of the HIE and then link today's high-deductible plans with those results. Because the HIE results predate managed care, I take up the relationship between managed care and cost sharing and conclude with brief thoughts on future research and health costs.