Consumer-Directed Health Plans and the RAND Health Insurance Experiment

Joseph P. Newhouse


Health Affairs. 2004;23(6) 

In This Article

What Was the RAND Experiment?

The RAND HIE randomized families to health insurance plans that varied their cost sharing from none ("free care") to a catastrophic plan that approximated a large family deductible with a stop-loss limit of $1,000 (in late-1970s dollars), which was scaled down for the low-income population.[2] If one uses the rate of increase in per capita medical spending to convert late-1970s dollars into 2004 dollars, a $1,000 deductible then would be more than a $6,000 deductible is today.[3] The HIE participants in the large-deductible (95 percent coinsurance) plan used 25 30 percent fewer services than those in the free-care plan; on average, they had just under two fewer face-to-face physician visits per person per year and were 23 percent less likely to be hospitalized in a year ( Table 1 ). Substantial reductions in use were found among all income groups (data not shown).

But the heat in the hoary debate over the appropriate role for patient cost sharing was not the magnitude of any savings, but whether any reduction in use induced by increased cost sharing was among "necessary" or "unnecessary" services and therefore whether it adversely affected health. Those on the political left generally espoused the view that the services were necessary; those on the right, that they were unnecessary.

On this score, the results of the HIE had something for both sides. For most people enrolled in the RAND experiment, who were typical of Americans covered by employment-based insurance, the variation in use across the plans appeared to have minimal to no effects on health status. By contrast, for those who were both poor and sick -- people who might be found among those covered by Medicaid or lacking insurance -- the reduction in use was harmful, on average.[4] In particular, hypertension was less well controlled among that group, sufficiently so that the annual likelihood of death in that group rose approximately 10 percent. This adverse effect occurred in spite of the reduced cost sharing for low-income families, a feature generally not found in today's plans.