Relative Value Health Insurance: The Behavioral Law and Economics Solution to the Health Care Cost Crisis

Abstract

With the Patient Protection and Affordable Care Act (ACA) set to sharply increase access to medical care, the problem of rising costs moves center stage in health law and policy discussions. “Consumer directed health care” proposals, which provide patients with financial incentives to equate marginal costs and benefits of care at the point of treatment, demand more decision making ability from boundedly-rational consumers than is plausible. Proposals that seek to change the incentives of health care providers threaten to create conflicts of interest between doctors and patients. New approaches are desperately needed.

This article proposes a government-facilitated but market-based approach to improving efficiency in the private market for medical care that I call “relative value health insurance.” This approach focuses on the “choice architecture” necessary to enable even boundedly-rational patients to contract for the efficient level of health care services through their health insurance purchase decisions. It relies on using comparative effectiveness research, which the ACA funds at a significant level for the first time, to rate medical treatments on a scale of 1-10 based on their relative value, taking into account costs and expected benefits. These relative value ratings would enable consumers to contract with insurers for different levels of medical care at different prices, reflecting different cost-quality tradeoffs.

The article describes both the benefits of the approach and the impediments to its implementation. It concludes with a brief discussion of how the principles can also be applied to public health insurance programs.

Keywords: moral hazard, bounded rationality, health insurance, consumer directed health care, behavioral law and economics