While the early studies provided only limited information regarding the extent of price responsiveness, the RAND Health Insurance Experiment [RAND-HIE] provided considerable insight into the price responsiveness of consumers of health services. The study is particularly useful because it largely [but not entirely] avoided the adverse selection problem by randomly assigning families to health insurance plans. It investigated a wide range of cohealth insurance rates, allowing consideration of a broader set of price responses, and it was conducted over six sites chosen to be reflective of urban and rural communities in the four census regions. See Manning and colleagues [1987] for a summary of the experiment and the major findings, and Newhouse and the Insurance Experiment Group [1993] for a systematic presentation of this seminal study.
You may legitimately ask about the relevance of a 30-year-old study. Clinical practice and health insurance institutions have changed dramatically in the intervening years. However, the RAND-HIE is still the gold standard for examining price sensitivity of health services for three reasons. First, its methodology was very strong. It overcame the adverse selection problem in a way that no other study ever has. Second, it examined virtually the whole range of health services provided, and it did so in a consistent framework. Third, more-recent studies have been able to look at the price sensitivity of selected health services and almost always find results consistent with the older RAND-HIE.
Between 1974 and 1977, families in Dayton, Ohio; Seattle, Washington; Fitchburg, Massachusetts; Franklin County, Massachusetts; Charleston, South Carolina; and Georgetown County, South Carolina were enrolled in a health insurance program run by RAND under a federal contract. Participating families were randomly assigned to one of 14 different fee-for-service health plans. In Seattle, some participants were enrolled in Group Health of Puget Sound, a health maintenance organization [HMO].
The plans had cohealth insurance rates of 0, 25, 50, and 95%. Within each cohealth insurance group, families were assigned to stoploss groups of 5, 10, and 15% of income to a maximum of $1,000. That is, out-of-pocket expenses for covered services could not exceed the%age of income cap or $1,000, whichever was lower. While the $1,000 stoploss feature appears low, in 2006 dollars, it would be approximately $4,160. Virtually all medical services were covered.
One final point about the design of the RAND-HIE: You might ask what happened to people who already had health insurance. The answer is that they kept it. Since the RAND-HIE only lasted four to five years, there was some concern that a health event could make participants uninsurable, or uninsurable at the same prices, if they did not continue coverage. Also, by keeping the existing policies in force and assigning the benefits to the RAND-HIE, the study was able to pass on many of the claims expenses to the participants'' existing insurers.
Many participants received more-generous coverage from the RANDHIE than from their existing plans, but some were assigned to worse plans. Why did some people give up the coverage they had to take inferior coverage through the RAND-HIE? The answer is that the RAND-HIE paid them to participate. A lump-sum payment of this sort did not affect their incentives to use services within the context of the RAND-HIE plan to which they were assigned [Newhouse and the Insurance Experiment Group 1993].
The sample of families was generally representative of the under age 65, nonwealthy population. It excluded those who would be eligible for Medicare over the course of the experiment, those with incomes above $25,000 [$104,900 in 2006 dollars], as well as those in the military and veterans with serviceconnected disabilities. Slightly more than 5,800 people were enrolled in the various fee-for-service plans, and data on 20,190 person-years of experience were collected.
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