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Recommended Reading: Russell Korobkin’s “Bounded Rationality, Moral Hazard, and the Case for Relative Value Health I

Posted Feb 09 2012 11:14pm

kate-greenwood_high-res-2011-comp Earlier this week at The Incidental Economist , Austin Frakt asked the following question:

“Is it still the case that US and state laws make it impossible for insurers and hospitals to control the use of health technologies? If so, this is a substantial problem for translation of comparative effectiveness research (CER) into practice. It seems that physicians, as well as hospitals and insurers, would need some legal safe harbor to put CER to use. Who is thinking or talking about this? Anyone?”

In an interesting new article, Bounded Rationality, Moral Hazard, and the Case for Relative Value Health Insurance (posted last month to SSRN), Russell Korobkin identifies a way to incorporate learnings from comparative effectiveness research into insurance contracts without running afoul of the laws to which Dr. Frakt refers.  If a dispute arises over coverage of a medical treatment that is not clearly excluded under the terms of a health insurance policy, the law favors the insured individual over the insurance company. But, as Professor Korobkin explains, “there is no impediment, in theory, to insurers excluding from coverage treatments that fail to satisfy a cost-benefit analysis, as long as the exclusions can be adequately specified at the time of contracting.”

Professor Korobkin contends that an adequate level of specificity could be achieved if insurers sold policies that varied in just one way: the cost effectiveness of the treatments they cover.  “Under this framework,” he explains, “the function of government-sponsored CER would be to evaluate different treatments for medical conditions and rate them on a scale of 1 (low) to 10 (high) in terms of cost effectiveness.”  Insurers could then offer less expensive plans that cover only relatively cost effective interventions (e.g. those rated 7 or above) and more expensive plans that also cover less cost effective interventions (e.g. those rated 3 or above).

In choosing an insurance plan, consumers would be asked to “trad[e] off price against a general level of medical care coverage[.]“  Professor Korobkin argues that this is “a better approach to rationalizing the amount of resources allocated to medical care” than either (1) “consumer directed health care” which is founded on the unrealistic assumption that consumers are able to make “complex cost-benefit tradeoffs at the point of treatment” or (2) “proposals to pay physicians based on the efficient use of resources that rely on them to compromise their fiduciary duties and undermine professional norms[.]“  The (relative) simplicity of the 1 to 10 scale would enable consumers to make sound and legally-binding decisions about how much of their money to spend on health care and how much to allocate to other priorities.

Professor Korobkin acknowledges that there are impediments to putting his “relative value health insurance” proposal into practice including the dearth of information on the effectiveness, never mind the comparative effectiveness, of many, if not most, medical interventions, the difficulty of making the value judgments inherent in “measuring the benefits side of the equation,” and the risk that the ratings process would be captured by industry but suggests that they are not insurmountable.  He also reviews and responds to some of the issues that might arise in a “ratings-based market,”  including the effect of relative value health insurance on the Patient Protection and Affordable Care Act’s health insurance exchanges and premium subsidies.

I highly recommend Professor Korobkin’s thought-provoking article to everyone with an interest in our notorious health care cost curve and how to bend it.

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