A New Approach to Hospital Insurance

by Joseph P. Newhouse, V. D. Taylor


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A proposal for a new type of hospital insurance that would re-establish consumer concern with price: Variable Cost Insurance (VCI). Major features of VCI are: (1) The insurance premiums vary directly with the "expense class" of coverage chosen by the subscriber. (2) In the event of hospitalization, the proportion of the hospital bill covered by insurance varies directly with "expense class" of the hospital used. In addition to making the consumer an active seeker of economical care, VCI would give hospitals an incentive to be efficient; it can be introduced without substantial prior research; it avoids quality-comparison problems and the bureaucratic complexities of central planning and franchising; and it is adaptable to all types of insurance programs including Medicare and Medicaid. While not a total solution to spiraling hospital costs, VCI appears sufficiently superior to current plans that every effort should be made to introduce it quickly.

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