A commentary on an article in the June 1968 [American Economic Review] pointing out that medical insurance reduces medical care price below marginal cost and thus acts as a subsidy. Hospital insurance has contributed to the overall inflation in medical costs by making the consumer responsible for only a small portion of the cost differences between hospitals, thus encouraging him to opt for more expensive care. A remedy would be to provide Variable Cost Insurance (VCI) that pays a hospitalized individual a lump sum for a predetermined quality level, which may be applied either to more or less expensive care. Insurance subsidization of the quantity of hospital services provided would still exist, but by removing the distortion in the consumer's choice of a hospital, VCI could importantly reduce the escalation of hospital costs. This scheme is relevant to the current policy debate over medicare and medicaid.
This report is part of the RAND Corporation Paper series. The paper was a product of the RAND Corporation from 1948 to 2003 that captured speeches, memorials, and derivative research, usually prepared on authors' own time and meant to be the scholarly or scientific contribution of individual authors to their professional fields. Papers were less formal than reports and did not require rigorous peer review.
This document and trademark(s) contained herein are protected by law. This representation of RAND intellectual property is provided for noncommercial use only. Unauthorized posting of this publication online is prohibited; linking directly to this product page is encouraged. Permission is required from RAND to reproduce, or reuse in another form, any of its research documents for commercial purposes. For information on reprint and reuse permissions, please visit www.rand.org/pubs/permissions.
The RAND Corporation is a nonprofit institution that helps improve policy and decisionmaking through research and analysis. RAND's publications do not necessarily reflect the opinions of its research clients and sponsors.