Medical Costs, Health Insurance, and Public Policy

by Joseph P. Newhouse, V. D. Taylor

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Spiraling medical costs are partly the result of price subsidy health insurance plans that prompt neither hospitals nor the insured to economize. Most regulatory approaches do not directly address the problem. A new kind of insurance might. The authors propose variable cost insurance (VCI). Under its terms, applicable to all types of health insurance, hospitals would be rated according to their expensiveness and a portion of costs, reflected in variable premium plans, would be passed on to subscribers. Many might still choose more costly (which may often be only more "luxurious" or wasteful) treatment. But economy-minded patients and their physicians would use more efficient hospitals, in turn providing rewards for good management. Expected results: a slowdown in the hospital cost spiral and the return of the consumer as a force in the market place.

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