A New Type of Hospital Insurance

A Proposal for an Experiment

by Joseph P. Newhouse, V. D. Taylor

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Proposes variable cost hospitalization insurance to give consumers more choice of cost and quality, give doctors and hospitals an incentive to cut waste, and stop insured users of lower-cost hospitals from subsidizing users of expensive ones. Under variable cost insurance (VCI), the insured's premium depends on the relative costliness of the hospital he selects. Higher quality or greater economy would be chosen according to tastes and income. Physicians would be encouraged to consider hospital cost. At least some doctors and patients would switch from high-cost, low-quality hospitals to others, giving hospitals a motivation for improving their management practices. VCI is completely compatible with major risk insurance, and straightforwardly applicable to comprehensive prepaid medical care. Costs for the latter might be calculated as the Clakamas County (Oregon) Physicians Association has done for 30 years. Cost index calculations are appended.

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