The Effect of Coinsurance on the Health of Adults: Results from the RAND Health Insurance Experiment
Jan 1, 1984
After decades of evolution and experiment, the U.S. health care system has yet to solve a fundamental challenge: delivering quality health care to all Americans at an affordable price. In the coming years, new solutions will be explored and older ideas revisited. One idea that has returned to prominence is cost sharing, which involves shifting a greater share of health care expense and responsibility onto consumers. Recent public discussion of cost sharing has often cited a landmark RAND study: the Health Insurance Experiment (HIE). Although it was completed over two decades ago, in 1982, the HIE remains the only long-term, experimental study of cost sharing and its effect on service use, quality of care, and health. The purpose of this research brief is to summarize the HIE’s main findings and clarify its relevance for today’s debate. Our goal is not to conclude that cost sharing is good or bad but to illuminate its effects so that policymakers can use the information to make sound decisions.
In the early 1970s, financing and the impact of cost sharing took center stage in the national health care debate. At the time, the debate focused on free, universal health care and whether the benefits would justify the costs. To inform this debate, an interdisciplinary team of RAND researchers designed and carried out the HIE, one of the largest and most comprehensive social science experiments ever performed in the United States.
The HIE posed three basic questions:
The HIE was a large-scale, randomized experiment conducted between 1971 and 1982. For the study, RAND recruited 2,750 families encompassing more than 7,700 individuals, all of whom were under the age of 65. They were chosen from six sites across the United States to provide a regional and urban/rural balance. Participants were randomly assigned to one of five types of health insurance plans created specifically for the experiment. There were four basic types of fee-for-service plans: One type offered free care; the other three types involved varying levels of cost sharing — 25 percent, 50 percent, or 95 percent coinsurance (the percentage of medical charges that the consumer must pay). The fifth type of health insurance plan was a nonprofit, HMO-style group cooperative. Those assigned to the HMO received their care free of charge. For poorer families in plans that involved cost sharing, the amount of cost sharing was income-adjusted to one of three levels: 5, 10, or 15 percent of income. Out-of-pocket spending was capped at these percentages of income or at $1,000 annually (roughly $3,000 annually if adjusted from 1977 to 2005 levels), whichever was lower. The 95 percent coinsurance plan in the study closely resembled the high-deductible catastrophic plans being discussed today.
Families participated in the experiment for 3–5 years. The upper age limit for adults at the time of enrollment was 61, so that no participants would become eligible for Medicare before the experiment ended. To assess participant service use, costs, and quality of care, RAND served as the families’ insurer and processed their claims. To assess participant health, RAND administered surveys at the beginning and end of the experiment and also conducted comprehensive physical exams. Sixty percent of participants were randomly chosen to receive exams at the beginning of the study, and all received physicals at the end. The random use of physicals at the beginning was intended to control for possible health effects that might be stimulated by the physical exam alone, independent of further participation in the experiment.
The results showed that cost sharing reduced the use of nearly all health services. Specifically,
The analysis also examined the appropriateness of the services reduced by cost sharing and the technical quality of care received by participants. Did cost sharing deter participants from seeking appropriate care to a greater or lesser extent than it deterred ineffective care? To answer this question, analysts grouped specific conditions into seven categories according to the degree to which outpatient care and therapies were known to be effective in treating each condition. The categories ranged from conditions for which care is highly effective to conditions for which care is rarely effective.
The analysis found that cost sharing reduced the use of effective and less-effective care across the board (see the table). For hospitalizations and prescription drug use, cost sharing likewise reduced more-effective and less-effective care in roughly equal amounts for all participants. The proportion of inappropriate hospitalizations was the same (23 percent) for cost-sharing and free-plan participants, as was the inappropriate use of antibiotics.
|Medical Effectiveness Category||Predicted Percentage of Participants with at Least One Episode of Care in a Single Year, by Medical Effectiveness Category and Plan|
|Free Care||Cost Sharing||Free Care||Cost Sharing|
|Rarely effective but equally effective with self-care or doctor||39||29||36||24|
Source: Lohr et al., 1986, p. 34.
Note: Percentages refer to participants who had at least one episode of care within the relevant diagnostic categories during a year of the experiment.
In addition to measuring the appropriateness of care sought by patients, the experiment measured the quality of care delivered. Analysts constructed process measures of the quality of ambulatory and dental care received by HIE participants. The process measures dealt with the appropriate use of visits and diagnostic tests by providers and the appropriate use of therapeutic interventions after participants sought care.
Two striking findings emerged: First, cost sharing did not significantly affect the quality of care received by participants. Clinically meaningful differences between the free plan and cost sharing plans appeared only for the process criteria dealing with the need for an office visit: 59 percent for free-plan participants versus 52 percent for those under cost-sharing. Second, the overall level of quality for process measures was surprisingly low for all participants: criteria for quality were met only 62 percent of the time. These results were discouraging at the time. What is more, recent RAND work found that health care quality may not have improved significantly in the interim. Results of a 2003 nationwide study showed that quality criteria were met only 55 percent of the time. Thus, despite tremendous technical progress that raises the potential value of care received, quality of care as a proportion of the best possible care has not improved in the past 20 years.
In general, the reduction in services induced by cost sharing had no adverse effect on participants’ health. However, there were exceptions. The poorest and sickest 6 percent of the sample at the start of the experiment had better outcomes under the free plan for 4 of the 30 conditions measured. Specifically,
Likewise, patient satisfaction, another outcome of interest, was generally high and did not vary at different levels of cost sharing among the fee-for-service plans. While health outcomes at the HMO were no different than outcomes for those with free care, patient satisfaction was lower among participants initially assigned to the HMO. These participants were less satisfied with care overall than either those who had previously chosen to be in the HMO or those who remained in the fee-for-service system.
Finally, the experiment examined whether shouldering more of their own health care costs leads people to take better care of themselves. It did not. Risky behaviors were not affected — rates of smoking and obesity, for instance, did not change.
Today’s health care environment differs in fundamental ways from the one in which the HIE took place. The science of medicine has changed across all dimensions. Managed care has become more prominent, as has prescription drug use. Doctors emphasize preventive care to a greater extent and know more about providing it. Given these and many other systemic changes, it is impossible to know whether a similar experiment undertaken today would produce similar results.
It is possible to take two contrasting perspectives on the HIE’s relevance to today’s health care debate. On the one hand, the study raises the possibility that cost sharing can be adapted to help achieve fundamental goals: containing costs and reducing waste without damaging health or quality of care. Would pairing some form of cost sharing and managed care allow us to exploit cost sharing’s benefits (reduced costs and unnecessary care, small overall health effects) while avoiding its negatives (reduction in needed care, some health effects for poorer and sicker patients)? The study suggested that cost sharing should be minimal or nonexistent for the poor, especially those with chronic disease.
On the other hand, the HIE showed that cost sharing can be a blunt tool. It reduced both needed and unneeded health services. Indeed, subsequent RAND work on appropriateness of care found that economic incentives by themselves do not improve appropriateness of care or lead to clinically sensible reductions in service use.
In addition, cost sharing may not address the principal causes of cost growth. Cost sharing cuts expenditures by reducing visits but has little effect on the cost of treatment once care is sought. If, as is widely believed, cost increases are driven by treatment expense and new technologies, cost sharing can contribute to reducing costs at each point in time but may have little effect on the overall rate of cost growth.
Testing the effects of cost sharing in today’s environment and determining its usefulness as a tool for health system reform would require another large-scale demonstration. To our knowledge, no such demonstration has been conducted since the HIE. However, important nonexperimental work has been done in the interim using the HIE’s findings on the effect of cost sharing in more targeted insurance plans. A recent series of RAND studies showed that cutting prescription co-payments for patients who needed cholesterol- lowering drugs the most could improve their health and save more than $1 billion annually in medical costs by increasing adherence and reducing the chance of hospitalization. In this instance, reduced cost sharing led to greater savings and improved health.
As health reform reenters the national policy dialogue, RAND Health is once again providing a framework and objective analysis to inform the evaluation of options. The Comprehensive Assessment of Reform Efforts (COMPARE) initiative is developing a multidimensional framework within which a variety of proposed solutions to the problems in the U.S. health care system can be evaluated. RAND Health will use a variety of analytic tools including microsimulation to explore the expected performance of the health care system over the next two decades in the absence of significant policy change (i.e., establish a base case). Proposals for change will be evaluated in comparison to the base case. This work continues the role that RAND Health began with the HIE by providing the facts and analysis necessary for informing health policy.
 For a summary of this work, see “Cutting Drug Co-Payments for Sicker Patients on Cholesterol-Lowering Drugs Could Save a Billion Dollars Every Year,” RB-9169.
This Research Highlight summarizes key findings from the RAND Health Insurance Experiment:
Robert H. Brook et al. “Quality of Ambulatory Care: Epidemiology and Comparison by Insurance Status and Income.” Medical Care, May 1990, Vol. 28, No. 5, pp. 392–433.
Robert H. Brook, John E. Ware, William H. Rogers, Emmett B. Keeler, Allyson Ross Davies, Cathy Donald Sherbourne, George A. Goldberg, Kathleen N. Lohr, Patti Camp, and Joseph P. Newhouse. The Effect of Coinsurance on the Health of Adults: Results from the RAND Health Insurance Experiment. Santa Monica, Calif.: RAND Corporation, R-3055-HHS, December 1984.
Emmett B. Keeler. “Effects of Cost Sharing on Use of Medical Services and Health.” Medical Practice Management, Summer 1992, pp. 317–321. Available online.
Kathleen N. Lohr, Robert H. Brook, Caren J. Kamberg, George A. Goldberg, Arleen Leibowitz, Joan Keesey, David Reboussin, and Joseph P. Newhouse. Use of Medical Care in the RAND Health Insurance Experiment: Diagnosis- and Service-Specific Analyses in a Randomized Controlled Trial. Santa Monica, Calif.: RAND Corporation, R-3469-HHS, December 1986.
Joseph P. Newhouse and the Insurance Experiment Group. Free for All? Lessons from the RAND Health Experiment. Cambridge, Mass.: Harvard University Press, 1993.
Bibliographical note: Work on the HIE began in 1973 and ended in 1982. The study led to over 300 publications, including journal articles, reports, and books. View a comprehensive bibliography of HIE-related publications »