Comparative effectiveness research as choice architecture: the behavioral law and economics solution to the health care cost crisis.

• Author: Korobkin, Russell
• Position: Introduction through IV. Relative Value Health Insurance A. The Legal Status of Relative Value Health Insurance 1. Limitations on Ex Post Utilization Review, p. 523-549

With the Patient Protection and Affordable Care Act ("ACA") set to dramatically increase access to medical care, the problem of rising costs will move center stage in health law and policy discussions. "Consumer directed health care" proposals, which provide patients with financial incentives to equate marginal costs and benefits of care at the point of treatment, demand more decisionmaking ability from consumers than is plausible due to bounded rationality. Proposals that seek to change the incentives of health care providers threaten to create conflicts of interest between doctors and patients. New approaches are desperately needed.

This Article proposes a government-facilitated but market-based approach to improving efficiency in the private market for medical care that I call "relative value health insurance." This approach focuses on the "choice architecture" necessary to enable even boundedly rational patients to contract for an efficient level of health care services through their health insurance purchase decisions. It uses comparative effectiveness research, which the ACA funds at a significant level for the first time, to rate medical treatments on a scale of one to ten based on their relative value, taking into account expected costs and benefits. These relative value ratings would enable consumers to contract with insurers for different levels of medical care at different prices, reflecting different cost--quality trade-offs.

The Article describes both the benefits of relative value health insurance and the impediments to its implementation. It concludes with a brief discussion of how relative value ratings could also help to rationalize expenditures on public health insurance programs.

TABLE OF CONTENTS INTRODUCTION I. THE PROBLEM OF MORAL HAZARD II. CONSUMER DIRECTED HEALTH CARE A. CDHC as an Approach B. Bounded Rationality 1. Complexity 2. Novelty 3. Inconsistent Comparative Information 4. Emotion-Laden Decisions C. Empirical Research on Medical Decisionmaking III. MEDICAL PROVIDERS AS DECISIONMAKING AGENTS A. Provider Financial Incentives B. The Problems with Even Economically Optimal Physician Incentives IV. RELATIVE VALUE HEALTH INSURANCE A. The Legal Status of Relative Value Health Insurance 1. Limitations on Ex Post Utilization Review 2. Ex Ante Exclusions B. The Information Problem C. CER and Relative Value Ratings D. Relative Value Ratings and the ACA V. ADVANTAGES OF RELATIVE VALUE HEALTH INSURANCE A. Better "Choice Architecture" for Consumers Than CDHC 1. Complexity 2. Novelty 3. Points of Comparison 4. Emotion-Laden Choices B. Aligning the Interests of Physicians and Patients C. Efficient Incentives for Innovation and Pricing VI. OBSTACLES A. Creating the Ratings 1. Getting from Here to There 2. Implicit Value Choices 3. Industry Capture B. Operating a Ratings-Based Market 1. Adverse Selection 2. Subsidies and Health Exchanges 3. Individual and Subgroup Variation C. The Inevitability of Context Effects CONCLUSION INTRODUCTION

Since the 1960s, health care spending in the United States has consistently increased--often by significant amounts--as a percentage of gross domestic product ("GDP"). (1) Accounting for 5.2% of GDP in 1960, health care expenditures grew to 7.2% of GDP in 1970, 9.2% in 1980, 12.5% in 1990, 13.8% in 2000, and 17.9% in 2011. (2) In 2013, the Congressional Budget Office predicted that without sharp, systemic change, 22% of domestic economic production will be devoted to health care by 2038. (3)

As total health care spending has increased, so too has the cost of private health insurance. As of 2013, the average cost of insurance coverage for a single adult with an employer-sponsored plan was $5,884, and a standard employer-sponsored policy for a family of four ran $16,351. (4) For American families, increasing private insurance costs have meant that workers who continue to enjoy employer-based health insurance have seen wages stagnate and out-of-pocket health care costs increase rapidly as employers have scrambled to maintain benefits. An estimated 46% of real wage increases went to employees' share of health insurance premiums each year from 2000 to 2009. (5) For the average worker with single coverage, annual contributions to premiums increased by 97% between 2003 and 2013; (6) out-of-pocket deductibles increased from 17% to 138%, depending on the type of plan, from just 2006 to 2013; (7) and the number of people with a deductible of at least $2,000 increased five-fold during the same time period. (8) Public expenditures on medical care have also increased sharply. In fiscal year 2012, Medicare, Medicaid, and the Children's Health Insurance Program ("CHIP") cost the federal government an estimated $732 billion, 21% of its total budget. (9) That number is up from less than 10% in 1985. (10) Medicaid spending alone now comprises 15% of all state government spending, (11) up from 10% in 1987. (12)

The United States is a wealthy country, so it is not obvious that it should not spend such a large share of its national resources on medical care. But rapidly increasing costs, coupled with the well-known fact that the health and longevity of Americans lag behind those of citizens of other developed nations that spend less of their wealth on medical care, (13) at least suggests that the nation probably allocates an inefficiently large fraction of national resources to health care, compared to competing goods and services. At a bare minimum, the continuing rapid escalation of health care costs will--if unchecked--result in the nation allocating a larger percentage of national wealth to medical care than is efficient at some point in the not-too-distant future.

The primary market-based approach to reining in health care costs is generally referred to in policy discussions as "consumer directed health care" ("CDHC"). The simple idea underlying CDHC is that patients will demand less care if they are burdened with a greater responsibility for paying the actual cost of that care than is common in our current system, in which costs are largely borne by public or private health insurance with little patient cost sharing. (14) CDHC implicitly relies on the "rational choice" assumption of neoclassical economics that, given the proper incentive structure, individual consumers will allocate resources between medical care and other goods and services (and, within the category of medical care, between competing treatment options) in a manner that maximizes their "subjective expected utility" ("SEU"). (15) As I explain below, there are compelling reasons to believe, however, that most consumers, as boundedly rational decisionmakers, would be particularly bad at making efficient trade-offs when asked to make point-of-service medical care decisions.

One view within the field of behavioral law and economics is that policymakers should use hard law and sorer institutional structures to "nudge" imperfect decisionmakers in the presumably efficient direction, while allowing them the liberty to make other choices should they strongly desire. (16) But a less paternalistic approach, and one that is more practical when public officials are uncertain ex ante which choices would maximize the SEU of most decisionmakers, (17) is for public officials to facilitate private choices in ways that will increase the likelihood that the individuals will be able to make personally utility-maximizing choices. This Article describes a novel, "choice architecture" approach that can help individuals to more optimally allocate their resources between medical care and other goods and services. Under this approach, the government would produce and dispense information concerning the costs and benefits of medical treatments sufficient to enable consumers and health insurers to contract for what I call "relative value health insurance" ("RVHI"), a product that covers medical interventions that meet or exceed a given level of cost-effectiveness.

Having survived Supreme Court review, (18) the landmark 2010 health care reform legislation, the Patient Protection and Affordable Care Act ("ACA" or "the Act") is now set to significantly expand access to medical care. (19) While most commentators agree that the Act is unlikely to have more than a modest effect on stemming the rapidly increasing cost of medical care, (20) a relatively overlooked provision can serve as the starting point for the promotion of RVHI. The Act provides significant funding for government-sponsored "comparative effectiveness research" ("CER"), (21) designed to evaluate the relative efficacy of different treatment options for a particular condition or ailment.

To facilitate the market for RVHI, government-sponsored CER should be used to evaluate different treatments for various medical conditions and rate them on a scale of "1" (high) to "10" (low) in terms of cost-effectiveness. Health insurance agencies could then use these transparent ratings as the basis for different coverage offerings. For example, an insurance company might offer three plans: (1) a policy that covers only treatments with a rating of "3" or higher at annual premium price $X, (2) a policy that covers only treatments rated "5" or higher at annual premium price $Y, and (3) a policy that covers only treatments rated "7" or higher at annual premium price $Z.

Consumers of health care would then decide at the time they purchase insurance--not at the time of illness--whether they wish to purchase relatively "shallow" insurance that covers only the most cost-effective interventions at a correspondingly modest price, or relatively "deep" insurance that covers increasingly less cost-effective treatments but at a higher price. The simple numerical rating scale would provide boundedly rational consumers with a useful tool for allocating resources between their medical care and other goods and services. If consumers wish to forgo expensive medical treatments that provide limited...