BUS 556 Report: Healthcare Economics and the RAND Experiment

This report provides an analysis of healthcare economics, focusing on Joseph Newhouse's article, "Consumer-Directed Health Plans and the RAND Health Insurance Experiment." The report begins with an introduction to health economics, emphasizing its importance in resource allocation within healthcare. It then provides an overview of the RAND Health Insurance Experiment, which examined the effects of cost-sharing on healthcare utilization and outcomes. The report highlights key economic principles applicable to the article, including the principles of trade-offs, incentives, and opportunity cost. The analysis demonstrates how these principles influence consumer behavior and decision-making within the healthcare system. The report concludes with a discussion on the significance of economic understanding in health management, emphasizing the role of consumers, healthcare organizations, and policymakers in ensuring affordable, safe, and quality healthcare services.

Running head: HEALTHCARE ECONOMICS 1
Healthcare Economics
Name
Institution

HEALTHCARE ECONOMICS 2
Healthcare Economics
Introduction
Economics is a diverse concept that applies to many disciplines. Many people thought
that there is no such thing as health economics. However, in my capacity as an economist, it is
my pleasure to boldly-express that health economics exists and it simply entails the study of the
allocation of resources in the field of health care. Health economics is equally important because
it helps in the distribution of scarce healthcare resources in the society. In this paper, I would like
to use Joseph Newhouse’s “Consumer-Directed Health Plans and the RAND Health Insurance
Experiment” to provide an insight on the concept of health economics, its significance, and its
related principles.
General Overview of the Study
“Consumer-Directed Health Plans and the RAND Health Insurance Experiment” is an
article that was authored by Joseph Newhouse. Here, the author was aiming at presenting a
comprehensive analysis of the intrigues in health economics. The article is purely on the
allocation of healthcare insurance services amongst the individual consumers. Healthcare, in this
case, is viewed as scarce resources that the people must work hard and sacrifice to obtain. The
author centered on the analysis of the RAND Health Insurance Experiment (RAND HIE) that
had been rolled-out in the USA between 1974 and 1982.
According to his understanding, Newhouse explains that the RAND HIE was actually an
experimental study that was done in the USA to find out the costs, utilization, and outcomes of
healthcare services in the country. The experiment used the randomized-controlled trial to
conduct the study. According to the experiment, cost-sharing was identified to be the most

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effective way of providing health insurance services in the country because of the many benefits
such as the promotion of full-utilization of health care as well as the elimination of unnecessary
overuse of the service (Newhouse, 2004). After exploring the experiment, the author went ahead
to provide an insightful analysis of the currently-used Consumer-Directed Health Plans.
According to his research, Consumer-Directed Health Plan is more effective because it helps in
minimizing the costs of healthcare services.
Economic Principles applicable in the Article
In this article, Newhouse used his knowledge in Health Policy and Management
to write a purely health economics paper. The scholar used his experience to present an in-depth
and critical discussion on the health economics. The discussions he presented on RAND HIE and
the Consumer-Directed Health Plan were purely economical. This is because, he did concentrate
on the economic values of sharing and allocating the scarce healthcare services to the individual
consumers each of whom has different levels of income. This demonstrates the article
encompassed the following principles of economics:
The Principle of People Face Trade-Offs
This is the first principle that is applicable in this discussion. According to this
principle, it is not economically-possible for an individual to get everything that he or she wants.
Meaning, for one to get something, one must forfeit the other alternative (Muennig &
Bounthavong, 2016). The principle is applicable when making economic decisions particularly
in situation in which there is a need to prioritize one wants over the other. The principle applies
in the article because it gives a clue on how the scarce healthcare services can be shared amongst
the people. In the experiment, it was found out that the use of cost-sharing strategy impacted on

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the consumers by increasing the costs of healthcare services because of the pressure it piled on
the inpatient services (Newhouse, 2004). This ended up hindering the patients from seeking for
medication no matter how important it was for them. That implies that anyone who wants to get
access to healthcare services must choose to sacrifice resources. The sacrifice might be higher if
one wants to acquire a wide range of services because the charges might be more (Phelps, 2016).
This must happen because no service can be given for free as the proponents of this principle
acclaim that there is nothing like a free lunch.
People respond to Incentives
This is the second principle that applies to this case. According to this principle,
individuals can be motivated to act if they are given rewards. The use of rewards is applicable in
economics because it can help in explaining and understanding human behaviors. When
incentives are used in healthcare, there can be a possibility of allocating resources and making
them to be fully-utilized by the consumers (Golberstein, Busch, Zaha, Greenfield, Beardslee &
Meara, 2015). During the experiment, it was established that the healthcare services were not
optimally used because the people were demotivated. There were no enough incentives to attract
the people to do so. That is why when the new Consumer-Managed Care Plan was introduced; it
got a warm reception since it was associated with certain rewards. For example, the author
recounts that the new plan was embraced on the grounds of affordability and flexibility
(Newhouse, 2004). Meaning, individual users would get an opportunity to enjoy a wide range of
quality healthcare services at affordable rates. Meaning, the managed care plan would bring
more incentives that had not been provided in the past. Hence, it implies that the use of
incentives is economically-viable because it promotes the culture of consumption and increases
the demand for services in the market.

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The Cost of Something is what you give up to get it
This is the third principle that remains relevant to this discussion. According to
this principle, consumers have to make a choice o what to acquire and be ready to forgo some
alternatives that would have otherwise been chosen. Meaning, human beings always have limited
resources to meet their unlimited needs. This principle is applicable in the article because
Newhouse used it to discuss about the allocation and utilization of scarce resources. During the
experiment, it was discovered that healthcare services are on a high demand. However, not
everyone is able to get access to all the services that they require because of lack of affordability
(Barnes, Unruh, Chukmaitov & van Ginneken, 2014). Whenever a patient is confronted with
such a situation, he must apply the principle of opportunity cost because he has to choose only
one alternative and be ready to forgo the other. The same applies to the managed care plan in
which the consumers have to prioritize their health need as and forgo the other alternatives no
matter how essential they might be.
Conclusion
“Consumer-Directed Health Plans and the RAND Health Insurance Experiment” is an
invaluable article that presents insightful information on health economics. Newhouse used the
article to prove his economic prowess and prove to the readers that he was actually writing about
what he knows best. All the information in the article is important because they can educate the
readers on the significant contributions of economical understanding in health management. All
the discussions given on the RAND HIE and managed care plan are suitable for anyone who
wants to have a sound knowledge of health economics.

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The article has been of a great contribution to me because it has enabled me to learn some
new things that I did not know before. For example, now I understand that healthcare resources
are scarce and should be managed well. The article has sensitized me that the success in the
healthcare sector relies on the decisions made by individual consumers, healthcare organizations,
and the policy makers. Each of these stakeholders should apply the relevant principles of
economics in order to make rational decisions that can be relied upon by the public to guarantee
the provision of affordable, safe, and quality healthcare services that can effectively meet the
needs of everyone in the country (Sanders, Neumann, Basu, Brock, Feeny, Krahn & Salomon,
2016).

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References
Barnes, A. J., Unruh, L., Chukmaitov, A., & van Ginneken, E. (2014). Accountable care
organizations in the USA: types, developments and challenges. Health Policy, 118(1), 1-
7.
Golberstein, E., Busch, S. H., Zaha, R., Greenfield, S. F., Beardslee, W. R., & Meara, E. (2015).
Effect of the Affordable Care Act’s young adult insurance expansions on hospital-
based mental health care. American Journal of Psychiatry, 172(2), 182-189.
Muennig, P., & Bounthavong, M. (2016). Cost-effectiveness analysis in health: a practical
approach. New York: John Wiley & Sons.
Newhouse, J. P. (2004). Consumer-directed health plans and the RAND Health Insurance
Experiment. Health Affairs, 23(6), 107-113.
Phelps, C. E. (2016). Health economics. New York: Routledge.
Sanders, G. D., Neumann, P. J., Basu, A., Brock, D. W., Feeny, D., Krahn, M., ... & Salomon, J.
A. (2016). Recommendations for conduct, methodological practices, and reporting of
cost-effectiveness analyses: second panel on cost-effectiveness in health and medicine.
Jama, 316(10), 1093-1103.