Relative value health insurance.

Journal of Health Politics, Policy and Law

Relative Value Health Insurance Russell Korobkin University of California, Los Angeles

Abstract Increases in health costs continue to outpace general inflation, and implementation of the Patient Protection and Affordable Care Act will exacerbate the problem by adding more Americans to the ranks of the insured. The most commonly proposed solutions—bureaucratic controls, greater patient cost sharing, and changes to physician incentives—all have substantial weaknesses. This article proposes a new paradigm for rationalizing health care expenditures called ‘‘relative value health insurance,’’ a product that would enable consumers to purchase health insurance that covers cost-effective treatments but excludes cost-ineffective treatments. A combination of legal and informational impediments prevents private insurers from marketing this type of product today, but creative use of comparative effectiveness research, funded as a part of health care reform, could make relative value health insurance possible. Data deficits, adverse selection risks, and heterogeneous values among consumers create obstacles to shifting the health insurance system to this paradigm, but they could be overcome.

In April 2013, the Food and Drug Administration approved a drug called Procysbi for the treatment of a juvenile kidney disease. According to the New York Times, Procysbi will retail for about $250,000 per year, compared with the price of roughly $8,000 per year for Cystagon, the established treatment (Pollack 2013). Cystagon has the same active ingredient as Procysbi, but the older treatment has a variety of side effects that can be Helpful advice and comments were provided by workshop and conference participants at Arizona State, Emory, Harvard, Hebrew University, and UCLA, and by Gregg Bloche, Glenn Cohen, Einer Elhauge, Mark Hall, Allison Hoffman, Jill Horwitz, Brendan Maher, and Mark Peterson. Emily Bisnett, Cassandra Gaedt, Ella Hushagen, Jordan Jeffery, Adam McIntosh, Sam Pierce, and Jonathon Townsend provided indispensable research assistance. Journal of Health Politics, Policy and Law, Vol. 39, No. 2, April 2014 DOI 10.1215/03616878-2416310 Ó 2014 by Duke University Press

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avoided with the new drug. Cystagon causes bad breath, body odor, nausea, and abdominal problems. Procysbi does not. Cystagon must be taken every six hours, which requires waking young patients in the middle of every night and often results in skipped doses, which in turn can have serious consequences. Procysbi may be taken once every twelve hours. The marginal benefits of Procysbi are not trivial, but are they worth its high price tag? Who should decide? Notwithstanding some slowing since the start of the recent recession, the cost of medical care in the United States continues to rise faster than the general rate of inflation, as it has in all but two of the past fifty years, and in 2011 it accounted for more than 17 percent of the country’s GDP, up from 9 percent in 1980 (Centers for Medicare and Medicaid Services 2013). The Congressional Budget Office projects that number will rise to 25 percent by 2037 without systemic change (CBO 2012). The average cost for employer-provided health insurance for a family of four now exceeds $15,000 per year (KFF 2012), and nearly half of all real wage increases for working Americans went to health insurance costs between 2000 and 2009 (Romer and Duggan 2010). The reasons for the ongoing price spiral are myriad, of course. Americans pay higher prices for the same services than consumers in other developed countries as a result of government policy and provider bargaining power, the delivery of medical care is inefficient in many ways, and the system provides incentives for the provision of care that does not improve health outcomes. But a fundamental source of consistent medical cost inflation, as the Procysbi story illustrates, is that technological progress consistently leads to the creation of beneficial new treatments at ever higher cost. Private insurance policies with relatively low deductible and cost-sharing requirements that are written to cover all ‘‘medically necessary’’ care then create moral hazard: providers provide and patients accept new, more expensive treatments that offer the promise of marginal benefits, without regard to marginal cost. Ironically, expanding access to private health insurance under the Patient Protection and Affordable Care Act (ACA) will exacerbate this problem, whether or not other provisions of the ACA prove successful in controlling other sources of the cost problem. At some point (and we may have already arrived at it), the opportunity costs of allocating an ever larger percentage of national wealth to medical care will exceed the benefits of doing so. The fundamental failing is that, as we spend more and more of our GDP on medical care, there is no system in place to ensure that these expenditures increase social welfare more than if we allocated some of these resources to other goods and services.



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Ideas for rationalizing medical care expenditures abound, but all of the leading concepts have significant flaws. Those on the political left traditionally favor proposals that rely on some combination of administrative rationing of care and price controls, as is common in much of the developed world: government officials with expertise on cost and efficacy decide, to a greater or lesser extent, what medical interventions are provided or reimbursed and how much providers are paid. In the United Kingdom, for example, a government-constituted expert panel would have to recommend that a new drug like Procysbi be added to that country’s National Health Care system formulary, taking into account clinical effectiveness and cost-effectiveness before it would be covered (Pearson and Rawlins 2005: 2618). Although this type of approach could restrain spending, its bluntness could never take account of the heterogeneity in preferences for medical care and thus would almost certainly result in significant inefficiencies, even assuming that political decision makers were able to roughly determine the overall, socially efficient amount of resources to allocate to medical care. Some people would prefer to pay the actuarially determined increase in health insurance prices to know that Procysbi would be covered if they needed it, while others undoubtedly would prefer to pay less and accept Cystagon, should the need ever arise. Those on the political right, in stark contrast, champion approaches— generally referred to as ‘‘consumer-directed health care’’ (CDHC)—that would give patients more responsibility for paying the actual cost of medical interventions than is common in our current system, by encouraging much higher co-payments and deductibles. CDHC implicitly relies on the ‘‘rational choice’’ assumption of neoclassical economics: specifically, 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. But the complexity of medical care choices suggests that most consumers will lack the information and ability to make rational cost-benefit trade-offs at the point of service. One consistent finding, dating back to the well-known RAND study of the 1970s and 1980s (Manning et al. 1987: 258), is that patients demand less care when faced with increasing marginal costs but do not do a good job of distinguishing between high- and low-value interventions (Baicker and Goldman 2011: 52). In any event, the uneven distribution of health care costs across the population in any given year undermines the premise of CDHC for even hyperrational consumers. Medical costs are notably bipolar, with 5 percent of



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patients responsible for about half of all costs in a given year (Conwell and Cohen 2005). This means that most treatment decisions that involve significant costs will be made by patients who will exceed their annual outof-pocket limit. Even a patient with an annual $12,700 deductible—the highest out-of-pocket limit permitted in 2014 for family policies offered in coordination with tax-advantaged Health Savings Accounts (Internal Revenue Service 2013)—loses the incentive to balance costs and benefits, for all practical purposes, the day he is admitted to a hospital or diagnosed with a serious ailment. Once a patient must pay at least the $8,000 cost of Cystagon out-of-pocket plus inevitable physician expenses, there is little incentive even for a patient with a high-deductible policy to balance the $242,000 marginal cost of Procysbi against its marginal benefit. A third approach seeks to use market forces to reduce the demand for medical care by focusing on the incentives of health care providers rather than patients. The most common provider compensation arrangements under private insurance reward physicians for the quantity of care provided. Outcome-based pay proposals, such as the encouragement for Accountable Care Organizations (ACOs) included in the ACA (section 1899[a]–[b]), envision holding provider groups accountable for the full costs of care and compensating them based on patient health outcomes. The fundamental problem with this approach is that it threatens to drive a wedge between the interests of patients, with insurance that promises all ‘‘medically necessary’’ care, and their physicians, who would find it in their personal interest to withhold marginally beneficial but costly care. No self-interested ACO would prescribe Procysbi when Cystagon is available, notwithstanding the benefits to patients of the newer drug. Assuming patients could distinguish the payment-focused physicians from the patient-focused physicians, the former group would have a difficult time attracting patients in the long run. Physicians who failed to identify the most effective treatment for their patients might also run a legal liability risk under informed consent or even fiduciary duty principles, even if doing so did not constitute malpractice. This article adds a novel approach to the menu of ideas for rationalizing medical care spending in order to foster an efficient allocation of resources between medical care and other goods and services that compete for our national resources. The mechanism is government facilitation of the private sale and purchase of what I call relative value health insurance (RVHI), a product that would cover medical interventions that meet or exceed a given level of cost-effectiveness and exclude from coverage relatively less cost-effective treatments.



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RVHI could be offered with different cost-benefit thresholds, enabling consumers with different subjective preferences for allocating their financial resources to medical care versus other goods and services to satisfy those preferences at the time that they purchase insurance. In this way, RVHI policies would offer much of the benefit sought from CDHC without unrealistically expecting consumers to conduct a complex analysis of costs and benefits at the point of treatment and saddling them with deductibles that are beyond their ability to pay in order to mitigate moral hazard. In other words, consumers who want to allocate more resources to medical care could buy what I will call a deep policy, which would cover both Procysbi (and treatments for other conditions with a similar costeffectiveness profile) and Cystagon, and consumers who want to allocate fewer resources to medical care could buy what I will call a shallow policy, which would cover only Cystagon. A combination of legal and informational barriers makes it impossible at this time for the health insurance market to offer the option of RVHI policies, even though it would be in the interests of customers and control the spiral of health care inflation. The first part of this article describes the impediments. The current implementation of the ACA provides a propitious opportunity to evaluate the potential of RVHI, however, because a relatively minor provision of the new law could serve as a starting point for making RVHI feasible. The second part explains how that portion of the ACA could be used as the springboard for a federal government effort to facilitate RVHI. Finally, the third part considers some of the most serious obstacles to successfully implementing an RVHI system. Existing Legal and Informational Impediments

With low-deductible health insurance, patients have an incentive to consume medical care that they believe (or their doctor believes) has a positive expected benefit, net of time and discomfort, regardless of whether that benefit exceeds the marginal cost of that care. The inefficient allocation of resources that results could be mitigated by insurers offering policies that cover only treatments that meet a particular cost-benefit threshold. Consumers who wish to spend their resources on treatments with relatively low cost-effectiveness profiles could buy more expensive, deeper policies, and consumers who wish to spend less of their disposable income on medical care could purchase shallower policies that cost less but cover only treatments with relatively high cost-effectiveness profiles. But there are two impediments to the market providing such RVHI policies. First, legal



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restrictions severely limit the ability of insurers to offer such coverage based on coverage determinations that they would make after customers have purchased insurance. Second, the lack of available information makes it impossible for insurers to fully specify what treatments would be covered under such policies at the point of sale of the policy. The Legal Regulation of Utilization Review

Within categories of care covered by health insurance contracts, nearly all contracts are written to cover ‘‘medically necessary’’ care (Morreim 2001: 47). In order to enforce this coverage limitation, insurance contracts often require that the insurer preapprove certain interventions to ensure that they meet the medical necessity requirement, a process commonly known as ‘‘utilization review.’’ During the 1980s and 1990s, the period in which the concept of ‘‘managed care’’ was in ascendancy (Starr 2011: 143), insurers became more willing than before to use this process to deny coverage to policyholders for treatments recommended by their physicians (Bloche 2011: 105). Utilization review conducted by insurers at the point of treatment can mitigate the moral hazard problem of patient overuse of services, but at the cost of creating a significant reverse-moral-hazard problem of its own. If permitted the discretion to judge ‘‘medical necessity’’ after receiving customers’ premium dollars, insurance companies would face a clear conflict of interest: the more treatments they denied, the more dollars would flow to their bottom lines. An insurer that promised its customers midquality coverage at a midrange price, for example, could plausibly use the tool of utilization review to deny even midquality medical care to their customers. This moral-hazard problem is typically mitigated in markets by the desire of sellers to please their customers in order to earn repeat business (Korobkin 2003: 1240). This constraint is far less potent in health insurance markets because sellers will often benefit if customers who seek expensive care choose to look elsewhere for insurance in future years, as those customers are more likely than average to seek expensive care then as well (Korobkin 1998: 35). Probably because of this obvious moral hazard problem with point-ofservice utilization review, it was unpredictable, even at the apex of the managed care revolution, whether insurers would prevail when their denials of care were challenged in court. The Supreme Court ruling in Firestone Tire & Rubber Co. v. Bruch (489 U.S. 101 [1989]) that an insurer’s medical necessity determinations were entitled to judicial deference if the insurance



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contract assigned the company authority to make such determinations helped protect utilization review. But courts still did, from time to time, find such decisions ‘‘arbitrary and capricious’’ and thus not entitled to deference (McGraw v. Prudential Insurance Co. of Am., 137 F.3d 1253, 1258, 1263 [10th Cir. 1998]; Bedrick By and Through Humrickhouse v. Travelers Ins. Co. 93 F.3d 149 [4th Cir. 1996]). At best, controlling costs through utilization review was always a risky strategy for insurers. More importantly, as part of the public backlash against cost-containment efforts by health insurers that began in the late 1990s, forty-four states and the District of Columbia enacted ‘‘external review’’ statutes, which give patients the right to challenge an insurer’s medical necessity-based denials of care to a state-selected quasi-judicial body (AHIP Center for Policy and Research 2008). Prevailing patients can obtain an order requiring the insurer to provide the requested treatment or reimburse them if they have already obtained it (Hunter 2006: 136). In most jurisdictions, external reviewers determine medical necessity de novo, and often based on a statutory definition of the concept, rather than merely applying an insurer’s definition of the term (if the insurer even defines the term, which the insurer often does not) (Hall 2003: 666). According to these definitions, medical necessity depends entirely on whether a treatment has any clinical indication, and in almost no jurisdictions does the relevant standard include any hint of cost-benefit balancing or consideration of cost-effectiveness,1 except to the extent that a treatment is not ‘‘medically necessary’’ if there is an equally efficacious treatment available (presumably at a lower price). Consequently, health insurers now have little if any legal space to mitigate moral hazard by refusing to cover low-value treatments. Consistent with this legal straitjacket, health insurers usually pay for any treatment recommended by a treating physician that offers the potential for any positive clinical benefit unless explicitly excluded from the contractual scope of coverage (Hall 2003: 655, 658, 671). When insurers do deny a physician’s treatment proposal and subsequently defend their position to external review boards, the issue is nearly always either whether the disputed treatment is at all effective for the patient’s condition or whether a requested procedure is cosmetic or lifestyle-related rather than medical in nature (Bloche 2011: 28; Hall 2003: 658). Bariatric surgery, breast reduction 1. One exception appears to be North Carolina (N.C. Gen. Stat. x58-3-200[b]). A handful of state statutes provide that the external reviewer is to apply the insurer’s standard (Alaska Stat. x21.07.050[d][1]; Ariz. Rev. Stat. Ann. x20-2537[E]; Kan. Stat. Ann. x40-22a13[b]; Or. Rev. Stat. x743.862[2]; Tenn. Code Ann. x56-32-227[b][6]; Wis. Stat. Ann. x632.835[3m]).



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surgery, Viagra prescriptions, residential care, and power-operated wheelchairs are frequent subjects of dispute (Gresenz and Studdert 2005: 457). Today it appears to be rare, if not completely nonexistent, for a private insurer to refuse to cover a physician-recommended treatment with recognized positive expected clinical value, unless specifically excluded by contract, on the ground that the treatment is not cost-justified. The consequence is that the insurance system requires all consumers to purchase the deepest plausible level of coverage. To use the metaphor of Havighurst (1994: 104–5), all buyers of private health insurance must purchase ‘‘Cadillac’’-quality health care at a Cadillac price, even if they would prefer to purchase a more modest level of care at a more modest price. This system is acceptable for the wealthy, who have minimal cost constraints. It also serves the interests of the nonwealthy, who place a particularly high value on marginally cost-effective medical care relative to the other goods and services that they must forgo because so much of their income is devoted to medical care—either directly or indirectly, as a consequence of the downward effect on wages created by increases in employer-sponsored coverage. But customers who would prefer cheaper and less comprehensive coverage are clearly not well served. They must buy deeper coverage than they wish to purchase or go without any coverage at all. And now, as a result of the ACA’s ‘‘individual mandate’’ (section 1501), all but the lowest-income people who choose the latter option will be subject to fines. Explicit Contractual Exclusions

The legal restrictions on utilization review that arose as part of the backlash against managed care have not interfered with insurers’ ability to refuse to pay for treatments that are explicitly excluded by the insurance contract. A patchwork of state ‘‘mandated benefits’’ laws requires health insurance policies to cover specified categories of treatments, and federal law currently includes a handful of private insurance treatment mandates. Except for such enumerated benefits mandates, however, insurers are legally able to exclude specified interventions from coverage, and courts routinely uphold their rights to do so as a matter of freedom of contract (Hall 2003: 667–68). It is common for insurance companies that sell policies that provide very broad coverage at a high price to also offer policies that are much narrower in their scope, such as a policy that covers only inpatient hospital care. Many insurance plans come with a list of ‘‘formulary’’ pharmaceuticals that are covered according to the standard cost-sharing rules when medically



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indicated, while nonformulary drugs require higher co-payments or are even excluded from coverage altogether (KFF 2009: 144). And of course health insurers can and do, by contract, limit coverage to care provided by hospitals and physicians within their provider network and/or requiring greater cost sharing if a patient chooses to go ‘‘out of network’’ for treatment (Kongstvedt 2001: 40). Against this background legal principle, there is no impediment, in theory, to insurers excluding from coverage all treatments that fail to satisfy a particular cost-effectiveness profile, as long as the exclusions can be adequately specified at the time of contracting. Further, there is no impediment to insurers offering multiple insurance products, priced differently, each of which explicitly excludes from coverage treatments that fail to meet different cost-effectiveness thresholds. The primary impediment to the sale of insurance that covers only costeffective interventions thus appears to be the difficulty of adequately specifying the relevant coverage exclusions ex ante (Baicker and Goldman 2011: 52; Neumann 2005: 145). The most fundamental problem is that there is very little solid information demonstrating the basic effectiveness of the majority of medical treatments recommended by physicians and other providers every day (Institute of Medicine 2007: 2). Where there is more than one plausible intervention, there is even less information available concerning the comparative effectiveness of possibilities. Clinical practice guidelines are often based on consensus opinion rather than firm scientific fact (Tricoci et al. 2009: 831). And when the law requires premarket regulatory approval for a treatment, such as a new pharmaceutical product, it usually requires proof only that it is safe and effective compared with a placebo rather than more effective than alternative treatment options for the same condition. The absence of information would make it impossible for any insurer interested in marketing a policy that covers treatments satisfying a certain costeffectiveness standard to identify ex ante what is included and what is excluded. Even if a particular insurance company endeavored to create a comprehensive list of exclusions based on a cost-effectiveness standard, this information would be far too overwhelming for most consumers to understand and evaluate when making insurance purchasing decisions. And if consumers fail to incorporate information provided by insurers at the time of contracting when making purchase decisions, the benefits of ex ante exclusions relative to ex post utilization review would evaporate. The same reverse-moral-hazard problem associated with the latter would still exist:



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insurers might market cost-effective care while shrouding a much lower level of care in the details of the long and complicated disclosures. For example, some insurers undoubtedly will respond to the high price of Procysbi by excluding it from their formularies, but this will not help ensure that the efficient level of medical care is provided. The parent who purchases the insurance policy that excludes Procysbi, and later learns that her child has contracted kidney disease and that only Cystagon is covered, will almost certainly not have known that she was opting for that particular cost-benefit trade-off when she chose that insurance policy. Finally, even if a complete list of exclusions could be specified ex ante and incorporated into consumer’s insurance purchase decisions, costeffectiveness measurements are dynamic and can change quickly when new effectiveness data are produced, when new interventions are developed, or when there are market changes (such as when a drug goes offpatent). Even if an insurer could fully specify all cost-effective interventions at the time of contracting, the lag time between contracting and use of services would mean that, at the point of treatment, a policy would cover some no-longer-cost-effective interventions and not cover some nowcost-effective interventions. Facilitating Relative Value Health Insurance

A market for relative value health insurance requires (1) a substantial amount of information concerning the marginal costs and benefits of treatment options for different conditions, (2) presented in a uniform way that facilitates consumer comparison of the depth of coverage, as well as the price, of products offered by competing insurers, that (3) can be adjusted when new treatments or new information about existing treatments become available without subjecting patients to a reverse-moral-hazard risk. All three of these requirements strongly suggest public provision of the information. The ACA (sections 6301, 6302) provides a significant down payment toward the necessary investment, allocating $500 million of annual funding through 2019 for comparative effectiveness research (CER), and establishes a nonprofit corporation, the Patient-Centered Outcomes Research Institute (PCORI), to produce and compile the research. CER and Relative Value Ratings

The goal of CER is to provide a firmer scientific understanding of the relative clinical benefits of competing medical treatments, services, and



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interventions (ACA section 6301). As promoted by supporters of health care reform, CER can reduce health care costs by delivering better information to providers about what treatments either do not work at all or provide no marginal benefits relative to cheaper interventions, and thus stop their provision. As President Obama put it while promoting the CER component of his health care reform proposal in 2009, ‘‘If there’s a blue pill and a red pill, and the blue pill is half the price of the red pill and works just as well, why not pay half price for the thing that’s going to make you well?’’ (Obama 2009). But CER also has the potential to facilitate reductions in medical care that has a positive expected benefit but is not justified by its cost. By facilitating understanding not just of the absolute effectiveness of treatments but also of their cost-effectiveness, CER can provide the informational basis necessary for private insurers to sell relative value health insurance. The key to enabling CER to help rationalize the allocation of resources to medical care is to assign potential medical interventions for different conditions a single score based on their marginal costs and benefits. I call such scores relative value ratings, and I propose that they range from a high score of 1 (extremely cost-effective) to a low of 10 (not at all costeffective), although other scales would be plausible as well. Cost figures could be based on national or regional averages. Benefits could be determined on the basis of QALYs (quality-adjusted life-years), the measure routinely used by health services researchers to compare the benefits of dissimilar interventions, which takes into account both mortality effects of treatments and their effect on quality-of-life features such as pain, illness, and disability (Garber and Sox 2010: 1806). At the time of a recent study, a five-year course of the drug tamoxifen was the standard drug therapy following surgery for early stage breast cancer. The study compared the tamoxifen-only treatment with a treatment that began with tamoxifen but then switched patients to exemestane, a different, and more expensive, treatment, midway through the five-year period. The marginal cost of switching to exemestane was an estimated $4,400 per patient, and its average marginal benefit was .22 QALYs per patient, for a cost of just over $20,000 per QALY (under $17,000 per QALY for patients with particular tumor characteristics) (Thompson et al. 2007: 372). Although the marginal benefits of exemestane were relatively modest, its low marginal cost made it quite cost-effective. Based on this evidence, it would earn a high relative value rating, perhaps a 2. Another study compared the treatment of advanced pancreatic cancer with gemcitabine only with treatment with gemcitabine plus erlotinib.



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The combined treatment increased cost by over $15,000 per patient, but increased life expectancy improved by only one-third of a month, and side effects of the erlotinib decreased the benefit in QALY terms. The researchers estimated the cost per QALY of the combined treatment to be between $430,000 and $510,000 (Miksad, Schnipper, and Goldstein 2007: 4507). This analysis suggests that the combined treatment would earn a very low relative value rating, maybe a 9. Of course, relative value ratings would be used for nonpharmaceutical interventions as well. One study randomly assigned 1,191 patients with herniated spinal discs who were considered candidates for surgery to either surgery or medical management of the condition. The researchers then studied both groups of patients for two years. Taking into account factors such as pain, physical mobility, and lost labor productivity, the researcher found a slight marginal benefit for surgery, on average, but at a much higher cost. Consequently, the researchers calculated that the cost per QALY of surgery was approximately $69,000 for patients younger than age sixtyfive (Tosteson et al. 2008: 2108). Based on these data, lumbar discectomy for a herniated disc would likely receive a relative value rating somewhere in the middle of the scale—perhaps a 5. In a perfect world, all relative value ratings would be based on the results of randomized, double-blind experiments, the gold standard of medical research (Bloche 2011: 268–69). Realistically, however, the rating authority usually would have to rely on less definitive sources of scientific evidence, including retrospective analyses of clinical data. Many relative value ratings would be population-wide, but different ratings for different subgroups would be possible when justified by the best available evidence. For example, a particular treatment awarded a score of 5 for an average patient might be awarded a score of 3 for patients who have a comorbidity that makes the treatment likely to be more beneficial for them or the alternative treatment less effective. With an established set of relative value ratings issued by an expert group, the members of which would not profit from higher or lower health care expenditures, insurance companies would then be able to contract with patients for health insurance that pays for care rated at or above a specified relative value score. A Level 8 policy—that is, one that covers all interventions rated 8 or better—would cover a deeper array of treatments than a Level 3 policy would. A Level 8 policy would also cost more, of course. The precise difference would be set by the market, determined by each health insurer’s projections of the difference in its cost of covering the relevant array of interventions for a subscriber population. An insurer able



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to negotiate lower prices from its provider network might be able to offer a deeper policy at a price comparable with that charged by a competitor for a shallower policy. Consumers of health care would then determine at the time of the insurance purchasing decision—not at the time of illness—whether they wished to purchase relatively shallow insurance that covers only the most costeffective 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 scale would provide consumers with tractable information that they could use, in conjunction with the prices of various RVHI products, to satisfy their individual preferences for allocating resources between medical care and other goods and services. Unless he has experience with kidney disease, a customer who purchases a Level 3 policy, which costs less than a Level 8 policy, would be unlikely to know that, because of this choice, his family will be eligible for Cystagon but not Procysbi in the case of kidney disease. But by browsing a CER database that lists treatments by condition along with their relative value ratings, he could appreciate generally the resource allocation choice he was making. If consumers operating in the RVHI market wish to forgo expensive medical treatments that provide limited benefits, health care cost inflation will decrease and more people will have more money for other goods and services. If consumers choose to buy high-priced insurance that covers less cost-effective services, health care cost inflation will continue until marginal costs exceed marginal benefits, but these increases will represent an efficient allocation of national wealth, at least roughly. Whatever depth of coverage any particular consumer purchased, she would know that she would be covered for all treatments that satisfy a particular costeffectiveness measure—regardless of condition—and understand that interventions that fail to provide that level of cost-effective interventions would be excluded. Once relative value ratings are established, the market is likely to offer variations on the pure concept of RVHI. Many consumers might like the idea of saving money on health insurance premiums by sacrificing the right to cost-ineffective treatments but feel uneasy about the fact that they will not know until they become ill precisely what is covered and what is not. If so, insurance companies might choose to market policies that provide coverage at all rating levels but vary cost-sharing arrangements based on the rating level of treatments. For example, an RVHI might provide that treatments rated 3 or higher qualify for full coverage, whereas interventions rated 4 or 5 would require a 25 percent co-payment, interventions



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rated 6, 7, or 8 would require a 50 percent co-payment, and interventions rated lower than 8 would not be covered. RVHI’s Compatibility with the ACA

The ACA places restrictions on how government-sponsored CER can be used in a way that tangentially implicates the RVHI paradigm but ultimately should not interfere with its development. For example, the statute prohibits the secretary of the Department of Health and Human Services (HHS) from using CER as the sole basis for denying services to holders of public insurance, and it forbids PCORI from using QALYs or similar measures as a ‘‘threshold to establish what type of health care is cost effective or recommended’’ (ACA section 1182). These provisions obviously reflect deep suspicion of cost-effectiveness analysis on the part of Congress, but the limitations indicate that this political concern is directed at the use of CER to facilitate government involvement in the rationing of care (Garber and Sox 2010: 1806). The core principle of RVHI, of course, is that the government provides only information, which consumers may then use to contract for insurance that includes different coverage depths. Not only would relative value ratings not determine by fiat what depth of care consumers could obtain or doctors provide, they would not even constitute a recommendation concerning the appropriate trade-off. A treatment’s relative value rating would merely indicate that it is more cost-effective than interventions with worse ratings and less than interventions with better ratings. The creation of such information is not prohibited; in fact, it is fully consistent with the ACA’s endorsement of guidelines that permit insurers to ‘‘utilize value-based insurance design’’ (ACA section 2713[c]). The enactment of the ACA creates no new complications for the sale of RVHI products to the employment-based, large-group health insurance market (employers with more than one hundred employees). In this portion of the market, employers will continue to offer employees one or more health insurance options, and the facilitation of a market for RVHI would merely give employers the choice of offering different coverage depths as part of their menu of choices. Self-insured employer groups—groups that directly bear the cost of medical claims for members rather than purchase third-party insurance policies—might choose to provide coverage for their employees to a specified relative value rating level as well. The ACA now requires, however, that small-group and individual health insurance policies provide a minimum set of ‘‘essential health benefits.’’ To



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satisfy this requirement, provided policies must cover ten benefit categories, ranging from hospitalization to laboratory services to pediatric oral vision care. Within these parameters, the statute gives the secretary of HHS the authority to specify what will and will not comply with the ‘‘essential health benefits’’ requirement (ACA section 1302). As the federal and state governments scrambled to establish the original set of health insurance exchanges, HHS required that all policies offered be similar to ‘‘benchmark’’ policies that already exist (47 C.F.R. x156.110). Since the status quo is limited to deep policies that cover all ‘‘medically necessary’’ care within covered categories, shallower RVHI policies presumably would be noncompliant. Since the ACA’s statutory requirements speak only to breadth of coverage, however—not to depth— there appears to be nothing to prevent HHS from establishing a floor concerning the depth of coverage that small-group and individual insurance policies must provide, rather than requiring insurers to cover all medically necessary treatments within covered categories. By setting a relatively low floor (i.e., Level 4 or 5), HHS could enable RVHI products to flourish within the ACA framework, to the extent that consumers prove willing to trade off depth of coverage for lower insurance prices. One of the ACA’s central features is that it establishes a system of tax credits to subsidize the purchase of insurance from the new health insurance exchanges by low- and moderate-income individuals and families without employer-sponsored coverage. The size of the tax credit is a complicated function of both the purchaser’s income and the cost of insurance policies that cover 70 percent of the actuarial value of the benchmark plan (ACA sections 1401–2). The affordability, and thus the viability, of the ACA over time depends on the uncertain future costs of the exchange’s benchmark policies. As the actual cost of these subsidies becomes clearer, RVHI could provide the government with flexibility that might prove necessary. The ACA subsidies attempt to make affordable2 what are effectively Level 10 insurance policies (i.e., policies that cover all medically necessary treatments within covered categories of care). But in a health care system that promotes RVHI, subsidy levels could potentially be reduced without pricing low- and moderate-income consumers out of the individual health 2. Affordability is in the eye of the beholder, of course. Subsidy levels established by the ACA might or might not make health insurance ‘‘affordable’’ for Americans with various levels of income. But the subsidy levels are based implicitly on the ideology that the government should make it possible for all Americans to afford insurance that covers all ‘‘medically necessary’’ treatments within covered categories of care.



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care market altogether. For example, if the cost of the subsidies turns out to be higher than the Congressional Budget Office’s (2012) estimate of $1 trillion over ten years, future lawmakers might find themselves under pressure to reduce those subsidies. But if Level 7 policies are available in the market (rather than only what are effectively Level 10 policies with different cost-sharing requirements), the reduced subsidies might still be sufficient for individuals of modest means to purchase substantial — although somewhat shallower—health insurance. Drawbacks

Like bureaucratic fiat, CDHC, outcome-based physician pay, and all other competing ideas for controlling health care cost inflation and rationalizing medical care spending, the RVHI approach is not without substantial drawbacks, both practical and theoretical. Proper evaluation of the project’s merits require careful consideration of these in more detail than this article can provide. Nonetheless, this section identifies several of the most serious challenges to implementing RVHI. Data Deficits

The most obvious practical impediment to facilitating RVHI is the paucity of data concerning the cost-effectiveness of a large majority of medical interventions (Schneider and Hall 2009: 22–23). Years of funding well in excess of the ACA’s current budget for CER would be necessary before the medical community could hope to develop good information for most treatments (Griffin and Woodcock 2010: 2078). While substantial, this problem could be dealt with by phasing in relative value ratings. All currently available treatments for which there is no good comparative effectiveness data could be grandfathered into the system with a rating of 1—that is, they would be covered by every health insurance policy. Similar grandfathering approaches have been used in other countries that have instituted some form of cost-effectiveness analysis within their health care systems (Neumann 2005: 97). For new interventions to obtain a rating—necessary for reimbursement under relative value insurance policies — PCORI could require drug or device manufacturers or provider organizations to submit comparative effectiveness data. Simultaneously, public funding for CER could be designated to study treatments of common conditions or treatments for which large sums of money are spent but for which there is little scientific evidence concerning relative benefits.



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Politicization

A second problem with RVHI is the risk of undue influence of industry groups on what should be an entirely evidence-based relative value rating system. An enticing feature of RVHI is that it involves no bureaucratic rationing of medical care. Unlike cost-effectiveness analyses conducted under government auspices in other countries—the best-known being the United Kingdom’s National Institute for Clinical Excellence (NICE)—relative value ratings would not determine whether treatment is covered by insurance. A treatment’s rating would merely indicate that its relative value is greater than that of interventions with lower ratings and less than interventions with higher ratings. Individuals acting in markets would then use this information to help maximize their overall expected welfare through their insurance purchase decisions. Nonetheless, pharmaceutical companies, device manufacturers, and medical provider groups would have significant financial interests in the ratings because a higher relative value rating for any treatment would mean a larger pool of potential customers. Developers of new technologies would surely attempt to design their data collection practices in ways that place their products and services in the best possible light, potentially biasing the results of CER (Neumann 2005: 38–43). Although this risk is real, it would be mitigated, at least to some extent, by the fact that lobbying efforts and/or research biased in favor of one company or interest group would often provoke counterefforts by others that would stand to lose business if a competing treatment earned a high rating. While the makers of Procysbi would do everything in their power to obtain the best relative value rating possible, for example, the makers of Cystagon would presumably push for assigning the new drug a worse relative value rating. Market Stability

Any insurance market in which customers can select different levels of coverage creates the risk that adverse selection will cause the market to unravel into a ‘‘death spiral,’’ in which high-cost customers differentially select deeper coverage, which increases the price of that coverage to the point where all but the highest-cost customers opt out (Cutler and Zeckhauser 1998: 4). With RVHI, the primary fear is that healthy people would economize by purchasing shallow coverage and then, should they contract a serious or chronic illness, switch to a deeper policy during the



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next open enrollment period. For example, a customer might strategically purchase the cheapest policy possible and then, if a family member is diagnosed with kidney disease, use Cystagon temporarily and ‘‘upgrade’’ to a Procysbi-eligible policy on January 1. Under the ACA (section 1201), customers cannot be differentially charged based on health status, so the market for RVHI policies would be likely to unravel to the point at which only insurance products that provide the minimum coverage depth permitted would be financially viable. This problem could be avoided by a change in law that would permit insurers to cover individuals who switch to deeper policies only to the level of their prior policy for any preexisting conditions, for a specified period of time. For example, if a customer purchased a Level 3 policy and then switched to a more generous Level 8 policy, he would be covered for interventions rated 8 or higher for any new conditions but only for interventions rated 3 or higher for preexisting conditions. As long as all consumers are guaranteed the community rate for any depth of coverage they chose at the point that they enter the RVHI system, this rule would not undermine the ACA’s philosophy that all Americans should be able to purchase reasonably priced health insurance regardless of their health status. Individual and Subgroup Variation in the Effectiveness of Treatments

Providers of medical care are often suspicious of attempts to use general algorithms to dictate the care they should provide to specific patients, because the population-based data on which these are based cannot take into account all of an individual patient’s unique health characteristics (Shaneyfelt and Centor 2009: 868; Hayward et al. 1997: 1720). The reality of individual variation presents a similar problem for relative value ratings. Drug A might be no more effective than Drug B for most people and more costly, earning it a 10, the worst possible relative value rating for a clinically effective treatment. But for a minority of patients with a stomach sensitivity to Drug B, Drug A might provide a substantial marginal benefit. To generalize the problem, a patient who has purchased a Level 5 policy might find that he is ineligible for a treatment that would be as cost-effective for him as other interventions rated 2 because its lower average costeffectiveness for the population in general earns it only a relative value rating of 7 from the rating agency. In an ideal world, a particular treatment would not simply be rated Level 5, but instead would have different ratings for different population



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subgroups based on characteristics of that group that are correlated with the benefits provided by the intervention, the benefits provided by alternative interventions, or the costs of either. And with useful CER data, some subgroup differentiation undoubtedly would be possible. Indeed, the ACA (section 6301) assumes that CER will take subgroup variation into account. But it is inevitable that actual differentiation will fall short of the ideal (Bloche 2011: 53). The consequence is that, in some cases, a patient’s RVHI policy will deny her an intervention that is highly cost-effective given her unique circumstances but that carries a relative value rating based on its lower average value for a broader group of patients. Heterogeneous Values

Building a relative value rating system requires policy makers to value very different types of benefits that medical treatments offer on a single scale. Measuring benefits thus requires the imposition of value choices that cannot possibly reflect the values of all concerned. As noted above, the benefits side of the equation will probably be based on the marginal QALYs that a particular treatment offers, but there is no value-neutral method of calculating QALYs (Neumann 2005: 31–34), and a heterogeneous society is unlikely to ever reach consensus on a single methodology. This means that a particular patient who purchases an RVHI policy might find himself covered for an intervention that (to him) offers relatively modest cost-adjusted expected value and not covered for an intervention that (to him) has much greater cost-adjusted expected value. The benefits of Procysbi compared with Cystagon would undoubtedly be extremely important to some individuals and less so to others, for example, by orders of magnitude in some cases. A relative value rating system could not possibly take all individual idiosyncrasies into account. This problem can only be justified, if at all, by observing that the alternatives are arguably worse. In our current private insurance system, consumers must pay for deeper coverage than a great many would wish to purchase, with carve-outs that are specified ex ante in insurance policies that are undoubtedly inefficient for many customers, but few read or understand them before they find themselves in need of treatment. Bureaucratic regulation of insurance coverage based on cost-effectiveness would allow for even less individuation of coverage than a system based on RVHI. Attempting to get the macro decision ‘‘right’’—that is, providing the architecture that enables consumers to make informed and stable choices about the allocation of their resources to medical care — requires simplifying



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information on the benefits side of the equation, even though it is clear this strategy will fail to account for heterogeneous preferences for different types of benefits. Conclusion

This article has argued that using CER as the basis for relative value ratings of medical interventions could facilitate a market for a new type of health insurance. RVHI would help to rationalize the amount of resources spent on medical care in a way that takes seriously both consumer preferences and the limits of consumers’ decision-making abilities while avoiding bureaucratic rationing. On the surface, using relative value as the basis for different levels of coverage might appear similar in nature to the concept of value-based insurance design (VBID) (Chernow et al. 2007). Under the rubric of VBID, insurance companies and self-insured employers have experimented with reducing customer co-payments for treatments (usually but not necessarily prescription drugs) thought to be particularly cost-effective, in an effort to encourage greater use of some treatments and lesser use of others (Choudry et al. 2010: 1990–91). VBID and RVHI are fundamentally different concepts, however. First, VBID is fundamentally an attempt to save the insurer or sponsoring employer money by encouraging patients to use maintenance treatments today that will reduce the need for more expensive acute care tomorrow. RVHI, by contrast, does not reduce the cost to insurers of serving enrolled patients: patients with deep coverage would pay more and patients with shallow coverage would pay less, but all patients would pay the actuarial value of the care for patients who have chosen their depth of coverage. This difference reflects the fact that VBID’s primary concern is the inefficient underconsumption of treatments that sometimes results from cost-sharing requirements (Chernow et al. 2007: w196), whereas RHVI’s primary concern is the overconsumption of other treatments that results from the moral hazard problem. More importantly, VBID is a company-by-company or insurer-byinsurer approach that is not intended to affect consumer choice at the time of enrollment in an insurance program. It would be extremely difficult for customers to compare the differences in insurance policies that employ VBID principles ex ante and incorporate that information into their purchase decisions. RVHI emphasizes the public provision of relative rating information that would allow insurers to offer comparable policies by



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indicating the depth of a particular policy with a single number, which would facilitate consumer comparisons between sellers. VBID and RVHI are complementary strategies, but while VBID provides a tool that can help increase the efficient use of resources on the margin, RVHI offers a new paradigm for insurance coverage. Although this article has focused on the portion of the US population that has private health insurance or is expected to purchase private health insurance once the ACA is fully implemented, the concept of relative value ratings has obvious applications to rationalizing expenditures on public insurance programs as well. For example, a relative value rating system would enable a transparent discussion of the depth of Medicare coverage in a way that is absent in the current environment. If the costs of the program rise above what taxpayers are willing to pay, legislators could see clearly the cost savings that would be available, and the treatments that would no longer be covered, should they decide to limit Medicare coverage to treatment alternatives that receive a certain relative value rating. RVHI would be directly useful to the Medicare population if that program were ever changed from a fixed entitlement to a voucher program, as some conservative legislators and health economists support (Antos et al. 2012: 955; Starr 2011: 133). In that scenario, RVHI would give Medicare beneficiaries the option of controlling out-of-pocket co-insurance costs by purchasing shallower coverage—an option they would not have if Medicare were converted to a voucher system in today’s health insurance environment.

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Russell Korobkin is the Richard H. Maxwell Professor of Law at the UCLA School of Law, where he teaches health care law, contracts, and negotiation. He is also a professor in the UCLA Institute of Society and Genetics and a faculty associate at the UCLA Center for Health Policy Research. He is the author of Stem Cell Century: Law and Policy for a Breakthrough Technology (2007), and more than fifty journal articles on the subjects of behavioral law and economics, health care law, negotiation, and contracts.



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