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.