The Split Benefit: The Painless Way to Put Skin Back in the Health Care Game

Abstract

This Article proposes a solution to the growth of health care costs, focusing on the sector of expensive, and often unproven, treatments. Political, legal, and market limits prevent insurers or physicians from rationing care or putting downward pressure on prices. Since the insurer bears the cost, the patient is also not sensitive to price, and thus consumes even low-value treatments.

The traditional cost-sharing solution is stymied by the patients’ limited wealth. When treatments can cost $25,000 or more, the median patient cannot be expected to pay a significant portion thereof. Instead, patients often enjoy supplemental insurance or exhaust their cost-sharing limits, and thus enjoy full insurance when making such a consumption decision. Raising the limits is a painful solution, since it would reduce access to care and cause medical bankruptcies.

A new solution emerges from the recognition that insurance currently provides only an “in kind” benefit, paid to the provider rather than the beneficiary. Instead, under a “split benefit,” for expensive treatments (costing say $100,000), the insurer should consider satisfying its coverage obligation by paying a portion (say $10,000) directly to the patient. The patient decides whether to spend that portion on the treatment. If so, the insurer pays the balance ($90,000) to the provider, thereby insuring access. If the patient instead declines the care, she can save or spend the money on anything else. The insurer saves the balance ($90,000).

Because it is fungible, the split benefit creates an opportunity cost, causing some patients to decline the expensive treatment in lieu of medical and non-medical alternatives that they value more highly. Strikingly, the split benefit is consistent with current insurance contracts and regulations, since it does not change coverage or the size of the benefit. That feature makes the split benefit practicable, unlike many other theoretical solutions. Moreover, the insurer can exercise the split benefit as a unilateral option, whenever it is most likely to save money.

Unlike traditional cost-sharing policies or rationing, the split benefit does not reduce access to care. The proposal serves patients’ autonomy by giving them additional options, and reduces the distortion in the larger economy caused by non-fungible insurance. This Essay considers objections, including the possibility of stimulating false demand and the need to protect patients who are unable to decide for themselves - both of which the appropriate legal mechanisms can address.

Keywords: healthcare, moral hazard, opportunity cost, insurance, cost benefit analysis

JEL Classification: I10, I11, D61, H42