Health care cost-containment regulation: prospects and an alternative

Regulation of the health care system to achieve appropriate containment of overall costs is characterized by Professor Havighurst as requiring public officials to engage, directly or indirectly, in the rationing of medical services. This rationing function is seen by the author as peculiarly difficult for political institutions to perform, given the public's expectations and the symbolic importance of health care. An effort on the part of regulators to shift the rationing burden to providers is detected, as is a trend toward increasingly arbitrary regulation, designed to minimize regulators' confrontations with sensitive issues. Irrationality and ignorance are found to plague regulatory decision making on health-related issues, even though it is the consumer who is usually thought to suffer most from these disabilities. The author argues that consumer choice under some cost constraints is a preferable mechanism for allocating resources because it better reflects individuals' subjective preferences, has a greater capacity for facing trade-offs realistically, and can better contend with professional dominance of the resource allocation process. In view of the unlikelihood of regulation that is both sensitive and effective in containing costs, the author proposes that we rely primarily on consumer incentives to reform the system. A simple change in the tax treatment of health insurance or other health plan premiums, to strengthen consumers' interest in cost containment while also subsidizing needy consumers, is advocated. Steps to improve opportunities for innovation in cost containment by health insurers, HMOs, and other actors are outlined briefly.