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Summary of the Rand Experiment paper for Health insurance
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RAND Experiment, Manning et al., (1987)This paper was one of the first pieces of empirical evidence
that showed the spread of health insurance can
quantitatively account for most of the sustained rise in health
expenditure, no one had shown this previously (Pauly, 1986).
In cross-sectional data, insurance is endogenous, those who
expect to demand more services have a clear incentive to
obtain more complete insurance, wither by selecting a more
generous option at the place of employment, by working for
an employer with a generous insurance plan, or by
purchasing privately more generous coverage. Treating
insurance as exogenous has generally produced results
showing that demand for medical care responds to insurance-
induced variation in price. Treating insurance as endogenous
however, has generally led to coefficients with confidence
intervals that are insignificantly different from zero at
conventional levels (Newhouse and Phelps, 1976).
The Rand Health insurance experiment (HIE) in 1974 sheds
light on the uncertainty around how demand responds to
insurance-induced changes in price and emphasises the fact
that this response should be quantified. Their findings imply
that insurance had a role in explaining the post-war increase
in medical expenditure and contributed to the magnitude of
the welfare loss from health insurance. They also look into
the differences in decision making with insurance coverage
between different socio-economic groups. They discovered
that insurance coverage shouldn’t have to be uniform across
all medical services, for people with different demand
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