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In Chapter 8, we discussed the general relationship between costs and health outcomes and explored the tension between painful and painless approaches to cost containment. In this chapter, we examine specific methods for controlling costs. Our emphasis is on distinguishing among the different types of cost-control mechanisms and understanding their intent and rationale. We briefly cite evidence about how these mechanisms may affect cost and health outcomes.

Financial transactions under private or public health insurance (see Chapter 2, Figs. 2-2, 2-3, and 2-4) may be divided into two components:

  1. Financing, the flow of dollars (premiums or taxes) from individuals and employers to the health insurance plan (private health insurance or government programs), and

  2. Payment, the flow of dollars from insurance plans to physicians, hospitals, and other providers.

Cost-control strategies can be divided into those that target the financing side versus those that impact the payment side of the funding stream (Fig. 9-1 and Table 9-1).

Figure 9-1

Cost-control mechanisms may be applied to both the financing and payment components of health care spending under a system of health insurance.

Table 9-1Categories of cost controls


Cost controls aimed at the financing of health insurance attempt to limit the flow of funds into health insurance plans, with the expectation that the plans will then be forced to modify the outflow of payment. Financing controls come in two basic flavors—regulatory and competitive.

Regulatory Strategies

Dieter Arbeiter, a carpenter in Berlin, Germany, is enrolled in one of his nation’s health insurance plans, the “sick fund” operated by the Carpenter’s Guild. Each month, Dieter pays 8.2% of his wages to the sick fund and his employer contributes another 7.3%. The German federal government regulates these payroll tax rates. When the government proposes raising the employee rate to 9.2%, Dieter and his coworkers march to the parliament building to protest the increase. The government backs down, and the rate remains at 8.2%. As a result, physician fees do not increase that year.

In nations with tax-financed health insurance, government regulation of taxes serves as a control over public expenditures for health care. This regulatory control is most evident when certain tax funds are earmarked for health insurance, as in the case of the German health insurance plans (see Chapter 14) or Medicare Part A in the United States. Under these types ...

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