Mark V. Pauly
In order to protect people against the random risk of high medical services expenditures, health insurance of some form is appropriately furnished in all modern societies. However, because of the existence of moral hazard caused by insurance, it is almost equally inevitable that some method will be chosen to limit the quantity of care to an amount less than the provider would recommend and the patient would accept if the care were free of monetary cost at the point of use. Some moderate amount of limitation is provided by retaining some user money price, but in almost all cases the bulk of the burden of limitation is placed on the supply side - through rules, provider incentives, or characteristics of access, care is rationed.
While rationing is inevitable and therefore predictable, there are two things which vary greatly and which are unpredictable - how strictly care will be rationed and (a logically prior issue) what persons or institutions will act as the citizen’s agent in deciding on the amount of rationing. The amount of health care people ultimately consume depends on a combination of their own decisions and those of others. Sometimes, the supply or rationing constraint imposed by others is binding, while at other times the person’s own demand limits the quantity he or she will get.
There are two ways a person can choose the agent who will ration the care under health insurance: individually or collectively. The individual choice is expressed through markets. The collective choice is expressed through the political process. Which method is likely to be selected by different populations in different settings? In this chapter I will explore some theories about the choice of institutional arrangements, and apply those theories, in an informal way, to variations in institutions across countries. I will also, with some trepidation, use this model to comment on the much-discussed question of equity in the allocation of resources to medical services.
In the idealized and intuitive form of the individual market, each buyer confronts a choice among a set of ‘managed care’ insurance plans which differ in terms of the method and the outcomes of their rationing processes (Hall, 1997; Enthoven, 1988). Some plans ration strictly, either by setting administrative limits or by offering