Catastrophic Health Insurance

VII. Key Issues: Regulation & Reform >> C. Health Reform >> Mandatory Health Reform Plans >> Major Risk Insurance (last updated 12.8.15) 

Major Risk Insurance

Overview

This idea was first proposed by Martin Feldstein in a spring 1971 Public Interest article. The idea was subsequently updated and analyzed in much more detail by Feldstein and Jonathan Gruber in a September 1994 NBER working paper.

Basic Design

MRI would provide a standardized major risk (catastrophic) health insurance plan to everyone under the age of 65; this plan would offer comprehensive benefits, but would include 50% cost-sharing for individuals or families up to a maximum annual out-of-pocket limit of 10 percent of income.

  • Eligibility: all U.S. residents below age 65 not covered by Medicare would be included; except for Medicaid long-term care, all means-tested health programs such as SCHIP would be eliminated. Because the entire premium cost for MRI would be borne by taxpayers, the proposal authors have not attempted to address the possibility that such coverage would be refused. There would be no changes in Medicare eligibility, although in theory, Medicare cost-sharing could be re-designed to make it more MRI-like in structure.
  • Benefits: plans would include comprehensive acute-care benefits subject to 50 percent patient cost-sharing; selected essential preventive benefits could be included without cost-sharing if there were concerns about inappropriate scrimping on care. For all individuals or families above poverty, the maximum limit on annual out-of-pocket spending would limited to 10% of income. Families below poverty would face the same percent limit, but could be given a cash payment equivalent to their expected out-of-pocket costs, thereby substantially reducing the actual size of the financial burden they otherwise would face. Medicaid would continue to provide subsidized long-term care coverage for those who need it.
  • Freedom of Choice: details of this proposal have not been fleshed out to the same degree as others described here. Even though MRI would be federally tax-financed, there is no reason the plans themselves could not be privately provided using the sort of competition framework described under the individual mandate with income-related tax credits approach, thereby giving consumers choice among different types of plans, providers and methods of cost containment.
  • Financing: again, details have not been fully fleshed out, but as under the individual mandate with income-related tax credits approach, each citizen could be provided a voucher or refundable, advanceable tax credit to purchase the lowest cost MRI plan in their geographic area (those wishing to purchase more expensive coverage would do so with their own after-tax dollars). Taking into account savings from a) the elimination of the current tax exclusion for employer-provided health benefits and the tax deduction for medical costs exceeding 7.5% of adjusted gross income; b) elimination of Medicaid acute care for non-disabled beneficiaries under 65; and c) spillover benefits to Medicare resulting from the general reduction in cost/price trends as a consequence of more price-sensitive consumers, the net increase in financing needed would be roughly $150 per person a year in 1995 dollars.
  • Regulation: details have not been fleshed out, but adverse selection problems should be much smaller with MRI plans than the much more comprehensive plans contemplated by the universal voucher system described below. Since premiums would not be regulated, this could take the form of guaranteed enrollment requirements for all plans or simply using competitive bidding to select a single low-cost backup plan in each geographic area to serve as insurer of last resort.

 

Progressive Cost-Sharing

Overview

This was first proposed in April 2007 by Jason Furman (currently chairman of the Council of Economic Advisors) in a Brookings Institution discussion paper.

Basic Design

This proposal would require typical families to pay half of their health costs until they reached 7.5 percent of their income; low-income families would not have any cost sharing.

Research and Analysis

Furman’s 2007 analysis shows that this template could reduce total health spending by 13 to 30 percent, reducing premiums by 22 to 34 percent without hurting health outcomes. Moreover, low- and moderate-income families would face less cost sharing than they do under typical plans today while the premium savings would be more than enough to compensate middle- and upper-income families for the modest increase in their exposure to small risks.

Practice

  • U.S. These proposals are similar in many respects to bills repeatedly introduced in the 1970’s and 1980’s by Senate Finance Committee chairman Russell B. Long.
  • Other Countries. No modern industrialized nation has adopted this approach to national health insurance. The closest parallel is Singapore’s Medishield program, in which individuals with mandatory Medisave accounts are automatically enrolled (and premiums paid from their Medisave accounts) unless they request not to be enrolled. Medishield has a high deductible and only covers hospital expenses and certain expensive outpatient treatments, such as kidney dialysis and outpatient cancer treatments, but note that the entire arrangement is on top of mandatory and universal Medisave accounts to which all citizens are required to contribute 6-8 percent of earnings up to a maximum dollar limit; these latter accounts pay for the lion’s share of medical expenses in Singapore.

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