VII. Key Issues: Regulation & Reform >> C. Health Reform >> Mandatory Health Reform Plans >> Major Risk Insurance (last updated 4.2.17)
Proponents of catastrophic coverage argue that health insurance, like other forms of insurance, should perform one fundamental function: to protect against serious or catastrophic financial loss. What it should not, and need not do is pay for “maintenance” expenses. Homeowner’s insurance does not cover the cost of replacing the roof or painting the house. Auto insurance doesn’t cover the cost of gas or oil changes. So why should health insurance pay for doctor visits, antibiotics, or cough syrup?
Most catastrophic insurance plans recognize that the operational definition of what constitutes a catastrophic medical expense depends on family income. The plans below vary in terms of the income threshold used to trigger catastrophic coverage. Another important design feature is whether the catastrophic coverage is provided by competing private health plans or a public (single-payer) plan. As well, plans vary in terms of their target population and whether coverage is mandatory or voluntary, with a distinction drawn between plans relying on a hard mandate vs. a softer form of “nudging” such as auto-enrollment. These plans are presented in chronological order.
Major Risk Insurance (1971)
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.
- Martin Feldstein. A New Approach to National Health Insurance. The Public Interest 1971;23:93-105.
- Martin Feldstein and Jonathan Gruber. A Major Risk Approach to Health Insurance Reform. National Bureau of Economic Research, Working Paper No. 4852. September 1994.
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.
DeLong Plan (2007)
This plan was developed by Berkeley economist Brad DeLong.
Benefits. Families would use their HSAs to finance all spending. Once their HSA balances were exhausted, all further expenses would be covered by the publicly-financed, publicly-run catastrophic plan.
Financing. Families would be required to set aside 15% of income in a health savings account, using another 5% to finance a single payer public catastrophic plan.
Progressive Cost-Sharing (2007)
This was first proposed in April 2007 by Jason Furman (currently chairman of the Council of Economic Advisors) in a Brookings Institution discussion paper.
- Jason Furman. The Promise of Progressive Cost Consciousness in Health-care Reform. Brookings Institution Discussion Paper, April 2007.
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.
Hagopian/Goldman Plan (2014)
This is the simplest, most basic version of the proposal, suggested in National Affairs in 2014 and summarized here at Forbes.
- Eligibility. Anyone not covered by Medicaid or Medicare (roughly 200 million), i.e., birth until age 65.
- Income-Related Deductible. The deductible would be means-tested by varying it as a percent of the income that exceeds the Federal Poverty Line (FPL). Thus, for a family with income of $28,000, the individual deductible would be only a few hundred dollars, while a family earning $50,000 would have an individual deductible of about $2,500.
- Coverage Above the Deductible. To make beneficiaries more cost conscious, we would require modest cost-sharing after the deductible has been reached, which would phase out as costs approach a multiple of the deductible. Thus, poorer families would have a proportionately lower cost-sharing obligation.
- Preventive Care. Certain preventive-care services—particularly those that can be demonstrated to save money (such as statins, anti-asthma medications, and childhood vaccinations)—would be provided for free. (Free preventive care is particularly important for those with lower incomes.)
- Chronic Illness Care. For people with chronic illnesses (such as diabetes) who regularly use up the deductible, there would be a process by which the deductible could be reduced, thus lowering the threshold at which the insurance kicks in.
Research and Analysis
The authors estimate this could be done for about $2,000 per person which is about half the cost of conventional insurance for single coverage.
- 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 as an alternative to the more comprehensive proposals for national health insurance being discussed at that time.
- Other Countries. No modern industrialized nation has exclusively 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.