Parsing the details of catastrophic health plans

On Friday evening May 24, 2013, an exchange broke out on twitter about catastrophic health insurance plans. It is worth thinking through the details of such a shift, because while catastrophic insurance is often thought of as a simpler approach to health reform, there are many details that would require government action.

I think the Friday discussion began with Megan McArdle (@asymmetricinfo) lamenting that the ACA would kill catastrophic health plans, met with a variety of responses about the relatively large out of pocket maximums that someone could have with a Bronze exchange plan and the existence of the catastrophic under 30 ‘invincible’ plans. Megan correctly pointed out that having, say a $10,000 out of pocket maximum (within a benefit structure where some care has no co-pay, while other care does) is not the same as having to pay the first $10,000 in care before a 0% cost share (all paid by insurance) kicks in, even if the result was the same out of pocket expenditure. The point being that it would take a very different amount of total health care utilization to reach the $10,000 plateau in those two scenarios. Fair enough, lets look closer.

Megan suggested that her preferred solution would be an insurance plan whereby everyone would be responsible for all the cost of care up to 15-20% of adjusted gross income, with 0% cost share above that. She suggested we could keep Medicaid and/or premium support for private gap insurance for the poor, thus providing something closer to first dollar coverage below a certain amount. I have suggested that a political deal between the ‘two sides’ would have universal catastrophic coverage with a deductible of $10,000 for individuals, $15,000 for families, with income based premium support to purchase ‘gap’ insurance. These two ideas are similar, and if you could get a political consensus to do this (which seems impossible) the policy details should be tractable. However, I think the details are more complicated than Megan implies. A few questions/thoughts for any such plan.

  • How do you define benefits? Many proponents might say “you don’t” that is the point; the consumer decides what care is needed. Does this mean my gym membership counts toward the deductible? How about my bike? How about an expensive carbon fiber bike? You need a practical way of identifying what expenses count toward fulfilling the maximum out of pocket amount. That is determining benefits.
  • How will the unit price for care be determined? If you had all payer rate setting this would be easy. Most wanting a catastrophic approach will want the prices to be determined by the interplay of providers and patients. That is actually a lot easier to say than it is to bring about in practice….there will be tremendous transaction costs if each person is trying to negotiate a separate price for care. Forcing providers to publish prices would help, but it would be a non-trivial shift to move from a system in which most prices are either dictated or negotiated up front by third party payers and providers, and then applied to patients. I realize that is part of the point, but this will be hard.
  • Where will the catastrophic insurance come from? This is actually the hardest part of such a proposal. In my book, I suggested using Medicare as the catastrophic insurance vehicle and Medicare prices in the deductible, but of course there are other ways to do it. However, they aren’t as simple as many think and will  involve lots of government. For example, here is Martin Feldstein arguing against the ACA on October 8, 2009 by putting forth a catastrophic insurance scheme in the WSJ. A key reason he advocates his plan instead of the ACA, “All of this [his plan] would happen without involving the government in the delivery or rationing of health care.” But, look at the government actions that would be necessary on the insurance side of his plan. 1. Repeal the tax exclusion of employer sponsored insurance. 2. Won’t some regulation be required to ensure that the $3,500 voucher to be provided for the purchase of private catastrophic plans will guarantee that such coverage will be available to all? Presumably a federal regulation, especially as the proposal is linked to a federal tax reform. 3. Dr. Feldstein further proposes a federal ‘health care credit card’ that would ensure that patients can finance the care they need, and that also ensures that providers will get paid. Consumers would simply ‘run a tab’ and Dr. Feldstein notes that the federal government could then garnish wages given how much information the IRS will have in this tax credit based system to ensure that these bills are eventually repaid.

Anyway, Megan and I have proposed fairly similar things as a way forward (universal coverage, but only for catastrophic coverage, with ways to deal with the poor). It is a simple idea, that is far more technically difficult to bring about than many imagine. These details are a key part of the counterfactual that is “replace Obamacare with a catastrophic insurance plan.”

update: revised for clarity in a few places.

About Don Taylor
Professor of Public Policy at Duke University (with appointments in Business, Nursing, Community and Family Medicine, and the Duke Clinical Research Institute). I am one of the founding faculty of the Margolis Center for Health Policy, and currently serve as Chair of Duke's University Priorities Committee (UPC). My research focuses on improving care for persons who are dying, and I am co-PI of a CMMI award in Community Based Palliative Care. I teach both undergrads and grad students at Duke. On twitter @donaldhtaylorjr

10 Responses to Parsing the details of catastrophic health plans

  1. mlarkento says:

    The Avik Roy proposal, instead of the high deductible approach, covers basic care using a fixed monthly payment to the primary physician.

  2. Bob Hertz says:

    It is a pleasure to see this post.

    Damned few writers have advocated using Medicare to provide catastrophic coverage. I have been saying this for 4 years, and have written a short book with this as a feature.

    In a thumbnail, here is my concept:

    1. If a person enters a hospital with no insurance, Medicare pays the bill right away.
    (no agonizing attempts to sweat the patient for money.)

    2. The deductible is the same as for the elderly, i.e. about $1100.

    3. There is no coinsurance on hospital stays.

    4. This is paid for as follows:

    a. Anyone who does not buy insurance pays an extra 2% in payroll taxes.

    b. Any employer who does not buy insurance for their employees pays an extra 2% in payroll taxes on the whole firm’s payroll.

    c. If this is not enough funding, then the remainder comes from an increase in income taxes.

    d. If this is not enough, tax part of employer payments to those receive them.

    e. If this is not enough, take funds from the defense budget.

    Special treatment must be made for certain non-discretionary procedures that are not done in hospitals. We already do this with dialysys.

    Comments or questions? I welcome same.

    Bob Hertz, The Health Care Crusade

    • Don Taylor says:

      for all the folks who claim to be for ‘catastrophic insurance’ it is surprising how little thought most have given to how to get the cata vehicle in place. Medicare is by far the easiest to pull off (technically speaking).

      • Bob Hertz says:

        The advocates of catastrophic insurance tend to be conservatives.

        They are convinced that the Medicare we have now will grow unaffordable, so how dare we consider expanding it?

        They also believe that once Medicare gets “a foot in the door,” political pressure will make it expand. An initial $10,000 deductible will be dropped to $5,000 etc etc.

        They are not all wrong. Politicians of both parties treat Americans as fiscal children.
        That is why the payroll tax percentage has not been raised for 20+ years, and why seniors pay $104 a month for Part B (unless they are very wealthy seniors).

        Conservatives sense that we will someday have to choose between defense spending and health care spending. In their eyes, defending the world is manly and heroic, versus giving
        Grandma more blood pressure pills.

  3. Toby says:

    bcbsnc offers an HSA plan with a $5000 deducible, zero copayment over that amount, no cap on benefits, an annual physical, and other benefits. I happened to check the cost for a male nonsmoker, age 43, and the cost is $108/month. Combined with a direct payment to doc plan with proper coverage, this could be inexpensive coverage for a person who is not living from paycheck to paycheck. Although this could be expensive for one who contracts a chronic illness, it would protect the patient and the system from bankrupting medical costs and provide cheap insurance for employers, and provide protection against preexisting conditions by providing continuous coverage.

    IMHO we should not dismiss the current private care system until we have tried it with transparency and choice in price and quality. The cost of paying and filing small claims and other paperwork is excessive with reports of 20% of the doc’s time spent on paperwork.

    Interesting idea and forum Don, thanks.

    BTW, have you read ed conard’s book, his views on value creation need wider attention in economics since price paid does not tell the big picture, IMHO, taxation and spending tend to defeat the price mechanism. You can learn lots on his site without requiring a purchase.

  4. Pingback: Best of Both Worlds | freeforall

  5. Pingback: Best of Both Worlds « The Reality-Based Community

  6. Bill says:

    Boy, it is just shocking what they did with the catastrophic plans in ACA. I can not believe they have bungled it so badly. Undoubtedly my situation is an outlier (otherwise the guillotining would have already started in Washington DC, and I haven’t heard that it has). But for specifics, I’m 51 with a North Carolina BCBS catastrophic policy with $10,000 deductible and $70 monthly premiums. Previously I worked in healthcare administration. I’m a very savvy health insurance consumer. This is an excellent, excellent policy for my situation. Of course, it is nowhere near ACA-compatible, so it is being discontinued. I don’t yet know for sure, but it looks like I would pay about $350 for a 2014 catastrophic policy on the Exchange (Not Bronze, but Catastrophic. Actually they really discourage you even from learning that these sub-Bronze policies are still available for older people.) If indeed the monthly premium has gone from $70 to anywhere near $350, I will be absolutely priced out of the market. I am both Medicaid & Subsidy ineligible. Ironically, the ACA is going to move at least one person into the ranks of the healthcare uninsured!
    Seems to me there were better alternatives.

  7. Pingback: More on catastrophic plans | freeforall

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