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.