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A Major Risk Approach to Health Insurance Reform

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  • Martin Feldstein
  • Jonathan Gruber

Abstract

This paper examines the implications of a 'major-risk' approach to health insurance using data from the National Medical Expenditure Survey. We study the impact of switching from existing coverage to a policy with a 50 percent coinsurance rate and 10 percent of income limit on out-of-pocket expenditures, as well as several alternative combinations of a high-coinsurance rate with a limited out-of-pocket payment. Our analysis is limited to the population under age 65. Although 80 percent of spending on physicians and hospital care is done by the 20 percent of families who spend over $5,000 in a year, our analysis shows that shifting to a major risk policy could reduce aggregate health spending by nearly 20 percent. The reductions would be greatest among higher income individuals. By reducing excess consumption of health services, the major risk policy increases aggregate economic efficiency. With modest values of both demand sensitivity and risk aversion we find that shifting to a major risk policy would raise aggregate national efficiency by $34 billion a year. Government provision of a major risk policy" to those under 65 could be financed with a premium of about $150 per person because of the increased tax revenue and reduced Medicare outlays that would result from the provision of universal major risk insurance for the population under age 65. Even without government provision, individuals might be induced to select major risk policies by changing existing tax rules to eliminate the advantage of insurance, either by including employer provided insurance in taxable income or by permitting a tax deduction for out-of-pocket medical expenditures.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4852.

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Date of creation: Sep 1994
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Publication status: published as A Major Risk Approach to Health Insurance Reform , Martin Feldstein, Jonathan Gruber. in Tax Policy and the Economy, Volume 9 , Poterba. 1995
Handle: RePEc:nbr:nberwo:4852

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  1. Feldstein, Martin S, 1971. "Hospital Cost Inflation: A Study of Nonprofit Price Dynamics," American Economic Review, American Economic Association, American Economic Association, vol. 61(5), pages 853-72, December.
  2. Manning, Willard G, et al, 1987. "Health Insurance and the Demand for Medical Care: Evidence from a Randomized Experiment," American Economic Review, American Economic Association, American Economic Association, vol. 77(3), pages 251-77, June.
  3. Gould, John P, 1969. "The Expected Utility Hypothesis and the Selection of Optimal Deductibles for a Given Insurance Policy," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 42(2), pages 143-51, April.
  4. Davis, Karen & Russell, Louise B, 1972. "The Substitution of Hospital Outpatient Care for Inpatient Care," The Review of Economics and Statistics, MIT Press, vol. 54(2), pages 109-20, May.
  5. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, American Economic Association, vol. 84(3), pages 622-41, June.
  6. Jonathan Gruber & Alan Krueger, 1990. "The Incidence of Mandated Employer-Provided Insurance: Lessons from Workers' Compensations Insurance," Working Papers, Princeton University, Department of Economics, Industrial Relations Section. 659, Princeton University, Department of Economics, Industrial Relations Section..
  7. Feldstein, Martin & Friedman, Bernard, 1977. "Tax subsidies, the rational demand for insurance and the health care crisis," Journal of Public Economics, Elsevier, Elsevier, vol. 7(2), pages 155-178, April.
  8. Pauly, Mark V, 1974. "Overinsurance and Public Provision of Insurance: The Roles of Moral Hazard and Adverse Selection," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 88(1), pages 44-62, February.
  9. Feldstein, Martin S, 1973. "The Welfare Loss of Excess Health Insurance," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(2), pages 251-80, Part I, M.
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Cited by:
  1. Amy Finkelstein, 2002. "Minimum Standards and Insurance Regulation: Evidence from the Medigap Market," NBER Working Papers 8917, National Bureau of Economic Research, Inc.
  2. Jonathan Gruber, 1997. "Health Insurance for Poor Women and Children in the U.S.: Lessons from the Past Decade," NBER Chapters, in: Tax Policy and the Economy, Volume 11, pages 169-211 National Bureau of Economic Research, Inc.
  3. Gary V. Engelhardt & Jonathan Gruber, 2009. "Medicare Part D and the Financial Protection of the Elderly," Working Papers, Center for Retirement Research at Boston College wp2009-24, Center for Retirement Research, revised Oct 2009.
  4. Matthew Eichner & Mark B. McClellan & David A. Wise, 1998. "1. Insurance or Self-Insurance? Variation, Persistence, and Individual Health Accounts," NBER Chapters, in: Inquiries in the Economics of Aging, pages 19-49 National Bureau of Economic Research, Inc.
  5. Dahlia K. Remler & Adam J. Atherly, 2003. "Health status and heterogeneity of cost-sharing responsiveness: how do sick people respond to cost-sharing?," Health Economics, John Wiley & Sons, Ltd., vol. 12(4), pages 269-280.
  6. Hitoshi Shigeoka, 2014. "The Effect of Patient Cost Sharing on Utilization, Health, and Risk Protection," American Economic Review, American Economic Association, American Economic Association, vol. 104(7), pages 2152-84, July.
  7. Chernew, Michael E. & Encinosa, William E. & Hirth, Richard A., 2000. "Optimal health insurance: the case of observable, severe illness," Journal of Health Economics, Elsevier, Elsevier, vol. 19(5), pages 585-609, September.
  8. Finkelstein, Amy & McKnight, Robin, 2008. "What did Medicare do? The initial impact of Medicare on mortality and out of pocket medical spending," Journal of Public Economics, Elsevier, Elsevier, vol. 92(7), pages 1644-1668, July.
  9. Yesim Köksal, Miyase, 2011. "Compassion and cost: The dual role of reference pricing," Working Papers in Economics, University of Gothenburg, Department of Economics 498, University of Gothenburg, Department of Economics.

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