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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.

Suggested Citation

  • Martin Feldstein & Jonathan Gruber, 1994. "A Major Risk Approach to Health Insurance Reform," NBER Working Papers 4852, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:4852 Note: HC HE PE
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    References listed on IDEAS

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    1. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, pages 305-346.
    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, vol. 77(3), pages 251-277, June.
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    9. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, vol. 84(3), pages 622-641, June.
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    Cited by:

    1. repec:eee:jhecon:v:55:y:2017:i:c:p:14-29 is not listed on IDEAS
    2. 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, pages 1644-1668.
    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. 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.
    5. Flores, Gabriela & O’Donnell, Owen, 2016. "Catastrophic medical expenditure risk," Journal of Health Economics, Elsevier, vol. 46(C), pages 1-15.
    6. Amy Finkelstein, 2002. "Minimum Standards and Insurance Regulation: Evidence from the Medigap Market," NBER Working Papers 8917, National Bureau of Economic Research, Inc.
    7. Yesim Köksal, Miyase, 2011. "Compassion and cost: The dual role of reference pricing," Working Papers in Economics 498, University of Gothenburg, Department of Economics.
    8. Chernew, Michael E. & Encinosa, William E. & Hirth, Richard A., 2000. "Optimal health insurance: the case of observable, severe illness," Journal of Health Economics, Elsevier, vol. 19(5), pages 585-609, September.
    9. Kowalski, Amanda E., 2015. "Estimating the tradeoff between risk protection and moral hazard with a nonlinear budget set model of health insurance," International Journal of Industrial Organization, Elsevier, vol. 43(C), pages 122-135.
    10. 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.
    11. Hitoshi Shigeoka, 2014. "The Effect of Patient Cost Sharing on Utilization, Health, and Risk Protection," American Economic Review, American Economic Association, vol. 104(7), pages 2152-2184, July.
    12. Stéphane Verguet & Jane J. Kim & Dean T. Jamison, 2016. "Extended Cost-Effectiveness Analysis for Health Policy Assessment: A Tutorial," PharmacoEconomics, Springer, vol. 34(9), pages 913-923, September.
    13. Matthew Eichner & Mark B. McClellan & David A. Wise, 1998. "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.
    14. Barnes, Kayleigh & Mukherji, Arnab & Mullen, Patrick & Sood, Neeraj, 2017. "Financial risk protection from social health insurance," Journal of Health Economics, Elsevier, vol. 55(C), pages 14-29.
    15. Limwattananon, Supon & Neelsen, Sven & O'Donnell, Owen & Prakongsai, Phusit & Tangcharoensathien, Viroj & van Doorslaer, Eddy & Vongmongkol, Vuthiphan, 2015. "Universal coverage with supply-side reform: The impact on medical expenditure risk and utilization in Thailand," Journal of Public Economics, Elsevier, pages 79-94.

    More about this item

    JEL classification:

    • H4 - Public Economics - - Publicly Provided Goods
    • I1 - Health, Education, and Welfare - - Health

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