'Such a system would help ensure that no one is financially devastated by a serious illness or injury'
Quentin Fottrell: "President Ronald Reagan introduced the Medicare Catastrophic Coverage Act of 1988 to provide such coverage - but it was dead in the water within a year."
People get uneasy about changes in their healthcare plans, with good reason.
A Moneyist reader says catastrophic coverage should be extended to the poorest Americans: "I believe Medicaid - and, perhaps, even Medicare - should evolve toward providing primarily catastrophic coverage," he says. The reader's heart is in the right place. Over 500,000 people every year file for bankruptcy due to medical bills, and yet his suggestion to address the problem of high deductibles would be met with resistance. For starters, Medicaid is a needs-based health-insurance program, and does not expose beneficiaries to the high deductibles found in many private plans.
"HSAs should be available to everyone," he writes. "For individuals below the poverty level, the government could fully fund HSA contributions, with those subsidies gradually phasing out as income rises. Such a system would help ensure that no one is financially devastated by a serious illness or injury." The reader is asking a lot: finding a workable way to separate routine healthcare expenses from genuinely catastrophic ones. The Affordable Care Act of 2010 took a more practical approach, aiming to ensure Americans don't have to wait until they're catastrophically ill to receive meaningful care.
Medicare offers protection against catastrophic medical expenses, but it's very uneven. Original Medicare (Part A for hospital and inpatient care and Part B for doctors and outpatient services) has no annual out-of-pocket limit. That means it covers catastrophic medical care, but doesn't actually protect you from catastrophic medical bills. Medicare Advantage plans are required to cap out-of-pocket spending for covered Part A and Part B services, giving enrollees real protection. Part D (prescription drugs) has the clearest catastrophic protection, capping annual out-of-pocket costs for covered Part D drugs at $2,100.
This Moneyist reader dreams of a world where low-income Americans have little or even no deductible.
Imagine a system where preventive care is covered at little or no cost, and primary care and essential medications have affordable and predictable copays. In this world, low-income people have little or no deductible, middle-income people have moderate cost sharing, and higher-income people can deal with a larger deductible in exchange for lower premiums. In the Moneyist reader's utopia, everyone has an out-of-pocket cap that depends on their income, and health insurance covers the genuinely catastrophic expenses above that ceiling. Sounds like my kind of Shangri-La.
I'll take the HSA idea first. The Center on Budget and Policy Priorities issued a paper last June arguing that HSAs won't meaningfully solve healthcare affordability. The progressive think tank said that people with higher incomes see larger tax savings, and noted that HSAs are already expected to cost the federal government $182 billion in lost tax revenue between 2026 and 2035. Fully funding HSAs for the poor would direct the subsidy toward those who need it, but it leaves the person with the least ability to pay exposed to a $10,000 deductible.
The Medicare issue has also reared its head in recent times. Earlier this year, Mehmet Oz, administrator of the Centers for Medicare and Medicaid Services, threw his support behind a proposed rule to introduce new types of insurance aimed at lowering premiums, including high-deductible coverage, even if it would cost tens of thousands in out-of-pocket costs. In response, Sen. Ron Wyden, a Democrat from Oregon who serves on the Senate Finance Committee, said the Trump administration was "rolling out the red carpet for junk plans that don't cover essential healthcare."
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Lessons from 1988
I'd also expect pushback on the notion that Medicare should be redesigned around catastrophic coverage. Preventive care and management of chronic diseases (hypertension, diabetes, COPD, etc.) actually help prevent catastrophic events. Plus, wealthier individuals would end up picking up the tab through their own premiums. President Ronald Reagan's Medicare Catastrophic Coverage Act (MCCA) of 1988 attempted to provide such coverage, but it was dead in the water within a year. Congress repealed it. Wealthy seniors were not crazy about paying a higher surtax.
In the immediate aftermath of the repeal of the proposed legislation, this academic postmortem, published in the monthly peer-reviewed journal Health Affairs, speculated that the MCCA's failure was, indeed, partly due to financial reasons. "The seeds of its destruction seemed to lie in the unwillingness of elderly individuals who already were protected against the economic consequences of catastrophic illness to accept a new tax that would have financed such coverage for the entire Medicare population," the researchers wrote.
But that was only part of the story. How the act was sold, or missold, mattered. A separate study published in the Journal of Health Politics, Policy and Law a few years later said the debate surrounding the repeal of the Medicare Catastrophic Coverage Act of 1988 did not adequately address the improvements it made to nursing home benefits, which may have made the legislation more palatable to, even welcomed by, seniors. Researchers said their findings underscore the importance of clearly communicating with the public when developing and implementing healthcare reforms.
The Affordable Care Act offers catastrophic health insurance through the ACA Marketplace.
A version of what the Moneyist reader yearns for actually already exists. The Affordable Care Act offers catastrophic health insurance through the ACA Marketplace. These plans are attractive, at first glance. They carry low monthly premiums paired with very high deductibles ($10,600 for an individual). But premium tax credits and other ACA subsidies cannot be used to offset the cost of a catastrophic plan, and eligibility is limited to people under 30, or people 30 and older who qualify for a hardship or affordability exemption through the ACA Marketplace.
If you have a bad accident, therefore, prepare to pay a pretty penny out of pocket. A catastrophic plan can protect someone from an $80,000 hospital bill while still leaving them with a $10,000 bill of their own. For "Brad," a 25-year-old with $10,000 in savings, that may be manageable; for a 70-year-old Medicare beneficiary, "Ernest," who also qualifies for Medicaid, has no savings and still has rent to pay, the same deductible could mean bankruptcy. An HSA is supposed to fill that gap. That's why the Moneyist reader's two proposals only work together in an ideal world, if at all.
Finally, a catastrophic medical bill isn't caused by a catastrophic event alone, but by high cost-sharing and, at an extremely vulnerable time, an inability to pay. The deductible can run into the thousands of dollars, just like it did for "Brad." Coinsurance can cost 20% of your total costs until the plan hits the out-of-pocket maximum, which can run as high as $10,600 for an individual or $21,200 for a family (although the goal posts change on those figures from year to year). And if you get taken to an out-of-network hospital after your accident? That could cost you a lot more.
The choice between routine and catastrophic care, therefore, is not a fair one.
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You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com. The Moneyist regrets he cannot reply to questions individually.
More columns from Quentin Fottrell:
Social Security's funding crisis is the elephant in the room. But don't ignore the mouse.
'It's a double-edged sword': My husband got a $42,000 bonus. Will it wipe out our Affordable Care Act subsidy?
My son does not work, yet pays $500 for Affordable Care Act health insurance. Is that fair?
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-Quentin Fottrell
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