Make people pay more:
This paper proposes a template for a progressive cost sharing plan that would require typical families to pay half of their health costs until they reached 7.5 percent of their income; low-income families would not have any cost sharing. The analysis shows that this template could reduce total health spending by 13 to 30 percent, reducing premiums by 22 to 34 percent without hurting health outcomes. Moreover, low- and moderate-income families would face less cost sharing than they do under typical plans today while the premium savings would be more than enough to compensate middle- and upper-income families for the modest increase in their exposure to small risks. Every family would have an affordable limit on their out-of-pocket payments, in contrast to the situation today, where many families have insurance policies that expose them to unlimited cost sharing. In addition, the paper suggests the potential inclusion of evidence-based exceptions for highly valuable preventive care and chronic disease treatments as well as other mechanisms to protect the chronically ill.
This plan, of course, can be applied to either markets or government provision. It finesses the problems with Bush health savings accounts, including the distributional issues and the lack of directness in achieving first-party payment. It also assumes that the individual desire for comprehensive insulation from risk — clearly the market tendency where markets are present — is the fundamental problem in the health care sector. If I protect myself from risk, I don’t take into account my diminished incentive to monitor health care costs, which creates larger dilemmas for the market as a whole.
An alternative plan is simply to tax the health insurance purchases of the relatively wealthy. But if people overestimate anxiety costs of non-comprehensive coverage, they’ll be too ready to pay the tax and we might prefer Furman’s method of allocating health insurance according to a formula. How easily supplemental insurance can be prevented remains an open question.
Addendum: Matt Yglesias comments.