VIEWPOINTS Medical Loans and Major-risk National Health Insurance By Laurence S. Seidman The availability of medical loans for households unable to afford immediate payment of medical bills is a crucial ingredient of majorrisk (catastrophic) national health insurance (MR-NHI). The household cash-flow problem has been recognized by some proponents of MR-NHI, and M. Feldstein [1] has advocated medical loans to alleviate it, but the practical implementation of medical loans has received little attention. (Eilers [2] offers an analysis of medical loans but not in the context of NHI.) This short article does not attempt a detailed analysis. Its purpose is to explain why the availability of medical loans is essential to the strategy behind MR-NHI and to suggest some principles for practical implementation. It is hoped that this article will stimulate further analysis.
The Consumer Cost-consciousness Strategy Most health economists believe present health insurance coverage has two fundamental defects. On the one hand, a minority of households are not insured against large (catastrophic) medical expenses. On the other hand, the majority of households are overinsured for routine expenses. This pervasive shallow coverage means that hospital care involves virtually no out-of-pocket expense for the average patient. His financial burden is largely unaffected by his own use of hospital care. Patients therefore have no incentive to limit utilization wherever possible or to choose less-expensive alternatives. Patients are thus encouraged to seek the most expensive hospital, services, and amenities, and hospitals and physicians are encouraged to provide an expensive style of care. Maintaining low prices will not help them attract patients. Just as restaurant bill-splitting causes overordering and bill inflation, widespread shallow health insurance causes overutilization and cost inflation [1,3-6]. To treat these two defects, many economists advocate major-risk national health insurance, which would completely protect all houseSUMMER Address communications and requests for reprints to Laurence S. Seidman, Assistant Professor of Economics, Department of Economics, University of Pennsylvania, 3718 Locust Walk CR, Philadelphia, PA 19174.
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holds against medical expenses that are large relative to their incomes but would provide little or no coverage for expenses that are moderate relative to income. MR-NHI would cause a dramatic increase in consumer cost-sharing compared to the current situation and would thereby help reduce health sector inefficiency and cost inflation. The basic MR-NHI design is embodied in several bills before Congress. If NHI is enacted, it will probably assign each household a deductible, a coinsurance range and rate, and an out-of-pocket ceiling. For example, a family with an income of $15,000 might be responsible for its first $750 (5 percent of its income) and 20 percent of its additional medical expense until it has spent $1,500 (10 percent of its income) out-of-pocket (when its annual medical bill reaches $4,500). Beyond this, NHI would pay 100 percent [6]. To be equitable, the deductible, coinsurance rate, and out-ofpocket ceiling must vary with a household's income, so that the subjective burden of out-of-pocket expense is comparable for all households. It is often not realized that, without such variation, MR-NHI would either be inequitable or highly inefficient. If the deductible, coinsurance rate, and ceiling were small enough to avoid inequity to low-income families, they would be trivial for middle and upperincome families, giving them little incentive to economize. Furthermore, the federal budget cost of MR-NHI would be unnecessarily large, because MR-NHI would pay large fractions of medical bills that these households could afford to pay out-of-pocket. The high federal budget cost of MR-NHI would in turn squeeze other federal programs, many of which aim to assist the poor and the elderly. Unintentionally, the result would be to shift federal dollars away from the poor and elderly to middle and upper-income households. Few would find this desirable [7,8]. Income-related MR-NHI could be implemented most easily through the federal personal income tax. A family with income of $15,000 would file, on its annual tax return, for a tax credit of 80 percent of its medical expense from $750 to $4,500 and a tax credit of 100 percent of its medical expense in excess of $4,500. If the tax credit exceeded the family's tax liability, the household would receive a net cash payment from the Internal Revenue Service, so that full federal payment would be made to all households, whatever their tax liability. This method of implementing MR-NHI is supported by Mitchell and Vogel [9] and by Marmor [10]. The Medical Expense Tax Credit Bill proposed by Senator Brock in 1975 is similar in design, with the crucial difference, however, that his proposal never raises the tax credit to 100 percent and therefore does not fix a ceiling on a household's out-of-pocket burden [6]. Low-income households with no tax liability that do not currently file tax returns would either have to file HEALTH or be included in another way. The best procedure depends on the SERVICES RESEARCH outcome of welfare reform, currently under review by DHEW. The cost-consciousness strategy behind MR-NHI would fail if 124 most households continued to be covered for routine medical exSEIDMAN
penses by supplementary private health insurance (SI) through ar- VIEWPOINTS rangements with employers. Three policies are required to prevent widespread SI. First, current tax subsidies that encourage SI, especially at the workplace, must be eliminated. (Removal of tax subsidy for workplace health insurance is also advocated by Davis [6], M. Feldstein [1], and Mitchell and Vogel [9], who also suggest that only a household's direct payments to medical providers should count toward tax credit; expense on SI premiums would be excluded. It is possible, however, that allowing a fraction of the SI expense to count toward tax credit would provide the proper degree of discouragement [11].) Second, if an employer offers his employees SI, he should be legally required to offer each employee the option of receiving an equivalent amount of cash instead of SI. I have argued elsewhere that one cause of today's pervasive shallow workplace health insurance is that many employees regard such insurance as free to them and do not realize how much lower their cash wages are because of their insurance [12]. The third policy is the subject of this artide.
Medical Loans and the Cash-flow Problem Under MR-NHI, implemented through the federal personal income tax, many households would face a severe cash-flow problem since they would not receive their tax credit from IRS until their tax return had been filed and processed. (Even if IRS processed applications throughout the year, a household's out-of-pocket liability could still cause a significant cash-flow problem.) Of course the lower the household's income, the more severe the cash-flow problem, but even relatively affluent families would be financially pressed by large medical bills. If there were no guarantee that adequate medical loans would be available, many would desire supplementary insurance to protect their households against the cash-flow problem. Thus failure to assure availability of medical loans would not only cause hardship; it would also cause many households to obtain SI. Several principles should guide the practical implementation of medical loans under MR-NHI: * Adequacy. Each household must be assured the availability of a loan large enough to make its cash-flow problem manageable. * Economy. The volume of loans made available should be kept as small as possible. * Simplicity. A medical loan should be easy for a household to obtain and simple to administer. * Continuity. Because the strategy behind MR-NHI requires a substantial reduction in private health insurance, it would be desirable to offer private health insurance companies a role in administering medical loans in order to minimize the dislocation caused by MR-NHI. * Integrity. A household that fails to repay its loan must suffer some penalty.
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To achieve both adequacy and economy simultaneously, the size of the loan made available to a household would have to vary with its income; without such variation, a loan large enough to be adequate for a low-income household would be unnecessarily large for an affluent household. The goal of simplicity, however, makes it doubtful that current income at the time the loan is granted should be sought. Instead, each household could be issued a health credit card each year after its tax return had been processed. The credit card, based on the previous year's income, would specify a medical loan deductible. The household would not be assured eligibility for a medical loan until its cumulative medical bill in a given year exceeded the deductible (it would of course be free to seek an ordinary loan). Once the loan deductible is exceeded, however, the household should be entitled to a loan equal to the difference between its cumulative medical bill and its deductible. The household could, of course, borrow less, or nothing, if it desired. The size of the loan deductible must, of course, be much smaller than the MR-NHI deductible for which it is ultimately liable. For low-income households, the loan deductible should be zero. Some households would have a current-year income significantly below the previous year's income, the figure on which their credit card would be based. Further investigation is required to determine whether the benefit of allowing such households to file for a new credit card would be worth the administrative cost. Adequacy requires that the interest rate on the loan not be excessive and that the term be sufficiently long. Economy, however, requires that the interest rate be high enough and the term short enough to discourage unessential borrowing. If the interest rate were below the rate on savings accounts, it would be profitable for a household with sufficient savings (to manage its cash-flow problem) to nevertheless obtain the maximum medical loan and keep its savings earning interest. Thus a compromise between adequacy and economy is required. Continuity calls for the government to offer private health insurance companies (as well as banks and loan institutions) a role in the provision of medical loans. At one extreme, the government would contract with private companies to administer the loans, but the government would bear the full risk. Under this arrangement the private company would receive loan requests from households, process applications, and supervise repayment. The company would be fully reimbursed by the government for extending cash to households, and the government would bear the risk of default. At the other extreme, the government would contract with private companies to assume the risk. An intermediate alternative would involve the sharing of risk. The experience with housing loans, college student loans, and other SERVICES programs should be useful in choosing among these options. Finally, integrity and economy require that a household that fails RESEARCH to repay its loan suffer some penalty. The sanctions applied in the 126 case of ordinary bank loans, special government-sponsored loan proSEIDMAN
grams, and taxes should be considered in arriving at the appropriate VIEWPOINTS penalty. Without a meaningful penalty the loan becomes a grant. Lack of an appropriate penalty would therefore undermine the ethical basis of the program and of MR-NHI, dissipate consumer costconsciousness, and harm the economy of the program by encouraging excessive borrowing.
An Example An example will illustrate one possible way of administering medical loans under MR-NHI in light of the principles just listed. It may not be the best way, and further analysis should be able to improve the design. This example is offered as a starting point for developing an optimum design. Consider a household with an income of $8,000 that incurs a $3,000 hospital bill. Given its low income, assume that its loan deductible, indicated on its health credit card (based on the previous year's tax return), is zero. On receiving the bill from the hospital, the head of the household would fill out a loan application requesting, for example, the maximum loan and would mail the hospital bill, credit card, and application to the loan agency designated for that area. On receiving the application and the credit card indicating the loan deductible of zero, the loan agency would write a check to the hospital for $3,000 and send the head of the household a repayment schedule, billing him, perhaps monthly. It should be noted that hospitals would be eager to make loan applications available and assist persons in applying for loans, since this would speed the payment of hospital bills. When the current tax year had ended, the head of the household would file the household's tax return, claiming a medical tax credit under MR-NHI and indicating that the household had incurred a medical loan of $3,000. Suppose the household's deductible was $240 (3 percent of its income), the coinsurance rate was 15 percent, and the out-of-pocket ceiling was $480 (6 percent of its income). Then the household's own liability would be $480, the out-of-pocket ceiling, and it would be entitled to a medical tax credit of $2,520 ($3,000 minus $480). The IRS would then write a check for $2,520 to the loan agency, which would credit the $2,520 toward repayment of the $3,000 loan. The loan agency would continue billing the household until the remainder of the loan (plus interest) was repaid. Clearly many practical options should be considered in designing the medical loan program under MR-NHI. It should be emphasized, once again, that the example just given may not be the best method. The expertise of loan specialists must be called on to develop the optimum design. Ackowledgments. I am grateful to Matt Stiefel of the Masters of Public Administration Program t the University of Pennsylvania and Helen Peters at SUMMER the Federal Reserve Bank of Philadelphia for helpful discussions on this problem. 1977 127 Responsibility for the content of this artide, however, rests solely with me.
SEIDMAN
REFERENCES 1. Feldstein, M. A new approach to national health insurance. Public Interest No. 23 p. 93 Spring 1971. 2. Eilers, R. Postpayment medical expense coverage: A proposed salvation for insured and insurer. Med Care 7:191 May-June 1969. 3. Feldstein, M. Econometric Studies of Health Economics. In M. Intriligator and D. Kendrick (eds.), Frontiers of Quantitative Economics, Vol. 2, pp. 377-434. Amsterdam: North Holland, 1974. 4. Newhouse, J. and C. Phelps. Coinsurance and the Demand for Medical Services. R-964-OEO/NC. Santa Monica, CA: Rand, Apr. 1973. 5. Pauly, M. The economics of moral hazard: Comment. Am Econ Rev 58:531 June 1968. 6. Davis, K. National Health Insurance. Washington, DC: Brookings, 1975. 7. Seidman, L. The Aroman food crisis: A fable with a lesson for national health insurance. Med Care (forthcoming). 8. Seidman, L. A strategy for national health insurance. Inquiry (forthcoming). 9. Mitchell, B. and R. Vogel. Health and Taxes: An Assessment of the Medical Deduction. R-1222-OEO. Santa Monica, CA: Rand, Aug. 1973. 10. Marmor, T. Rethinking national health insurance. Public Interest No. 46, p. 73 Winter 1977. 11. Seidman, L. Supplementary health insurance and the cost-consciousness strategy. University of Pennsylvania economics discussion paper, Apr. 1977. 12. Seidman, L. A cash-equivalent option for supplementary insurance under majorrisk national health insurance. Policy Anal (forthcoming).
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The Consumer Cost-consciousness Strategy Most health economists believe present health insurance coverage has two fundamental defects. On the one hand, a minority of households are not insured against large (catastrophic) medical expenses. On the other hand, the majority of households are overinsured for routine expenses. This pervasive shallow coverage means that hospital care involves virtually no out-of-pocket expense for the average patient. His financial burden is largely unaffected by his own use of hospital care. Patients therefore have no incentive to limit utilization wherever possible or to choose less-expensive alternatives. Patients are thus encouraged to seek the most expensive hospital, services, and amenities, and hospitals and physicians are encouraged to provide an expensive style of care. Maintaining low prices will not help them attract patients. Just as restaurant bill-splitting causes overordering and bill inflation, widespread shallow health insurance causes overutilization and cost inflation [1,3-6]. To treat these two defects, many economists advocate major-risk national health insurance, which would completely protect all houseSUMMER Address communications and requests for reprints to Laurence S. Seidman, Assistant Professor of Economics, Department of Economics, University of Pennsylvania, 3718 Locust Walk CR, Philadelphia, PA 19174.
1977 123
123
holds against medical expenses that are large relative to their incomes but would provide little or no coverage for expenses that are moderate relative to income. MR-NHI would cause a dramatic increase in consumer cost-sharing compared to the current situation and would thereby help reduce health sector inefficiency and cost inflation. The basic MR-NHI design is embodied in several bills before Congress. If NHI is enacted, it will probably assign each household a deductible, a coinsurance range and rate, and an out-of-pocket ceiling. For example, a family with an income of $15,000 might be responsible for its first $750 (5 percent of its income) and 20 percent of its additional medical expense until it has spent $1,500 (10 percent of its income) out-of-pocket (when its annual medical bill reaches $4,500). Beyond this, NHI would pay 100 percent [6]. To be equitable, the deductible, coinsurance rate, and out-ofpocket ceiling must vary with a household's income, so that the subjective burden of out-of-pocket expense is comparable for all households. It is often not realized that, without such variation, MR-NHI would either be inequitable or highly inefficient. If the deductible, coinsurance rate, and ceiling were small enough to avoid inequity to low-income families, they would be trivial for middle and upperincome families, giving them little incentive to economize. Furthermore, the federal budget cost of MR-NHI would be unnecessarily large, because MR-NHI would pay large fractions of medical bills that these households could afford to pay out-of-pocket. The high federal budget cost of MR-NHI would in turn squeeze other federal programs, many of which aim to assist the poor and the elderly. Unintentionally, the result would be to shift federal dollars away from the poor and elderly to middle and upper-income households. Few would find this desirable [7,8]. Income-related MR-NHI could be implemented most easily through the federal personal income tax. A family with income of $15,000 would file, on its annual tax return, for a tax credit of 80 percent of its medical expense from $750 to $4,500 and a tax credit of 100 percent of its medical expense in excess of $4,500. If the tax credit exceeded the family's tax liability, the household would receive a net cash payment from the Internal Revenue Service, so that full federal payment would be made to all households, whatever their tax liability. This method of implementing MR-NHI is supported by Mitchell and Vogel [9] and by Marmor [10]. The Medical Expense Tax Credit Bill proposed by Senator Brock in 1975 is similar in design, with the crucial difference, however, that his proposal never raises the tax credit to 100 percent and therefore does not fix a ceiling on a household's out-of-pocket burden [6]. Low-income households with no tax liability that do not currently file tax returns would either have to file HEALTH or be included in another way. The best procedure depends on the SERVICES RESEARCH outcome of welfare reform, currently under review by DHEW. The cost-consciousness strategy behind MR-NHI would fail if 124 most households continued to be covered for routine medical exSEIDMAN
penses by supplementary private health insurance (SI) through ar- VIEWPOINTS rangements with employers. Three policies are required to prevent widespread SI. First, current tax subsidies that encourage SI, especially at the workplace, must be eliminated. (Removal of tax subsidy for workplace health insurance is also advocated by Davis [6], M. Feldstein [1], and Mitchell and Vogel [9], who also suggest that only a household's direct payments to medical providers should count toward tax credit; expense on SI premiums would be excluded. It is possible, however, that allowing a fraction of the SI expense to count toward tax credit would provide the proper degree of discouragement [11].) Second, if an employer offers his employees SI, he should be legally required to offer each employee the option of receiving an equivalent amount of cash instead of SI. I have argued elsewhere that one cause of today's pervasive shallow workplace health insurance is that many employees regard such insurance as free to them and do not realize how much lower their cash wages are because of their insurance [12]. The third policy is the subject of this artide.
Medical Loans and the Cash-flow Problem Under MR-NHI, implemented through the federal personal income tax, many households would face a severe cash-flow problem since they would not receive their tax credit from IRS until their tax return had been filed and processed. (Even if IRS processed applications throughout the year, a household's out-of-pocket liability could still cause a significant cash-flow problem.) Of course the lower the household's income, the more severe the cash-flow problem, but even relatively affluent families would be financially pressed by large medical bills. If there were no guarantee that adequate medical loans would be available, many would desire supplementary insurance to protect their households against the cash-flow problem. Thus failure to assure availability of medical loans would not only cause hardship; it would also cause many households to obtain SI. Several principles should guide the practical implementation of medical loans under MR-NHI: * Adequacy. Each household must be assured the availability of a loan large enough to make its cash-flow problem manageable. * Economy. The volume of loans made available should be kept as small as possible. * Simplicity. A medical loan should be easy for a household to obtain and simple to administer. * Continuity. Because the strategy behind MR-NHI requires a substantial reduction in private health insurance, it would be desirable to offer private health insurance companies a role in administering medical loans in order to minimize the dislocation caused by MR-NHI. * Integrity. A household that fails to repay its loan must suffer some penalty.
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To achieve both adequacy and economy simultaneously, the size of the loan made available to a household would have to vary with its income; without such variation, a loan large enough to be adequate for a low-income household would be unnecessarily large for an affluent household. The goal of simplicity, however, makes it doubtful that current income at the time the loan is granted should be sought. Instead, each household could be issued a health credit card each year after its tax return had been processed. The credit card, based on the previous year's income, would specify a medical loan deductible. The household would not be assured eligibility for a medical loan until its cumulative medical bill in a given year exceeded the deductible (it would of course be free to seek an ordinary loan). Once the loan deductible is exceeded, however, the household should be entitled to a loan equal to the difference between its cumulative medical bill and its deductible. The household could, of course, borrow less, or nothing, if it desired. The size of the loan deductible must, of course, be much smaller than the MR-NHI deductible for which it is ultimately liable. For low-income households, the loan deductible should be zero. Some households would have a current-year income significantly below the previous year's income, the figure on which their credit card would be based. Further investigation is required to determine whether the benefit of allowing such households to file for a new credit card would be worth the administrative cost. Adequacy requires that the interest rate on the loan not be excessive and that the term be sufficiently long. Economy, however, requires that the interest rate be high enough and the term short enough to discourage unessential borrowing. If the interest rate were below the rate on savings accounts, it would be profitable for a household with sufficient savings (to manage its cash-flow problem) to nevertheless obtain the maximum medical loan and keep its savings earning interest. Thus a compromise between adequacy and economy is required. Continuity calls for the government to offer private health insurance companies (as well as banks and loan institutions) a role in the provision of medical loans. At one extreme, the government would contract with private companies to administer the loans, but the government would bear the full risk. Under this arrangement the private company would receive loan requests from households, process applications, and supervise repayment. The company would be fully reimbursed by the government for extending cash to households, and the government would bear the risk of default. At the other extreme, the government would contract with private companies to assume the risk. An intermediate alternative would involve the sharing of risk. The experience with housing loans, college student loans, and other SERVICES programs should be useful in choosing among these options. Finally, integrity and economy require that a household that fails RESEARCH to repay its loan suffer some penalty. The sanctions applied in the 126 case of ordinary bank loans, special government-sponsored loan proSEIDMAN
grams, and taxes should be considered in arriving at the appropriate VIEWPOINTS penalty. Without a meaningful penalty the loan becomes a grant. Lack of an appropriate penalty would therefore undermine the ethical basis of the program and of MR-NHI, dissipate consumer costconsciousness, and harm the economy of the program by encouraging excessive borrowing.
An Example An example will illustrate one possible way of administering medical loans under MR-NHI in light of the principles just listed. It may not be the best way, and further analysis should be able to improve the design. This example is offered as a starting point for developing an optimum design. Consider a household with an income of $8,000 that incurs a $3,000 hospital bill. Given its low income, assume that its loan deductible, indicated on its health credit card (based on the previous year's tax return), is zero. On receiving the bill from the hospital, the head of the household would fill out a loan application requesting, for example, the maximum loan and would mail the hospital bill, credit card, and application to the loan agency designated for that area. On receiving the application and the credit card indicating the loan deductible of zero, the loan agency would write a check to the hospital for $3,000 and send the head of the household a repayment schedule, billing him, perhaps monthly. It should be noted that hospitals would be eager to make loan applications available and assist persons in applying for loans, since this would speed the payment of hospital bills. When the current tax year had ended, the head of the household would file the household's tax return, claiming a medical tax credit under MR-NHI and indicating that the household had incurred a medical loan of $3,000. Suppose the household's deductible was $240 (3 percent of its income), the coinsurance rate was 15 percent, and the out-of-pocket ceiling was $480 (6 percent of its income). Then the household's own liability would be $480, the out-of-pocket ceiling, and it would be entitled to a medical tax credit of $2,520 ($3,000 minus $480). The IRS would then write a check for $2,520 to the loan agency, which would credit the $2,520 toward repayment of the $3,000 loan. The loan agency would continue billing the household until the remainder of the loan (plus interest) was repaid. Clearly many practical options should be considered in designing the medical loan program under MR-NHI. It should be emphasized, once again, that the example just given may not be the best method. The expertise of loan specialists must be called on to develop the optimum design. Ackowledgments. I am grateful to Matt Stiefel of the Masters of Public Administration Program t the University of Pennsylvania and Helen Peters at SUMMER the Federal Reserve Bank of Philadelphia for helpful discussions on this problem. 1977 127 Responsibility for the content of this artide, however, rests solely with me.
SEIDMAN
REFERENCES 1. Feldstein, M. A new approach to national health insurance. Public Interest No. 23 p. 93 Spring 1971. 2. Eilers, R. Postpayment medical expense coverage: A proposed salvation for insured and insurer. Med Care 7:191 May-June 1969. 3. Feldstein, M. Econometric Studies of Health Economics. In M. Intriligator and D. Kendrick (eds.), Frontiers of Quantitative Economics, Vol. 2, pp. 377-434. Amsterdam: North Holland, 1974. 4. Newhouse, J. and C. Phelps. Coinsurance and the Demand for Medical Services. R-964-OEO/NC. Santa Monica, CA: Rand, Apr. 1973. 5. Pauly, M. The economics of moral hazard: Comment. Am Econ Rev 58:531 June 1968. 6. Davis, K. National Health Insurance. Washington, DC: Brookings, 1975. 7. Seidman, L. The Aroman food crisis: A fable with a lesson for national health insurance. Med Care (forthcoming). 8. Seidman, L. A strategy for national health insurance. Inquiry (forthcoming). 9. Mitchell, B. and R. Vogel. Health and Taxes: An Assessment of the Medical Deduction. R-1222-OEO. Santa Monica, CA: Rand, Aug. 1973. 10. Marmor, T. Rethinking national health insurance. Public Interest No. 46, p. 73 Winter 1977. 11. Seidman, L. Supplementary health insurance and the cost-consciousness strategy. University of Pennsylvania economics discussion paper, Apr. 1977. 12. Seidman, L. A cash-equivalent option for supplementary insurance under majorrisk national health insurance. Policy Anal (forthcoming).
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