In the transcript of The Big Question discussion between Hal Weitzman and Professors Matthew J. Notowidigdo, John H. Cochrane, and Matthew Gentzkow ("Is there an alternative to Obamacare?" Spring 2014), Cochrane and Gentzkow discuss how insurance covers all treatment from checkups to cancer. They argue that there should be a policy available that is cheaper and only covers major medical events. Gentzkow then says, "That is a policy that I currently cannot buy."
Yet, in effect, such a policy not only exists but is becoming more common. Many families are taking larger deductibles to afford health-care coverage. Consequently, many families are out of pocket for the first $10,000–$20,000 of their annual health expenses. Insurance coverage does not kick in unless a major medical expense arises that exceeds that deductible. This scenario is in play today and yet Gentzkow says no one is able to buy such a policy? While he casts his description of such a policy differently, it is in fact the very policy that many families in the US currently have.
Additionally, the 25-year-old patient mentioned in the discussion does not subscribe to insurance because his mindset is that a flu or infection is treated by a free visit to the emergency room. Twenty-five-year-olds do not get annual checkups. Those are the realities of being 25 today, as they have been for the last 30 years. In summary, the panel discussion seemed to be based on assumptions very out of sync with the current state of health care and Obamacare.
Chase McCarthy, '06 (EXP-11)
As Mr. McCarthy points out, the large deductibles included in many of the new exchange policies are an interesting development, which may spur some competition and cost control as providers compete for these customers. However, those policies also feature long lists of mandated coverage, and also strong limits on doctors and hospital networks. The kind of catastrophic insurance that we had in mind would not have these features. It would also follow you from job to job and state to state, in the same guaranteed-renewable fashion that life insurance offers. Also, while there is a lot of attention paid to the exchanges, most Americans, including ourselves, receive employer-provided group plans that do not include this kind of insurance. Finally, I would emphasize that high-deductible, patient-pays-first insurance can only work with a robustly competitive supply.
John H. Cochrane
AQR Capital Management Distinguished Service Professor of Finance
Mr. McCarthy offers a helpful clarification. What I said in The Big Question discussion was, "When I'm a healthy 25-year-old, I would like to sign up for something that says, 'I am insured against the lifetime risk of having terrible health outcomes, terrible chronic conditions.' That is a policy that I currently cannot buy." The emphasis there was on lifetime risk. While it is true that there are many high-deductible policies, I still risk losing coverage if I become unemployed, change employers, or move to a new state.
Richard O. Ryan Professor of Economics and Neubauer Family Faculty Fellow