Center for Business and Public Policy
at the University of Illinois, Urbana-Champaign

Yes, I know that credit cards have gotten a bad name given the fact that so many families have gotten themselves deep into personal debt by not managing them effectively.  But a couple of interesting ideas have come across my desk recently that have me thinking that a “health care credit card” is an idea worth considering as part of an intelligent health care reform.

As background, my colleague Nolan Miller made a post last week about “The Health Reform House of Cards” in which he highlighted the difficulties in tackling reform.  He walks through the steps that one could take in order to put together a reform that actually works, highlighting how one reform element must be accompanied by other reform elements if it is all going to work.

As luck would have it, I recently received a proposal from a good friend of the College of Business, Jerry Carson.  In his proposal, which is much more detailed than what I will provide here, he outlines a system that appears to have many of the elements that Nolan calls for - and his approach has a role for health care credit cards.  I probably will not do Jerry’s proposal justice, but here are a few of the highlights …

First, require that everyone purchase a catastrophic loss health insurance policy.  In Jerry’s proposal, anyone could sell this insurance, including private insurers or the government.  Premiums would be based on the risk pool of the entire nation, which, in Jerry’s words is “the only true economical form of insurance - the broadest possible base with high deductibles.”  Policy terms would be the same without consideration of pre-existing conditions, and premiums would be tax deductible.  if insurers want to provide policies that wrap-around this catastrophic coverage by providing benefits that are more generous, they may do so, but such policies would not be tax deductible.  This would help limit the “Cadillac plan” problem that leads to inefficient over-utilization of health care services.  It also limits the tax burden arising from the “tax subsidy” of these plans.

Second, Jerry suggests allowing individuals to use a “health care credit card” that can be used at point-of-service.  These cards are with full recourse to the individual.  Private lenders can issue the cards, and again, if someone cannot get one then the government can issue one.  In the case that the government issues one, all services would be reviewed by a federal agency, and unpaid costs would be deducted from federal/state benefits.  As Jerry puts it, it would be “socialized health care without the free lunch.”  

Jerry is certainly not alone in trying to come up with creative ways to solve our health care dilemma by providing incentives for individuals to care about the cost of care (a focus on incentives and individual responsibility) while still protecting them from catastrophic losses (a focus on social insurance).  A few months ago, the esteemed economist Martin Feldstein (former President of the NBER and former CEA Chair for President Reagan) wrote an op-ed in the Washington Post that called for us to replace the current tax subsidy approach with a health care voucher system.  Interestingly, he also calls for “the government to issue a health-care credit card to every family along with the insurance voucher.”  

Health care reform is an enormously complex topic, and as Nolan’s blog and Feldstein’s op-ed both suggest, the solution requires a number of inter-locking pieces to work.  Both Jerry Carson’s and Marty Feldstein’s creative ideas may be the kind of innovation we need to get out of the current health care reform quagmire.

Deep within the “Patient Protection and Affordable Care Act” – the short title of the 2000+ page health care bill winding its way through the Senate – is a provision that came from legislation previously known as the CLASS Act.  The CLASS acronym stands for “Community Living Assistance Services and Supports” and is a plan to “establish a national voluntary insurance program for purchasing community living assistance services.”  Essentially, this legislation would create a voluntary, public long-term care insurance program.      

This provision has received almost no attention from the press, which is actually pretty surprising given that it would represent a major change in the federal government’s role in providing insurance for long-term care.  It would be a voluntary program through which individuals – in return for paying premiums to the government program for 5 years – would be eligible for a benefit of approximately $50 per day that they are receiving eligible care (where eligibility is triggered by an individual’s inability to engage in activities known as “Activities of Daily Living,” or ADLs – things such as bathing – without assistance.)

It is understandable that there is tremendous interest in rethinking our approach to long-term care.  The private market for long-term care insurance is quite small (e.g., only about 10 percent of the age 50-70 population is covered, and only about 4-5 percent of long-term care expenses are covered).  The government is already the largest source of payment for long-term care services through Medicare and Medicaid.  These expenditures are expected to grow rapidly in the coming decades due to population aging, among other factors. 

But as I read this legislation, the same question keeps nagging me over and over.  The reason it is nagging at me is that I cannot figure out the answer.  The question is, “exactly what problem is this legislation meant to address?” 

The legislation would create a public insurance program under the assumption that people cannot get the insurance privately.  In other words, it seems to be assuming that the problem is that private insurers can’t or won’t provide good insurance.  But there is not much evidence of this.  To be clear, we know the private market is imperfect.  My own research with Amy Finkelstein has shown that prices are higher than actuarially fair, and the benefits provided are not very comprehensive.  But we also show that the limited size of the overall market is almost surely driven by limits to consumer demand for these products, not because of problems with insurers providing insurance.  

So if the government wants to solve the problem of people being inadequately insured against long-term care expenses, it needs to address the issue of demand.  But, best I can tell, this legislation does virtually nothing on this front.  For example, if you think people are not buying it because they underestimate the risk, or because they are in denial about needing care, or because they think they have substitute forms of care, there is nothing in this legislation that will change this.  It is, after all, still voluntary to purchase it and simply having a government-run program is not going to change these beliefs.

On the other hand, Amy and I also show in our research that the Medicaid program serves as an enormous disincentive for purchasing private insurance.  In a nutshell, people do not want to pay for private insurance if most of the benefits they are paying for are simply duplicative of what Medicaid would have provided for free had they not purchased private insurance.  This public program would have the same problem – why should I pay premiums for this program so long as Medicaid will still pick up the tab if I fail to pay the premiums?  The feature that allows individuals to keep part of the benefit when Medicaid picks up the tab is presumably meant to address this, but I’m afraid it simply is not going to be sufficient to overcome this concern.

The government seems to implicitly understand that there are limits on demand - their own estimates are that only 5% of the population will take up this insurance.  That hardly sounds like a resounding success to me.

In short, it seems that the government has developed a solution to a supply problem that does not exist, but has failed to address the demand problems that do exist.  Needless to say, I am not optimistic as to this program’s future …