A Major Risk Approach to Health Insurance Reform

Martin Feldstein, Jonathan Gruber

NBER Working Paper No. 4852 (Also Reprint No. r2151)
Issued in September 1994
NBER Program(s):Health Care, Health Economics, Public Economics

This paper examines the implications of a 'major-risk' approach to health insurance using data from the National Medical Expenditure Survey. We study the impact of switching from existing coverage to a policy with a 50 percent coinsurance rate and 10 percent of income limit on out-of-pocket expenditures, as well as several alternative combinations of a high-coinsurance rate with a limited out-of-pocket payment. Our analysis is limited to the population under age 65. Although 80 percent of spending on physicians and hospital care is done by the 20 percent of families who spend over $5,000 in a year, our analysis shows that shifting to a major risk policy could reduce aggregate health spending by nearly 20 percent. The reductions would be greatest among higher income individuals. By reducing excess consumption of health services, the major risk policy increases aggregate economic efficiency. With modest values of both demand sensitivity and risk aversion we find that shifting to a major risk policy would raise aggregate national efficiency by $34 billion a year. Government provision of a major risk policy" to those under 65 could be financed with a premium of about $150 per person because of the increased tax revenue and reduced Medicare outlays that would result from the provision of universal major risk insurance for the population under age 65. Even without government provision, individuals might be induced to select major risk policies by changing existing tax rules to eliminate the advantage of insurance, either by including employer provided insurance in taxable income or by permitting a tax deduction for out-of-pocket medical expenditures.

download in pdf format
   (1033 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w4852

Published: A Major Risk Approach to Health Insurance Reform, Martin Feldstein, Jonathan Gruber. in Tax Policy and the Economy, Volume 9, Poterba. 1995

Users who downloaded this paper also downloaded* these:
Chandra, Gruber, and McKnight w12972 Patient Cost-Sharing, Hospitalization Offsets, and the Design of Optimal Health Insurance for the Elderly
Feldstein and Gruber A Major Risk Approach to Health Insurance Reform
Finkelstein w11619 The Aggregate Effects of Health Insurance: Evidence from the Introduction of Medicare
Al-Ississ and Miller w16193 What Does Health Reform Mean for the Healthcare Industry? Evidence from the Massachusetts Special Senate Election
Finkelstein and McKnight w11609 What Did Medicare Do (And Was It Worth It)?
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us