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A Better Catastrophic Option

3:28 PM, Oct 19, 2009 • By JIM PREVOR
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Ross Douthat's column in the New York Times, titled The Catastrophic Option, got right the purpose of insurance -- to protect people against bankrupting expenses. However his definition of a catastrophic plan as one that "would seek to insure Americans only against costs that exceed a certain percentage of their income" is actually a recipe for high-priced catastrophic coverage -- whether provided by the government or a private insurance policy.

In order for catastrophic coverage to be inexpensive, it needs to be cumulative and paired with a savings component. Imagine a man who was very healthy and never went to a doctor or had a medical expense until the day before he turned 65 and then fell ill and needed $250,000 in treatment.

If a catastrophic plan will pay this bill because it exceeds some percentage of that man's income on that particular year -- ignoring the fact that he has never paid a dime in medical bills -- the policy will be unnecessarily expensive.

In contrast, if we came to a conclusion that everyone should be required to pay, say, $100 a month toward his own medical care starting at age 18 and our catastrophic policy should cover anything over this $100 a month plus compound interest, the results are startling.

Forty-seven years of compounding $100 a month at, say, 8 percent would give our sick 64-year-old a medical savings account of $621,237.73 to pay his own bill. This not only would keep the cost of catastrophic coverage way down, it would more fairly hold people responsible for reasonable contributions to the cost of their own health care.