Question

Most private health insurance plans have out-of-pocket limits, which limit the total amount an insured individual must pay in any given year. For example, a plan may have a 10% copayment on all medical services and a $5,000 out-of-pocket limit. If an individual insured under that plan incurs $60,000 of medical expenses in one year, the individual will pay 10% of the first $50,000 ($5,000), after which the insurer will pay 100% of expenses. Medicare does not have an out-of-pocket limit. Suppose the government is considering adding an out-of-pocket limit. What are the advantages of doing so? What are the disadvantages of doing so?

Answer 1

Basically, this would be a trade-off between consumption smoothing benefit and moral hazard cost. Advantages will be that out of pocket limit will result into consumption smoothing i.e. better financial security for public in large. Another indirect advantage will be better public health. Disadvantage would be that public spending will increase and business of private sector medical insurance providers will decline steeply as Medicare is government backed. Moral hazard cost would be there which will lead to less health safety and inflated medical bills as individual pays only a fraction of medical cost and rest will be taken care by government.