A New Healthcare Model: The Case for Catastrophic Coverage and Cash-Pay

Healthcare is expensive. Too expensive. Not only that, but premiums and deductibles are increasing, which is increasingly creating strain on American’s financial (and physical) health. Something’s got to give.

So, after speaking with some people way smarter than me in the industry, here is my pitch for exploring a model that combines catastrophic coverage with cash-pay options for routine visits. Is it actually possible? Probably not, but here’s the case for it.

Basic Problems with Traditional Health Insurance

Traditional health insurance intends to cover a wide range of services – from routine check-ups to major surgeries. However, through a first-principles lens, this comprehensive approach has several drawbacks.

• It's too Expensive: Healthcare costs have risen dramatically in the U.S. over the past several decades. In 2023, the average annual premium for family coverage was $22,463 (almost 50% higher than in 2013), the average employee contribution was $6,106, and the average deductible for single coverage was $1,669. For many, that's money they don't have to spare.
• It's too Complex: Navigating insurance plans, coverage, and billing is overwhelming and confusing. People generally have negative experiences with insurance. A survey found that 41% of Americans reported having trouble understanding their medical bills.
• It's too Opaque: Patients often face unpredictable costs, with little clarity on what they will owe until after they receive care, and struggle to understand which providers are in-and-out of network. Additionally, about 59% of Americans are worried about unexpected medical bills.

A Simpler Solution: Catastrophic Coverage + Cash-Pay

One potential solution is to simplify the system by adopting catastrophic health insurance combined with cash-pay for routine visits.

• Catastrophic Health Insurance: This type of insurance is designed to cover severe or unexpected medical events that could otherwise lead to financial ruin. It provides a safety net for major health crises, such as hospitalizations or serious illnesses, with lower premiums compared to traditional plans. Catastrophic plans typically have low monthly premiums and high deductibles, covering essential health benefits after the deductible is met.
• Cash-Pay for Routine Visits: For everyday healthcare needs—like check-ups, minor illnesses, and preventive care—patients would pay out-of-pocket. This model promotes price transparency and allows patients to shop around for the best rates, fostering competition and driving down costs. One study showed that patients paying cash can save an average of 39% on routine care compared to those using insurance.

Benefits of This New Model

• Affordability: Lower premiums for catastrophic coverage reduce monthly expenses, making insurance more accessible.
• Transparency: Direct payment for routine care encourages clear, upfront pricing, helping patients make informed choices.
• Control: Patients have more control over their healthcare spending, paying only for the services they need.
• Reduced Administrative Burden: Simplified billing and fewer insurance claims decrease administrative costs for providers (as well as potential for fraud, waste, and abuse), potentially lowering prices further.

Potential Downsides of This New Model (& Opportunities for Startups?)

There are certainly downsides of this proposed model. It definitely is not widely applicable. For example, let’s look at a few personas. This model would work for someone like John, a 40-year-old male who is generally healthy and visits the doctor only for annual check-ups and minor illnesses. It would offer lower premiums and transparent pricing for routine visits. Susan, on the other hand, a 55-year-old early retiree with multiple chronic conditions who requires frequent medical attention, would not be a fit. The model might be burdensome, too expensive, and might lead to her delaying care.

Additional downsides include:

• Out-of-Pocket Burden: Patients must have the financial means to pay for routine and preventive care upfront, which can be challenging for those with limited resources. It is possible that a model like this could widen health disparities for groups like low-income individuals.
• Inadequate Coverage for Chronic Conditions: Patients with chronic conditions requiring frequent medical visits and ongoing treatment might find the cash-pay model burdensome and expensive.
• Limited Access to Immediate Care: Without comprehensive insurance, some patients might delay seeking routine care due to cost concerns, potentially leading to worse health outcomes.
• Provider Availability: Not all healthcare providers offer cash pay options, and patients may face difficulties finding providers who accept direct payments. But…is there an opportunity for a primarily cash-pay private practice franchise in the U.S.? I would argue yes.
• Misaligned Provider Incentives: Providers are backed into corners based on their reimbursement schedules – e.g. salaried docs don’t have to see as many patients (limiting access) and non-salaried docs are incentivized to see as many patients as possible (limiting quality?). Value-based-care somewhat addresses this but, in my opinion, can limit access (to a certain degree). Maybe incorporating some type of preventative care and/or incentive-based program or tax deduction into this model would make sense?
• Financial Planning: Managing healthcare expenses without the predictability of comprehensive insurance might require more diligent financial planning and budgeting, which can be stressful for some individuals. This seems like it would only really work for healthy folks – leaving the sickliest people in financial ruin. How could this be solved? Maybe an HSA card could help with this?

In Conclusion

By rethinking our health insurance system to focus on catastrophic coverage paired with cash-pay options for routine visits, we can create a more affordable, transparent, and efficient model. This approach empowers patients, reduces financial strain, and encourages a healthier, more sustainable healthcare environment.

There are already examples of this model in practice. Some direct primary care practices operate on a membership basis, where patients pay a monthly fee for access to routine care services. This model has shown promise by providing affordable and accessible care without the complexities of traditional insurance, but is not widely adopted.

I am sure I am missing some (or many) things. For example, if another pandemic hit, how would this model fair? I imagine a lot of people/economies would be underwater. But I’m not really sure how to answer that (kind of why I am posting this).

Could this actually happen? I don't know. I don't think so. The current system is too entrenched, too controlled, too big, too regulated, and too antiquated. But maybe there is some opportunity here that a startup can take advantage of?

I would love to hear what people think – and even be proven wrong.