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Sunday, January 22, 2006

Health Savings Accounts: Krugman vs. Feldstein

Last year, the administration promoted Social Security privatization. This year, the push is for Health Savings Accounts. Here's president Bush in his radio address today:

President's Radio Address: ...For the sake of America's small businesses, workers, and families, we must also make health care more affordable and accessible. A new product known as Health Savings Accounts helps control costs by allowing businesses or workers to buy low-cost insurance policies for catastrophic events and then save, tax-free, for routine medical expenses. This year, I will ask Congress to take steps to make these accounts more available, more affordable, and more portable...

I thought it would be useful to review the debate over these accounts. Here's Martin Feldstein's arguments in support of Health Savings Accounts:

Health and Taxes, by Martin Feldstein, WSJ, 1/19/04: ...Health Savings Accounts ... may well be the most important piece of legislation of 2003. These new tax and medical insurance rules have the potential to transform health-care finances, bringing costs under control and making health care reflect what patients and their doctors really want. It is remarkable that this legislation has received so little public attention.

Today's high cost of health care reflects the way that the tax law has subsidized the use of insurance to pay for health care. ... Because out-of-pocket payments at the time of care are only a small fraction of the total cost of producing that care, individuals naturally want "the best care" that medical science can provide. And the demand for that high-tech care drives medical innovation toward new and more expensive modes of treatment.

The demand for the typical health-insurance policy reflects the tax provision that allows employees to exclude payments for health insurance from their taxable income. ...[T]he resulting tax saving is a very large subsidy for the purchase of the kind of comprehensive, low-deductible insurance policy that drives up health-care costs ... essentially a $120 billion subsidy for purchasing the wrong kind of insurance. ...

The new HSA law (a part of the recent Medicare reform bill) eliminates the preferential subsidy... Anyone under the age of 65 can establish a Health Savings Account if they have a "qualified" health-insurance plan. A "qualified" plan is an insurance policy that has a minimum deductible of $2,000 for a family and a $10,000 limit on the family's annual out-of-pocket expenses. The deductible is designed to make individuals more cost-conscious in their consumption of health care, and the annual limit on out-of-pocket expenses is there to prevent financial hardship... An individual can withdraw funds from his HSA without paying tax if the money is used for any kind of health bills...

High-deductible policies give individuals and their doctors an incentive to avoid wasteful health spending. When spending comes from the individuals' own Health Savings Accounts, individuals and their doctors have a strong reason to balance the costs of medical procedures against the potential favorable impact on health. ...

Here's Paul Krugman with a different view:

Medical Class Warfare, by Paul Krugman, NY Times, 7/16/04: The ... main component of the Bush plan involves "health savings accounts." ...[H]ealth savings accounts don't seem to have much to do with the needs of the families likely to find themselves without health insurance. For one thing, such families need more protection than a plan with a $2,000 deductible provides. Furthermore, the tax advantages of health savings accounts would be small for those families most at risk of losing health insurance, who are overwhelmingly in low tax brackets.

But for people whose income puts them in high tax brackets, these accounts are a very good deal; making the premiums deductible turns them into a great deal. In other words, health savings accounts will offer the already affluent, who don't have problems getting health insurance, yet another tax shelter. Meanwhile, health savings accounts, in the view of many experts, will actually increase the number of uninsured.

This perverse effect shouldn't be too surprising: unless they are carefully designed, medical policies often have side consequences that worsen the problems they supposedly address. ... In the case of health savings accounts, the key side consequence is a reduced incentive for companies to insure their workers. When companies provide group health insurance, healthier employees implicitly subsidize their sicker colleagues. They're willing to do this largely because the employer's contributions to health insurance are a tax-free form of compensation, but only if the same plan is offered to all employees.

Tax-free health savings accounts and premiums would provide healthier and wealthier employees an incentive to opt out, accepting higher paychecks instead, and would lead to higher insurance premiums for those who remain in traditional plans. This would cause some companies to stop providing health insurance, or raise employee contributions to a level some workers can't afford. ...

And, from another column:

America's Failing Health, by Paul Krugman, NY Times, 8/27/04: ...Clearly, health care reform is an urgent social and economic issue. But who has the right answer? ... George Bush's economists think ... health costs are too high because people have too much insurance and purchase too much medical care. What we need, then, are policies, like tax-advantaged health savings accounts tied to plans with high deductibles, that induce people to pay more of their medical expenses out of pocket. (Cynics would say that this is just a rationale for yet another tax shelter for the wealthy, but the economists who wrote the report are probably sincere.) ...

[Others] believe that health costs are too high because private insurance companies have excessive overhead, mainly because they are trying to avoid covering high-risk patients. What we need, according to this view, is for the government to assume more of the risk, for example by picking up catastrophic health costs, thereby reducing the incentive for socially wasteful spending, and making employment-based insurance easier to get. A smart economist can come up with theoretical justifications for either argument. The evidence suggests, however, that the [second] position is much closer to the truth. ...

Does this mean that the American way is wrong, and that we should switch to a Canadian-style single-payer system? Well, yes. ... My health-economist friends say that it's unrealistic to call for a single-payer system here: the interest groups are too powerful, and the antigovernment propaganda of the right has become too well established in public opinion. All that we can hope for right now is a modest step in the right direction... I bow to their political wisdom. ...

I'm with Krugman on this one.

    Posted by on Sunday, January 22, 2006 at 01:38 AM in Economics, Health Care | Permalink  TrackBack (0)  Comments (17)

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