I agree with Posner that companies should not be forced to provide health insurance for all their employees since some employees may not want such insurance--for example, they may get it from a spouse. I also agree that co-payments should be required from employees since otherwise they have a strong incentive to use excessive medical care. Some of the older companies with generous health insurance plans, such as those in the automotive sector, now face staggering health expenses, in part because their plans had negligible co-payments by employees.
However, even employee co-payments of 10 or 20 per cent--which is at the high end--may not provide sufficient incentive for them to economize on health spending. An important improvement is health savings accounts (HSA), which were authorized by Congress in 2003 for everyone not on Medicare who has a health plan with high deductibles, such as $1000 for an individual and $2000 for a family. A family can make an annual tax-free contribution to its HAS that cannot exceed its deductible on its health plan, and is subject to an upper limit-- in 2005 the limit for families is $5250. If in any year they spend less on medical care than they put in, they can carry the balance forward, and invest the remainder on a tax-free basis until age 65.
No further contributions are allowed once a person reaches age 65 and usually enrolls in Medicare. Remaining balances on an HSA can then be used as a retirement annuity. This annuity is taxed without penalty as resources are withdrawn for spending on non-medical expenses.
HSAs provide a strong incentive to economize on medical expenses in any year since unspent amounts can be carried forward to future years when possibly more important medical problems arise. They can also be carried into retirement and used as a supplement to retirement income. As a result, HSAs give families a much stronger reason to scrutinize whether various medical expenses are really necessary since they would be trading off present care for future care and other future benefits.
Although co-payment medical systems also provide some incentive to economize on spending, most of the additional expense would be borne by the medical insurer, such as his employer, HMO, or insurance company, since the co-payment rate is a fraction of the total. HSAs provide stronger incentives to use medical care efficiently because all dollars saved today by the insured can be used for medical care in the future.
Since an HSA requires a large deductible, they are best when combined with a form of catastrophic insurance; that is, medical insurance that pays only for large, expensive, and unusual medical problems. For this reason, and to cut down free riding by the uninsured on taxpayers, I believe everyone should be require to have catastrophic medical insurance--with the very poor covered by Medicaid. The premium on such catastrophic coverage might be allowed to be deducted from taxable income, the way HSA contributions are.
Although employers are increasingly providing HSAs, families that start them on their own would receive the same tax benefits as when they are provided by employers. The United States' system of employer provided health care is not the usual one in most of the world. It was given a boost during World War II because employers could offer this "fringe" benefit to help get around controls over wages during a tight labor market with strong competition for a limited pool of labor. It remained afterwards because the growth in income tax rates gave an increasing advantage to any system that allowed premiums for health insurance to be provided tax-free.
Prior to the passage of the 2003 law on HSAs, individuals and families who purchased health insurance on their own were at a disadvantage compared to employee health insurance since they could not deduct their health insurance premiums unless they itemized their medical expenses. This advantage explains why employers provide the vast majority of health plans for persons of working ages.
But now an HSA provides an alternative that allows tax-free contributions to medical accounts that can be independent of employment. An HSA combined with catastrophic health insurance provides a very good system of health coverage. Catastrophic plans also need not be taken through an employer but could occur through a fraternal organization, church, professional association, or other group that gains the economies of administrative scale from group coverage, and can average risks of serious illness among different members.
The establishment of HSAs provides an opening wedge into removing the special privileges granted to employer provided health insurance. The next step would be to remove the tax advantage from all employer plans except HSAs, and except perhaps catastrophic health coverage if contributions to non-employer catastrophic plans are also tax-free.