The American system of health care has many attractive features, and the evidence indicates that Americans of all ages greatly value the large increase in life expectancy and the health quality of life that occurred during the past several decades. In addition, many persons from other countries in all parts of the world come here for advanced medical treatment, while few Americans find it worthwhile to go abroad to treatment. But this system is also the most expensive in the world as both per capita health spending and the fraction of GDP spent on health are larger than in any other nation.
Fortunately, many of the problems in the health system are correctable with the right policies. I believe the three most important defects are the over 40 million Americans who are not insured, the weak incentives to economize on unnecessary medical spending by most people covered by some form of health insurance, and the tying together of health insurance with employment as a result of special tax privileges provided to employers.
Arguably the best parts of President Bush's State of the Union address are his suggested reforms in the health care system. They do not fully attack all the problems, but they do offer significant improvements. I will concentrate particularly on his proposals to extend Health Savings Accounts (HSAs), and to improve the portability of health insurance when workers change jobs.
HSAs were introduced in 2003 to help consumers pay for non-catastrophic health care, and to give them financial incentives to economize on unnecessary medical expenditures. The law allows contributions to these accounts of up to $2700 for individuals and $5450 for a family, as long as their contributions are not greater than the deductible on their health insurance, which is required to be at least $2100 before a person or family is eligible to open such an account. The number of persons with high deductible health insurance has increased rapidly to about three million persons since HSAs were introduced, and some estimates indicate that over one million persons have an HSA.
If a company provides employees with an HSA, the company can deduct the amount they contribute each year from its reported taxable income. Employees do not have to report as taxable income either their employer contributions or their own contributions. As a result, the number of companies offering health savings accounts to their employees has been growing rapidly, especially among larger companies. The well-known companies that offer these accounts include Wal-Mart, Microsoft, General Motors, and Daimler Chrysler.
Companies are attracted by health savings accounts because of their ballooning spending on the medical care of employees. During the flush times in the past, companies like GM offered health insurance coverage that often had minor or even no deductibles. They discovered much to the damage to their balance sheets that employees can find many frivolous ways to spend money on medical care when they do not bear any of the cost. And since employees have become accustomed to this "entitlement", it is hard to raise co-payments when negotiating with unions. So many companies have started offering HSAs in the few years since the present law took effect.
Individuals who take out health savings accounts on their own are at a disadvantage compared to employees since individuals have to contribute after-tax dollars to their accounts. Other tax advantages are common to both individual health savings accounts and those provided by employers. The amount contributed in any year does not have to be spent during that year on medical care, but can be carried over to future years. This distinguishes HSAs from flexible-spending accounts, where contributions in any year have to be spent in the same year. The balance in a health saving account can be carried over to later years without paying any taxes on it, or on the interest earned on these balances. After age 65, dollars in these accounts can be also spent on non-medical items without penalty, but this spending is treated as income and is subject to income taxes.
The President proposed several highly desirable reforms in the system of health savings accounts. Perhaps most important, individuals setting up an HSA on their own would also be allowed to deduct their annual contributions before reporting their income for tax purposes. Since this eliminates one major advantage of employer-based HSAs over accounts set up by individuals, it is an important step in the right direction of leveling the playing field between individual and employer-based health insurance.
This change, if adopted by Congress, would reduce the number of persons without any type of health insurance. For many of them have jobs at companies that do not offer health plans, and they feel the premiums on insurance that they can take out on their own are too high. The proposed exclusion of contributions to an HSA from taxable income would encourage some of these uncovered individuals to buy insurance and set up an HSA. This would reduce a glaring hole in the American approach to health care.
President Bush also proposed raising the ceiling on how much might be contributed each year to a health saving account by tying the limit to the annual deductible in an health insurance policy. This gives families and individuals even greater incentives to economize on their less essential medical expenditures. After all, the purpose of insurance, health or otherwise, is to protect against very large outlays, not against outlays that are more or less expected year in and year out.
Of great importance, Bush also proposed allowing companies to offer employees portable health savings insurance that they could take with them if they change jobs or retire. A major defect in the employer-based health insurance that the United States has relied on since World War II is that employees may lose their company-based private health coverage when they become unemployed, when they retire, or when they change jobs to one of many companies without health insurance plans.
Studies show that this lack of "portability‚Äù"of health insurance coverage reduces job turnover, and makes the American labor market less flexible and efficient than it could be. Indeed, under the present system, virtually the only way people can be reasonably assured of continued health insurance coverage is by remaining throughout their working career with stable employers that offer health insurance. This ‚Äú"ock-in" effect is undesirable in a dynamic economy where good jobs open up in growing industries, and opportunities in declining industries dry up.
In contrast to employees who continue coverage by remaining with the same employer, individuals with their own health insurance plans sometimes lose coverage after contracting a serious illness, or by making too many claims. For various reasons, it is not possible for individuals to buy long-term health insurance, although what they want is protection against future major medical expenditures since it is uncertain how healthy they will be when they get older.
Bush's proposal to allow employers to offer portable HSAs is an important step toward providing such longer-term coverage for the many men and women who do not continue to work for the same employer, or who want to maintain their health insurance plans after retirement. If the ceiling on how much can be placed in these plans is raised to high enough levels, HSAs could cover all but the medical claims induced by major illnesses. Under present rules, individuals can have a health saving account only if that is combined with a catastrophic health insurance policy.
The President also proposed offering up to $3000 in annual tax credits to help low -income families buy health insurance if they also set up a health savings account. Since tax savings are much less important for lower income families, tax credits seems to be the appropriate way to give poorer families greater incentives to economize on their medical spending. It could also reduce the number on Medicaid since lower income families might prefer to get the tax credit and buy their own health insurance combined with a health savings account.
President Bush has proposed changes in the health care system that initially will reduce tax collections and increase federal spending at a time when the US government is already spending too much and running a sizeable budget deficit. However, by making the health delivery system more efficient, this important set of proposals in the State of the Union address might end up raising tax collections, and certainly would improve the efficiency of the American economy.