February 21, 2006

Healthcare Pt 3: Bush's Health Savings Accounts

Filed under: Random Stuff — Bob Gifford @ 6:02 pm

Let’s take a look at President Bush’s proposals for improving the U.S. healthcare system. In his 2006 State of the Union address, Bush said regarding healthcare:

Keeping America competitive requires affordable health care. (Applause.) Our government has a responsibility to provide health care for the poor and the elderly, and we are meeting that responsibility. (Applause.) For all Americans — for all Americans, we must confront the rising cost of care, strengthen the doctor-patient relationship, and help people afford the insurance coverage they need. (Applause.)

We will make wider use of electronic records and other health information technology, to help control costs and reduce dangerous medical errors. We will strengthen health savings accounts — making sure individuals and small business employees can buy insurance with the same advantages that people working for big businesses now get. (Applause.) We will do more to make this coverage portable, so workers can switch jobs without having to worry about losing their health insurance. (Applause.) And because lawsuits are driving many good doctors out of practice — leaving women in nearly 1,500 American counties without a single OB/GYN — I ask the Congress to pass medical liability reform this year. (Applause.)

In statements since the SotU, Bush has made it clear that health savings accounts (HSAs) are the centerpiece of his healthcare agenda. So what are they and what would they do?

Bush mentions controlling rising healthcare costs as one of his objectives for HSAs. As Christians taking Jesus’s commandment to care for the sick seriously, our top concern is the large number of uninsured. But if healthcare costs in the U.S. dropped in half (closer to the level of the rest of the developed world), there would be far fewer Americans without healthcare insurance. So controlling costs is an important goal for us, as it is for President Bush.

There are two ways to reduce healthcare costs: from the demand side or from the supply side. The latter is the approach taken by HMOs and nationalized healthcare in the rest of the world — controlling the supply of healthcare available to patients, a.k.a. rationing. The downside of this approach is that the patient loses control over the level of healthcare they receive (in the U.K. the best way to get the care you want is to have a relative in the National Health Service).

How much better, then, to have patients voluntarily reduce their demand for healthcare! This requires a free-market approach where healthcare consumers themselves decide whether the cost of a treatment is really worth the benefit. With typical healthcare insurance, the patient only pays 10 to 20 cents on the dollar, so the patient wants medical care even if the benefit is far less than the cost. The only way for consumers to forgo this unnecessary healthcare is for them to incur the full cost of their routine healthcare. And so we have HSAs — patients are uninsured for the first several thousand dollars of healthcare a year, after which a high-deductible insurance policy kicks in. This large deductible is paid out of the patient’s health savings account, which is funded by the patient and employer tax-free (so it isn’t strictly a free-market plan after all.)

There is a certain logic to the plan. Much of Americans’ health insurance isn’t insurance at all, but pre-paid healthcare. Insurance is designed to remove risk. In any given year, my life, disability, home and auto insurance companies don’t pay me a dime. And I like it that way. Those policies are there to protect my family and me in case of an extremely unlikely and catastrophic event. But not so with my health insurance. My health insurance pays claims on my behalf every month. Every year I know my family will need regular office visits for colds, allergies, the flu, ear aches and asthma. I can expect one or two emergency room visits for broken bones, stitches, high fevers, etc. All my insurance company does is take money from my employer on my behalf and send it to the doctors. So why not get rid of the middleman, put that money into an HSA and let me pay the doctor directly? Then I’ll be more careful about when I really need to visit the doctor or ER and what prescriptions I really need. And I’ll still have the high-deductible health insurance to take care of the risk that something really bad will happen.

One argument against HSAs is that patients are not qualified to make decisions regarding what healthcare is worth it and what is not. There is a huge information asymmetry — doctors know a lot about the various treatments and their cost effectiveness, and I don’t. But such information asymmetries occur all the time, and we manage just fine. I am not qualified to evaluate whether my car really needs a new alternator or just a new battery. However, I have developed a level of trust with the owner of my auto shop. When I take my car in for repairs, he explains the options, tells me what they will cost, and gives me his recommendation. I’ve learned that he doesn’t recommend repair work that doesn’t need to be done. I trust my auto shop, which is why I keep going back. But the fact that I’m paying for the repairs out of my own pocket means that we have a cost/benefit conversation before deciding on what he will do to my car. That’s not a bad model for healthcare with HSAs.

Another fair argument against HSAs is that patients will forgo preventive care such as routine check-ups, blood tests, mammograms, etc., since they would have to pay for it out of their own pocket via their HSA. This could lead to far more expensive care, as well as grave consequences for the patient, if conditions such as a cancer or high blood pressure aren’t detected early. For this reason, the accompanying high-deductible health insurance is supposed to cover all preventive care with no deductible. Problem solved.

But, you argue, HSAs don’t do anything for the uninsured working poor! So the Bush proposal includes a $3,000 tax credit for those making less than $25,000 that would go to a combination of an HSA and high-deductible health insurance premiums. (The unemployed would be left with Medicaid.) But small businesses can’t afford health insurance! So Bush proposes association health plans (AHPs) to pool purchasing power. What about individuals without employer-sponsored healthcare? Tax breaks for individuals contributing to HSAs.

If you’re getting the idea that the Bush proposal has been carefully designed to cover all the bases, you’re right. It has been well-architected to be as comprehensive as possible so as to counter the various objections from the left.

But I don’t believe the Bush administration is being entirely upfront about their intentions (imagine that!). Many on the progressive side see this as a small incremental proposal. For example, Kevin Drum writes:

These are incremental changes, and that’s the main avenue of attack against them. But that only works if our proposals aren’t incremental. If it’s just their small wonky proposals against our small wonky proposals, everyone will fall asleep.

But I don’t believe that’s true. Let’s run the scenario out assuming Bush gets exactly what he wants. Who will sign up for HSAs? For me, the sole breadwinner for a family of four with good employer-sponsored health insurance, HSAs are no better, and probably worse than what I have now. I won’t sign up. But what about a healthy 20-something? HSAs are golden! So the young healthy employees leave my employer-sponsored plan, and guess what happens next year — premiums go up, a lot. As premiums go up, more healthy employees decide to opt for HSAs, until the employer-sponsored health insurance becomes horribly expensive. And next thing you know, I sign up for an HSA, and eventually the 60-something diabetic signs up for an HSA, and employer-sponsored health insurance is no more.

The death of our current employer-sponsored health insurance system isn’t necessarily a bad thing, since it’s a fairly illogical accident of history. The important issue is what will replace it. With HSAs, Bush is aiming to replace our current system with an HSA/high-deductible insurance healthcare system. This is not a small, incremental program — this is the shape of the healthcare system of the future.

So the decision we face today regarding the expansion of HSAs is in reality a decision about what will replace employer-sponsored health insurance. It’s a choice between replacing it with a private savings account approach on the one hand versus the liberal alternative on the other. But what is the liberal alternative? Before we can decide whether HSAs are a good thing or a bad thing, we have to take a look at the alternatives.

Next: the single-payer healthcare model.

Update: After trading emails with Kevin Drum, it seems that I’ve misrepresented his views on the topic of HSAs. While he sees the latest Bush proposal as incremental in the evolution of HSAs, he views HSAs themselves as I do. To quote from his email: “I’ve written about HSAs at greater length before, and pretty much agree that their long run consequences are ruinous. In this particular post, however, I think I was just referring to the politics of the situation, and suggesting that Bush proposals were incremental within the scope of current HSA regulations.”.

1 Comment

  1. […] So far in this series of posts I have examined the biblical foundation for healthcare, the flaws in the current U.S. system, Bush’s proposals for healthcare, and some of the progressive alternatives for providing universal healthcare. All of this has been leading to the key question: as progressive Christians, what U.S. healthcare policies are we to advocate? […]

    Pingback by I am a Christian Too » Healthcare Pt 5: What’s the Solution? — March 12, 2006 @ 7:59 pm

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