A Better Way to Spread the Health -- and the Wealth

President Bush has promoted the use of health savings accounts.
President Bush has promoted the use of health savings accounts. (By Dennis Brack -- Bloomberg News)
By Steven Pearlstein
Wednesday, February 8, 2006

President Bush's health care proposal gets it half right.

Moving the country toward "catastrophic"-type insurance policies is indeed the way to go, a necessary step in getting Americans to be more value-conscious in their consumption of health care services. We know that Americans spend too much on health care and get too few results and that over-insurance is a contributing factor. Having well-informed patients with some "skin in the game," even if only for non-emergency care, is part of the solution.

Where Bush goes off the rails is arguing that health care savings accounts are the best way to move the country toward a consumer-driven health care system based on catastrophic insurance. In truth, they are an expensive, inefficient and regressive way to accomplish that goal.

Let's consider the two issues as they should be -- separately.

Don't give too much credence to those dire warnings that any move away from comprehensive health care coverage will result in widespread death and disease. We know from John Wennberg and his associates at Dartmouth College that as much as half of all health care consumed in some regions is medically unnecessary. And we know from a definitive Rand Corp. study that cost-sharing by patients can eliminate waste without affecting health outcomes -- except, perhaps, for those who are both sick and poor.

Will there be some people who choose not to get care under a "catastrophic" insurance plan because they don't want to pay a share of the cost? Sure. But that "bad" can't be considered in a vacuum. It has to be weighed against the "good" that would come from being able to offer more affordable policies to 45 million uninsured Americans and their employers, at prices 25 percent below today's standard policies. And those harmful effects would also have to be weighed against the good that would come from eliminating tens of billions of dollars each year in unnecessary health care expenditures -- money that could be used to extend care to the uninsured or simply be returned to workers in the form of higher wages.

Of course, any system based on "catastrophic" insurance needs to be carefully designed and regulated. On both counts, the Bush plan needs work.

As Massachusetts Institute of Technology economist Jonathan Gruber argues, the best way to structure a health care policy with a lot of patient cost-sharing is not through high deductibles (having insurance kick in only after the person has spent $2,000 or $5,000 out of his own pocket) but through co-payments (requiring the patient to pay 20 to 30 percent of every medical bill until an annual cap is reached). That reduces the risk of people foregoing needed care while enhancing their incentive to be vigilant about costs.

And to prevent the health insurance market from dividing in two -- a catastrophic insurance market for healthy people offering low premiums, and a full-coverage market for relatively unhealthy people with skyrocketing premiums -- the government would have to step in and manage it. First, it would need to define the components of a standard, catastrophic policy covering preventive care and serious illnesses. This basic catastrophic coverage would have to be priced separately and form the base portion of any health insurance package. Insurers would have to offer it to everyone at the same price, regardless of health or group size or whether it is combined with supplemental coverage.

I should add here that my preference would be to require all employers to offer a catastrophic policy to all employees and pay at least half the premium. But that is a politically charged discussion, one best left for another day.

Now, on to health care savings accounts.

One of the driving principles behind the Bush plan is to eliminate the heavy bias in the tax code in favor of those who get employer-paid health insurance. This amounts to a whopping $175 billion-a-year subsidy for the 170 million Americans with private insurance, tilted heavily to those in the upper half of the income bracket.

Any economist would tell you that the right policy is to eliminate this subsidy, or at least cap it, as the president's own tax revision commission recommended. But instead, the president went in exactly the opposite direction, proposing to "level the playing field" by offering the same or even larger tax breaks to anyone who sets up a health care savings account and purchases high-deductible insurance.

What he should have proposed is as economically elegant as it is politically risky: Replace the deduction for health insurance premiums with a tax credit that would rebate the same $175 billion to policyholders in a more progressive manner. This sliding scale might work out to a $2,500 per-person refundable credit for those in impoverished households and nothing for those in the wealthiest 10 percent of households. As an additional backstop for the poor and sick, there could be additional tax credits for out-of-pocket health care spending, including premiums, in excess of 10 percent of income.

While these ideas may seem radical, it turns out they have broad support among health care economists and policy experts. Some go back decades to a proposal made by Harvard University's conservative economist Martin Feldstein.

Others, such as the refundable tax credit, are included in more modest amounts in the fine print of the Bush program. There are even faint echoes of the "managed competition" of the Clinton health care plan.

Taken together, they represent a sensible approach to health care reform -- a uniquely American strategy for socializing the health insurance market without socializing health care.

Steven Pearlstein will host a web discussion at 11 a.m. today athttp://washingtonpost.com. He can be reached atpearlsteins@washpost.com.

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