Beware Bush's health savings accounts
By Sebastian Mallaby
The president likes to be consistent. Loves Laura; sticks to Laura. Kicks drink; keeps kicking it. First inaugural address: blue tie, white shirt. Second inaugural address: blue tie, white shirt. Weight in 2001: 190 pounds. Weight in 2005: 192 pounds. Hair length: same. Mood: same. No Clintonian gyrations.
Same deal when it comes to politics. Fights terrorists; keeps fighting them. Cuts taxes; keeps cutting them. Trusted Karl Rove in Texas; still trusts him. Simple man. Straightforward man. How many policy moods and political gurus did Bill Clinton go through?
Same deal with the "ownership society." First used the term in 2002. Went big with it at the 2004 Republican convention. Pretty much taped the slogan to his head in 2005 when he campaigned for personal Social Security accounts nationwide. You think George Bush would let go of this stuff just because Social Security reform failed? Fuhgedaboutit.
The ownership society is back, though it's got a new label. Bush may not be pushing individual Social Security accounts these days. But he is pushing things called health savings accounts, which turn out to be similar.
Health savings accounts are ostensibly supposed to fix the health system. Right now, tax rules subsidize company-provided health insurance, but they're less generous toward out-of-pocket medical payments; as a result, company health plans pay most bills, and patients have no incentive to shop around for the best bargain. Health savings accounts end this tax bias. Anyone who buys an insurance policy with a deductible of $1,050 or more can open an account and save $5,250 a year toward out-of-pocket health costs, tax-free. This will shift control of medical spending into the hands of consumers, who will discipline overpriced hospitals and clinics.
Or so goes the theory.
In practice, probably less than half of all health spending outside Medicaid and Medicare would be affected by the new consumer-driven discipline. Many hospital stays cost more than any deductible, so consumers would have no incentive to bargain; emergency-room patients aren't in a fit state to negotiate prices with their doctors. But consider an even more basic question: Is the ostensible reason for health savings accounts the real one?
If the administration's goal were merely to remove the tax bias against out-of-pocket health payments, it could simply make these tax-deductible. No need for health savings accounts to accomplish that — just tell people to count out-of-pocket payments against taxable income.
Even if the administration were determined to shelter out-of-pocket payments using health savings accounts, why make them so generous? It proposes both a tax deduction and a tax credit when money goes into the accounts; savings would accumulate tax-free and could be withdrawn tax-free also.
As Jason Furman points out in a paper for the Center on Budget and Policy Priorities, no other savings vehicle enjoys so many privileges. And then there's the size of these accounts. If the aim is to discipline health spending below the deductible, why subsidize savings up to $5,250 a year — five times more than the deductible?
In sum, health savings accounts are not just about ending the tax bias in favor of traditional company health plans. The administration is proposing a new kind of 401(k), and using it as an inducement to quit low-deductible insurance.
Rich people, who gain most from the tax breaks on saving, will be first to sign on; healthy people, who subsidize sicker people in company health plans, will be right behind them. Their exit may force traditional health plans into a death spiral. The loss of the subsidy from healthy workers will drive premiums up, which will drive more healthy people into health savings accounts, which will drive premiums up further.
The State of the Union address (blue tie, white shirt) contained barely a mention of health savings accounts, but don't let that fool you. Because these accounts are being pushed modestly, with no grand Social Security-style talk of remaking the social contract, there's a chance that they'll be seen as just one of various bewildering tax tweaks and slip quietly through Congress. But the proposal cries out for a debate very much like last year's — a debate about personal saving vs. collective insurance.
A rerun of last year's debate would show that health savings accounts are harder to defend than personal retirement ones. They are shockingly regressive: Furman's study shows how a poor family might get a subsidy of $150 while a rich one might get more than $4,000.
They have not just a transition cost but a real cost: The tax breaks could widen the deficit by at least $132 billion over 10 years and a lot more after that. And health savings accounts pose a more formidable threat to traditional corporate health plans than personal accounts posed to Social Security. Market forces are already dislodging company health plans; an extra shove could cause an avalanche.
The limited consumer discipline that would come from health savings accounts could not justify these disadvantages. But when you talk to administration officials, they express remarkably few doubts. They believed in the ownership society last year; they still believe in it this year. They believe in individual choice; they distrust collective programs. They don't worry too much about the risks to the budget. Or to distributional justice. Or to existing safety nets.
Straightforward administration. Simple administration. The Clinton team would never have proposed such a clunker of a policy.
Sebastian Mallaby is a member of The Washington Post's editorial page staff.