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Why is the President Determined to Destroy the Private Health Insurance System?

(slightly updated from last night)

I have to confess, I didn't watch all of the State of the Union address. Reading Madlenka's Dog to my daughter for the 40th time seemed like a better use of my time, and certainly easier on the ol' ticker.

So I just heard pieces here and there. But this jumped out: "tonight I propose that individuals who buy catastrophic health care coverage, as part of our new health savings accounts, be allowed to deduct 100 percent of the premiums from their taxes."

The health section of the speech was eyes-glaze-over stuff. And judging from Frank Luntz's focus group on MSNBC, voters were perfectly happy that he was talking about health costs at all. But what he actually said is hugely important.

It makes you wonder if Bush has a secret plan to bring about socialist revolution. What would you do if you wanted to create a public uprising that would demand single-payer health care? First, you would destroy the private health insurance system. And the way to do that is with exactly the policy Bush just proposed: make catastrophic insurance fully tax-deductible, and couple it with health savings accounts.

Any system of insurance depends on a balance of risk. In comprehensive health insurance, that means balancing healthy people who pay more into the system than they cost, against people who need the insurance more, and, in some years, cost more than they put in. And in the United States today, health and wealth are remarkably correlated, so you have to keep healthy, wealthy and young people in the system. That's one reason why requiring individuals to have health insurance is such a good idea, and would lower costs for everyone.

Catastrophic care insurance is a completely separate system. In exchange for a very high deductible, sometimes as high as $5,000, you pay a fraction of the premium in a comprehensive plan. In effect, you agree to pay out of pocket for all the normal, reasonable costs -- check-ups, outpatient procedures, minor emergencies -- that are the bread and butter of standard health care, but if you're hospitalized or have some major problem, insurance will kick in. As long as you're well off, healthy and relatively young, don't have and aren't planning to have small children, and don't spend much on ordinary doctor stuff, a catastrophic plan could be a very sweet deal. Health savings accounts, as passed in the Medicare bill, make it an even better deal. If I had a catastrophic plan, whatever costs I did incur under the deductible, I would pay for with pre-tax money from the account, which in a high tax bracket is the equivalent of a 35% discount. Plus, investment earnings in the account accumulate tax-free, so if I had doubled my money in the account, as long as I spent the money on health care, that would also be, in effect, free money. I could even spend it on plastic surgery. (Get that chin implant so I look more presidential.) Now this is starting to look like an irresistible deal.

And then, if on top of that, the premium on the catastrophic plan became 100% tax-deductible, the combination would be an even better deal. Now, if I'm in the 35% bracket, I'm paying that much less for my premium, plus anything I pay under the deductible is coming from tax-exempt funds. I'd have to be crazy not to go for this deal, especially because premiums for ordinary self-employed health insurance are not fully tax-deductible, and out-of-pocket costs are not tax-deductible unless you itemize and the costs exceed 4.5% of income.

If I were an employer, I'd figure out a way to start offering this deal to my higher-paid employees. It could be as simple as giving them $5,000 cash instead of health insurance. I'd get my costs under control, and they'd get a chunk of money tax-free to put straight into their health savings account and pay the premiums on the catastrophic plan.

But what if I'm not in the 35% bracket? If I'm in the 10% bracket, then both the deductibility of the premium and the health savings account are worth a lot less to me. But much, much more important: I can't deal with the risk of a catastrophic plan. If I'm making $25,000 a year, I can't handle the risk of $5,000 in health care costs. That would be a disaster. And I probably can't put that much away in a health savings account. The catastrophic plan combined with a health savings account simply isn't an option for poor and middle-class people, even if healthy.

Health savings accounts, combined with deductible premiums, are really just a giant bribe to better-off people to OPT OUT of the comprehensive health insurance system. What the administration is doing, first with health savings accounts, which are now the law, and then with this proposal, is to confer enormous tax advantages on a type of insurance that is already advantageous, but only for the relatively wealthy. But the consequence of it would be that, as young and healthy people withdraw from the standard, low-deductible insurance market, premiums in that market would go through the roof, insurers would desperately try to find ways to deny coverage to higher-risk people, and the whole delicate balance would surely collapse.

See this analysis from the Center on Budget and Policy Priorities last year on the risks to the insurance system from HSAs alone. The report cites other studies showing that the HSAs as passed in the Medicare bill could pull so many healthy people over to catastrophic that it would cause premiums for those left behind to double. And that's before adding the benefit of full tax deductibility.

Do Bush's advisors understand any of this? Are they just so profoundly opposed to any kind of communal pooling of risk, even outside of government, that they don't care? Is it just another way to funnel wealth to the rich, and to the politically connected insurance company that first offered HSAs, Golden Rule? Are they entirely indifferent to consequences that will occur a few years down the road? I suppose the answer is, All of the above, but the cause doesn't really matter. This is just something that must be stopped, now. I'm guessing that if I'd listened to more of the speech, I might find even more things like this.

Posted by Mark Schmitt on January 20, 2004 | Permalink

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Comments

But what if I'm not in the 35% bracket? If I'm in the 10% bracket, then both the deductibility of the premium and the health savings account are worth a lot less to me. But much, much more important: I can't deal with the risk of a catastrophic plan. If I'm making $25,000 a year, I can't handle the risk of $5,000 in health care costs. That would be a disaster. And I probably can't put that much away in a health savings account. The catastrophic plan combined with a health savings account simply isn't an option for poor and middle-class people, even if healthy.

Aside from the fact that MSAs allow money to be carried over from one year to the next, and so a healthyish poor person probably can accumulate $5000 eventually, people can and do run that sort of risk all the time. Most people's cars are not insured for their replacement value, if they're insured at all (most people have liability insurance which covers damage to others, but far fewer carry comprehensive and collision which cover damage to their own; such policies usually only cover low-blue-book, which is usually lower than the balance on the loan). Secondly, a moderately prudent poor person likely has several thousand dollars of available credit - while paying off a credit-card bill of $5000 really sucks on a $25000 income, it's possible. Thirdly, many low-income people when faced with catastrophic health-care costs will simply declare bankruptcy. Someone hit with a $5000 health-care bill and no other resources or credit might still be likely to declare bankruptcy, but $5000 is more manageable than a typical high-end hospital bill resulting from an auto accident or major illness.

So while the MSA and high-deductible policy isn't as good an option for low-income people, it is an option, and a better one than many low-income people have at present.

Posted by: Anthony | Jan 21, 2004 7:07:15 PM

There is an underlying assumption.

If young and healthy people agree to cover my major medical bills, then I sure as heck want them in my HMO.

Isn't that really the case here? Why lie about it?

Italy has solved this problem. They psychologically sterilize their children so the young people have no other desire in life except pay the medical bills of seniors.

Of course the Italian system has one slight flaw, as we all know, there will no new Italians in Italy in 50 years.

Here is a better idea for the short sided. Set your goal to produce families with seniors, parents, and 2.1 children per couple. Once your insurance actuaries are charged with making continuity their first public health concern, then you can play your regulation games.

After all, if the system is out of balance, then you kill off the seniors and the young simultaneously.

Posted by: Matt Young | Jan 22, 2004 1:19:51 AM

It seems that Bush is so wedded to the central dogma of Republicanism, tax credits and deductions as the answer to all problems, that he is blind to the consequences. This sort of thing encourages my belief that he is so out of touch with people who do not have high tax brackets that he will share the fate of his Father.

Posted by: Bob H | Jan 22, 2004 1:29:26 PM

The one semi-defensible rationale for HSAs is the notion that insured users of healthcare are too insulated from actual costs to apply any downward pressure on health care costs. By encouraging people (through tax subsidies) to pay for the bulk of medical services themselves, you create a class of consumers that engages in self-rationing and exhibits some price sensitivity. The WSJ carried an op-ed making this argument some months ago (don't remember the author), using the falling costs for LASIK surgery as an example of market discipline. While I think the LASIK example is deeply flawed for many reasons, there is a trace of merit in the argument. Ultimately, there needs to be some mechanism for holding down costs, especially once you have universal insurance (an objective I favor), to keep health costs from approaching 100% of GDP. You can hold down costs through command and control (price controls and rationing), or you can create more atomistic market incentives. Since our society seems to have little appetite for the former, it's worth thinking about ways to do the latter.

Posted by: JohnL | Jan 23, 2004 8:51:55 AM

"But much, much more important: I can't deal with the risk of a catastrophic plan. If I'm making $25,000 a year, I can't handle the risk of $5,000 in health care costs."

No, I think it's more accurate to say that you can't handle the idea of OTHERS deciding to take on this risk. This is a very, very big and very telling difference. When I was a freelancer living in NYC in the early 90s and making barely more than 25k, I was DYING to be able to take on the risks of a $5,000 or $10,000 deductable catastrophic plan -- not to mention one with a MSA -- as opposed to paying $3,000 in (then after-tax) income for a normal, individually-purchased comprehensive. But no, I couldn't: in New York State offering such a plan was strictly illegal.

So what happened?

1. I sold the story to a national magazine, the editors of which, being normal Americans (i.e. not NYC NGO-industrial-complex paleolibs) were astounded at how much the law could be an ass;

2. I dropped, in a huff, my insanely overpriced, "mandatory" individual coverage;

3. I (for this and other reasons, some related) left New York; and

4. I stopped be a reliable Democratic voter.

And I've never felt better.



Posted by: Erik D | Jan 27, 2004 10:56:10 AM

To Erik D:

That's absolutely not my point. I have no problem at all with the existence of catastrophic policies w/in our current system. I think it is a reasonable option for young, childless, relatively healthy and well-off people, within the current system.

What I object to is giving those policies any additional tax preferences over other kinds of health insurance, which will tend to push more and more people toward catastrophic, raising costs enormously for everyone else for whom catastrophic is NOT an option.

I used the example of a person making $25,000. Sure, some single people making $25,000 can take the risk of a $5,000 health disaster, but most cannot, and certainly those with children cannot. And further, the additional tax preference Bush has proposed will be of no value to the $25,000 person.

Yes, in an ideal world, I would like to see a standard, mandatory basic health insurance plan for absolutely everyone, with some options, and if that were the case, it would cost a lot less than $3,000, especially with real tax credits to buy it. In the current world, I think catastrophic should be an option, but not given any additional preference to encourage people to opt out.

And when Bush completely destroys the health insurance system, will you stop voting Republican? Or move to a country with socialized medicine?

Posted by: Mark Schmitt | Jan 27, 2004 1:27:47 PM

It's a deal: you get Denis Rivera to pay Joe Bruno to legalize catastropic coverage (and otherwise get ride of any other prohibitions and/or tax disincentives) and I pay Frist to get Bush to drop the tax preferences, which frankly I have little time for anyway.

Otherwise:

1. Isn't the quickest route to universal coverage via a Bush-inspired, cherry-picking death-spiral? Don't tell me you are such a Menshevik you haven't considered the reverse "starve the beast" possibilities...

2. Any standard, mandatory plan likely to be approved, even if shorn of experimental treatment and mental health, will cost a lot more than $3,000 per head, especially if Denis Rivera has anything to do with it -- and even if you actually meant "priced at", rather than "cost".

3. I haven't yet started voting Republican, at least nationally.

4. I already did move to a country with socialized medicine!

Posted by: Erik D | Jan 27, 2004 8:04:42 PM

I strongly suspect that, long-term, the Bush administration foresees catastrophic insurance (purchased by individuals) as the best route to the inevitable mandating of universal coverage. When you think about it, some of those making $25k will be healthy. Their premiums wouldn't be any more than those of a wealthy person in good health. Long-term, it will likely be cheaper for the government to buy or subsidize catastrophic coverage for poor people than it will be to buy them comprehensive coverage as is done in other rich democracies. And a law requiring individuals (as opposed to firms) to purchase insurance is a lot more business-friendly than our current system, which is increasingly becoming financially untenable for all but the wealthiest firms.

The tax code drawbacks of Bush's proposals could, of course, be addressed by changes in the tax code (allowing persons of low/moderate income to deduct greater than 100% of the cost of their premiums, for instance).

As someone noted upthread, the HSA component at least gives individuals some insentive to engage in anti-(medical) inflationary, rational consumer behavior. When you're playing with Blue Cross's money, that incentive is lacking. Indeed, your only goal is to buy the best treatment available; and with the dearth of available medical data that characterizes our system, consumers often use "most expensive and agressive" as a proxy for "best".

So, yes, the Bush administration is quite likely laying the groundwork for the "destruction" of the exhorbitantly wasteful and expensive (especally to firms) system of employer-based private health insurance. It's about time.

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