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.