Health savings accounts, catastrophic coverage, and rising health care costs
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Ross Douthat’s latest column touches on one of the most important questions in the health care reform debate: namely, whether the reforms currently under proposal will do enough to rein in health care costs. Write’s Douthat:
If a Baucus-esque bill passes into law, we should expect a significant decline in the number of Americans without health insurance. But for Americans who have employer-based insurance — still the lion’s share of the working-age population — premiums could climb more swiftly than ever.
That’s exactly what’s happened under Massachusetts’s recent reform, the best state-level parallel to what Congress is attempting. The Baucus bill includes measures that might partially counteract this trend — delivery system reforms, for instance, and an excise tax on the highest-premium plans. But their effects are speculative; the Bay State’s swiftly rising premiums are facts on the ground.
Meanwhile, our long-term fiscal trajectory will remain as unsustainable as ever. Baucus’s legislation is revenue-neutral only under rosy political assumptions, and it adds another entitlement to an already-groaning system.
Douthat goes on to suggest catastrophic coverage for everyone, and cites two different models as examples of how this might be done. The first, proposed by Harvard professor Martin Feldstein, is a system of vouchers that cover every citizen’s health care costs above 15% of their income. Private insurers pay all expenses above an income-based cap.
Specifically, the government would give each individual or family a voucher that would permit taxpayers to buy a policy from a private insurer that would pay all allowable health costs in excess of 15 percent of the family’s income. A typical American family with income of $50,000 would be eligible for a voucher worth about $3,500, the actuarial cost of a policy that would pay all of that family’s health bills in excess of $7,500 a year
The family could give this $3,500 voucher to any insurance company or health maintenance organization, including the provider of the individual’s current employer-based insurance plan. Some families would choose the simple option of paying out of pocket for the care up to that 15 percent threshold. Others would want to reduce the maximum potential out-of-pocket cost to less than 15 percent of income and would pay a premium to the insurance company to expand their coverage. Some families might want to use the voucher to pay for membership in a health maintenance organization. Each option would provide a discipline on demand that would help to limit the rise in health-care costs.
The second model is one touted by economist Brad DeLong. The concept is strikingly similar to Feldstein’s.
Essentially DeLong would have 20% of every taxpayers income siphoned off into a health savings account, 5% of which would be a tax. The remaining 15% would be used to pay for health care costs – not insurance, which would essentially be taken out of the loop entirely. Consumers would buy their health care directly, and anything above the 15% would be paid for by the federal government. At the end of the year, any money left over would be deposited in an IRA or returned to them with their tax return. This provides people with an extra incentive to keep costs low, while allowing them to cover basic health needs without ever having to worry that they’ll go bankrupt from medical bills.
Basically this is single payer + health savings accounts, and it’s also what the Singaporean health care system looks like. Singapore’s health care model is one of the most successful in the world, keeping costs far lower than the United States or Europe.
Douthat is right to point out both of these models. Despite obvious differences, they are both far more likely to rein in rising costs than the legislation currently on the table. Placing health care decisions in the hands of health care consumers is one of the only proven methods of keeping costs down – even more likely than the much-touted public option. Of course, at this point nothing even remotely like this is being considered in either the Senate or the House. It’s too bad Douthat didn’t join the health care fray until this late in the game. It would have been good to have more Republican voices taking this debate seriously.
For now, I’ve got my fingers crossed that Congressional leadership will start taking Ron Wyden seriously and add the Free Choice Act to whatever bill emerges.
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Erik,
Three points:
First, as a Massachusetts resident, I haven’t noticed my premiums rising any faster since the state began providing access to universal care than they did before. Yes, they go up every year. But no, I’ve not seen a shaprer increase. What evidence do you have of that?
Second, I am thankful every day for state law. My younger daughter is a single mother who, because of the state’s law, has health care for herself and her daughter. Both have had some health problems. Their insurance is enormously important.
Third, the notion that coverage is adequate if it kicks in after people have exhausted 15 percent of their income is not realistic and, in my mind, elitist. A family of four bringing home $50,000 a year lives close to the bone and probably has overextended credit.
Where is that family supposed to suddenly come up with $7,500? I suspect in many cases the only choice would be to not pay other bills and declare bankruptcy or default on a mortgage, if the family has one. In other words, this is a prescription for more economic pain and disaster, not fixing the system. It would be cheaper, yes. But it wouldn’t solve the problem.
Let’s get universal health care in place, gauge its cost impact and fix it. This country has frittered opportunities to enable affordable universal care for decades and the impact is burdening us all.
Jerry –
Thanks for commenting! Actually, for Americans 15% might be a little high given the other factors that differentiate us from the Singaporeans. While they have an elaborate network of state-subsidized hospitals competing with private hospitals, as well as a number of other programs to keep medical costs low, we certainly do not. Indeed, a more progressive withholding scheme might work better, with low-income workers putting aside only 10% of their wages, and perhaps a second tier at 12% and so forth.
I would note also that in a given year, most people would not spend their entire account on health expenses. Some years maybe, but not most. Most years that money would go right back into your bank account or into an IRA, etc. This could be very beneficial to helping Americans re-learn the savings ethic.
Personally, I receive health insurance from my employer. That amounts to probably about the national average premium of $13,000. So if I were to opt for this program instead, and received a raise of $13,000 to compensate, I think I’d be fine with having to pay for my health costs directly, especially knowing that over that cap I’d be taken care of and would never have to face bankruptcy for massive medical bills.
In any case, it’s what DeLong calls a totally unlikely utopian idea so I’m not holding my breath.
Thanks for stopping by!
In response to another comment. See in context »It’s a thoughtful piece (which I should have said the first time!). Thanks for the further elaboration. I’ve learned something.
Couple of things –
1. What these ideas boil down to are either a government plan with an effective 15% to 20% deductible based on income rather than expenses or a private plan with the same deductible.
Where these run into problems are in determining what exactly in ‘income’. If you are employed by a large company, not a problem. If you are a small business or an individual seeking coverage, pinning down income can be very tricky indeed. Top line gross income? Not really fair because it doesn’t take into consideration many deductions that could have a huge impact on what actual earnings are. Net income? Maybe, but very easy to keep low. Remember, some of the wealthiest people pay the least in taxes. This has always been the problem with trying to apportion deductibles/ contributions, etc. on an income basis. Jerry’s point is also right. The percentage has different impacts at different impact levels. This is why this country has never gone to a progressive tax system where everyone pays the same percentage.
2. You are, indeed, correct about the Singapore health care system – but it is a bit misleading. Singapore employees a huge percentage of its population in government jobs – so much so that this is driving the various economic development programs by the government to bring in business to employee people so they won’t all go into government service. Also- Singapore is one of the most financially comfortable nations in the world — due, in no small part, that it is more of a city than a country. Nobody has ever been able to use Singapore as a model for other nations given their highly unusual circumstances.
Rick – very true. Indeed, the Singapore model is best used as a guidepost, not a model to fashion after exactly. It just wouldn’t work (hence DeLong and Yglesias calling it Utopian, unrealistic, ideal, etc.) It’s a good idea to implement parts of the idea, however. I imagine placing more direct costs, more direct and transparent billing, and any other of a host of reforms that benefit consumers on the table would be a very good thing both for consumers and over-all rising costs.
Beyond this, the cost at 15% would not be so much higher than what people already pay when you add up premiums, deductibles, co-pays, and out-of-pocket caps, not to mention lost wages. Something to think about.
To your point on determining income levels, that is very true and a very good point and one reason, to be sure, that a lot would be lost in translation between the Singapore model (or DeLong model) and anything like it implemented in the States.
Thanks!
In response to another comment. See in context »[...] why I still like the DeLong model better. Not only does it cost people less (15% flat rate) it also rewards people for not spending [...]