Savings Accounts Are a Better Fix for Healthcare

By Mason Rayner
Guest Columnist

How can we fix health care? That’s the debate that has been raging in the halls of Congress and across the country since early in the summer. Almost everyone agrees the current system is a poor one, with costs too high and coverage too scarce. The question that has provoked so much debate is this: how do we cover the uninsured and lower costs?

The left has offered a number of ideas. The progressive wing of the Democratic party favors a “public option”: a government run insurance program which would take on those who can’t afford private insurance. Conservatives charge that the progressives really want a Canadian/Western European style single-payer system, in which the government is the sole facilitator of medical care, and that the public option will inexorably lead to such a system.

They have a point. The public option would address the coverage problem, but it would exacerbate the problem of rapidly accelerating costs.

More moderate Democrats have offered a plan (spearheaded by Sen. Max Baucus, D-Mont.) that would provide subsidies to the uninsured, require insurance companies to cover those with pre-existing conditions, and mandate that everyone buy health insurance. The penalty for not buying insurance, however, is small enough that many of the young people currently not insured could choose to pay it instead of buying insurance.

As a result, this plan would lead to sizeable increases in insurance premiums for everyone: the influx of sick people (those with pre-existing conditions) into the insurance pool would not be offset by entry of enough healthy, young people to spread an insurer’s costs over. Like the public option, the Baucus plan would be enormously expensive for the government.

Republicans have offered a few intriguing proposals, such as expanding health savings accounts (tax free accounts for medical expenditures), which could help lower costs; however, they haven’t come up with a credible way to get the uninsured covered.

Here’s a proposal that could lower costs and cover the uninsured, without increasing the deficit.

The government would provide universal catastrophic coverage: if your medical expenses went over a certain percentage of your income, the government would take over your bills. Concurrently, the current employer-based system of health insurance would be replaced by an individual market: everyone would get a health savings account, the balance of which they would use for checkups, tests, and minor surgeries. People with lower incomes would be provided subsidies for their accounts and catastrophic coverage premiums.

Ideally, this system would gradually replace Medicare and Medicaid, so that Americans of all ages would be guaranteed coverage for serious health events but would use their own dollars for routine and minor coverage.

Why would this proposal work? The main problem with our current system is this: none of us know how much our medical procedures cost. The price system, which works so well in allocating scarce resources in other sectors of the economy, isn’t allowed to function in health care. Since health insurance pays for everything, we have no idea what certain tests and drugs cost. As a result, we don’t shop around for the best prices and we over consume.

The result is persistently escalating prices. Health savings accounts, by allowing individuals to control their health care dollars, would provide incentives for judicious use of those dollars. Greater discretion and wiser choices at the individual level would lead to lower prices for everyone.

Insurance should be there for us when we need it most, but unfortunately this hasn’t always been the case in recent years. We’ve all heard the horror stories about people being forced into bankruptcy because they can’t pay their hospital bills. Universal catastrophic coverage takes care of that problem as well: you would be guaranteed care once your medical spending reached a certain level. At that point, demand for health care is greatly inelastic, so the inefficiencies of abandoning the price mechanism for allocating resources would be of far less importance.

Universal catastrophic coverage complemented by health savings accounts, if implemented, could bend the cost curve for health care downwards, cover the uninsured and avoid expanding the federal deficit. What are we waiting for?