A couple of weeks ago, in a blog entitled “Free Market Healthcare: Fighting Industrialized Corruption,” a follow-up blog was promised that would describe a key, simple healthcare reform that would bring about a rapid expansion of a truly entrepreneurial, free market healthcare system. This system would give us all the benefits that free markets dominated by the entrepreneurial spirit bring in every other economic area – higher quality and lower prices even as those working in such an industry get richer. This comes about as a result of innovation born of competition and free enterprise.
How can healthcare be simply transformed and, almost overnight, be made more like the competitive, free enterprise systems that have made automobiles, computers, and nearly everything we consume on a daily basis both better and less expensive?
The first thing that must be understood is the degree to which the high cost of healthcare is driven by the “third-party payer problem.” This is that patients (healthcare consumers) pay only about a dime of the average dollar spent on healthcare in the United States. The rest is paid by private, usually employer-provided, health insurance, or by some level of government. This doesn’t just make everyone a lazy consumer. It also makes providers less concerned about cost and efficiency. The insurance system also creates a middleman system whereby unproductive paper pushers profit handsomely from others’ healthcare needs.
The private health insurance system is brought about by federal income tax policy, which allows employers to avoid payroll taxes and employees to avoid income and payroll taxes on health insurance benefits. Were employers and employees able to get the same tax benefit from employers providing cash to employees for the employees to spend on health care, the system would radically change as long as unspent cash for healthcare stayed with employees. Employees would have an incentive to hold providers’ feet to the fire when it comes to pricing. There would be few middlemen. And employers would tend to pay in cash instead of benefits. This is what Health Savings Accounts (HSAs) are all about.
An HSA is a savings account wherein deposits from current income are not income-taxed. As long as the money in an HSA is spent on qualifying healthcare expenses, it remains untaxed, along with earned interest on the account. When an HSA owner turns 65 and retires, the money can be spent like an IRA; withdrawals are only income-taxed, however, if the money is not spent on healthcare. Employers can contribute to an employee’s HSA and count the contribution as a business expense. Or, an employee can make the contribution. Either way, contributions are tax free, but up to a maximum $3,650 for an individual and $7,300 for a family. Right now, an individual can only have an HSA in conjunction with a federally defined, employer-provided, high-deductible health insurance plan.
In a word, HSA policy needs to be liberalized. By as much as tripling maximum tax-free HSA contribution limits, and by divorcing HSAs from employer-provided health insurance, our healthcare payment system – the source of our high-cost problems – would be radically transformed for the better. Recent good innovations, like direct primary care and health sharing ministries, are important, but ancillary. They can be easily accommodated within the main reform – HSA liberalization.
With just these three changes to the HSA law – 1) allowing health insurance premiums (or any other health plan) to be paid by individuals from their HSAs, thereby divorcing HSAs from employer-provided high-deductible health plans, 2) allowing for roughly triple the current yearly HSA contribution limits, with employers able to contribute up to the limits, and 3) allowing for charitable HSA contributions by third parties – the current highly distortive health payment system in this country would be truly transformed.
Both employers and employees would have the same tax advantage from HSA contributions that they currently enjoy from employer-paid insurance premiums – avoidance of income and payroll taxes. Employees would likely demand, and employers would likely insist on, cash contributions to HSAs instead of employer-provided health insurance plans. Employees could choose their own insurance plans, including health sharing ministries and direct primary care plans, with instant portability since the plan would be theirs instead of their employers’. Americans would insist on changes in the law so they could opt for inexpensive, true-insurance “hospitalization” plans.
These few relatively simple changes to the federal HSA law would move the health care industry closer to a patient-driven, price-competitive system, putting downward pressure on prices and upward pressure on quality of service. Unfortunately, current HSA yearly contribution limits would not allow someone with a family of two or more to pay the full $12,500 yearly premium of even a Bronze plan as defined by the Obamacare law. Thus, yearly HSA contribution limits should increase considerably, to perhaps as much as $10,000 per individual and $20,000 per family, at least in cases where the employer does not otherwise provide insurance.
Americans would save a good deal more to finance their own health care if the HSA law were so strategically liberalized. Employees/employers should have the option of making much larger HSA contributions and then having health insurance premiums paid from the HSA by the employee.
Under a system where individuals pay for their insurance and direct health expenses from HSAs, providers would have to maximize net value to the directly paying patient. Employers would no longer be saddled with the trouble of being a health insurance go-between, saving on HR costs. We would have a patient-driven, cost-conscious health care system competing on price and quality the same as has made the American economic system the envy of the world in countless other industries.
The third major change suggested above would allow tax-free contributions to individuals’ HSAs by other individuals and charities. Limits on both givers and receivers could apply, but family members should be allowed to contribute to the HSAs of other family members. Parishioners should be able to contribute to other parishioners’ HSAs, and charities should be able to contribute to individual HSAs as well. An HSA should be heritable without tax implications, as long as the funds remain in an HSA, and someone with a large HSA balance should be able to contribute some of that balance to someone else’s HSA, without tax penalty.
With the three major changes listed above, and with employers paying into HSAs instead of buying insurance, there might be some need to transition by having government help populate some individuals’ and families’ HSA accounts. The expense would be made more affordable by the reforms just suggested, given the downward pressure on prices that would result almost overnight.
In HSAs, we have a ready tool waiting to be sharpened, honed, and grown that would change health care in the United States, practically overnight, from a costly system transferring nearly 20 percent of GDP to an already-wealthy health care sector, to a much leaner and more responsive system facing reasonable competitive pressure. Instead of having a very good health care system that puts people into debt and makes other endeavors like rebuilding infrastructure unaffordable, we could have an excellent system that no longer serves as a highly beneficial parasite that, nonetheless, is slowly killing its host.
Byron Schlomach is Director of the 1889 Institute and can be reached at [email protected].
The opinions expressed in this blog are those of the author, and do not necessarily reflect the official position of 1889 Institute.