To Your Health

Published In: The Wall Street Journal

Despite all the controversy about the new Medicare prescription-drug benefit, the law signed by the president this month contains a gem of an idea that should command support across the political spectrum. Beginning Jan. 1, 250 million nonelderly Americans will acquire the right to have a tax-free Health Savings Account.

Why are HSAs so important? Because their creation will help correct a major distortion in the tax law, one that has shaped our entire health-care system in a very perverse way.

Under current law, every dollar an employer pays in employee health insurance premiums avoids income and payroll taxes. For a middle-income employee, this generous tax subsidy means that government is effectively paying for almost half the cost of the health insurance. On the other hand, suppose the employer tries to put that same dollar in a savings account, from which an employee pays medical expenses directly. In this case, government will fully tax the dollar, taking almost half of it before it lands in the account.

In this way, our tax law lavishly subsidizes third-party insurance and severely penalizes individual self-insurance. It encourages us to use third-party bureaucracies to pay for minor discretionary expenses, even though it would make much more sense for patients to manage those expenses on their own. The new legislation will change all of that. It will give deposits to HSAs the same tax advantages now granted only to health-insurance premiums. It will allow individual self-insurance and third-party insurance to compete against each other on a level playing field by allowing individuals to control some of their own health-care dollars without a tax penalty. And, for the first time, it will allow a rational approach to the difficult social problem of how to allocate scarce dollars between health care and other goods and services.

Advances in medical science have reached a point where we can probably spend the entire GNP on health care — in useful ways! The Cooper Clinic in Dallas now offers a super-duper checkup (with a full body scan) for about $1,500 or more. If everyone in America took advantage of this opportunity, we would increase our nation's annual health-care bill by a third. There are more than 900 diagnostic tests that can be done on blood alone, and one doesn't need too much imagination to justify, say, $5,000 worth of tests each year. But if everyone did that we would double the nation's health-care bill.

So how do we decide which procedures are worthwhile and which are not? There are basically only three ways. In other developed countries, the decisions are made either directly or indirectly by government. But government-imposed rationing is arbitrary, inefficient, unfair and probably unacceptable to most Americans. The second method is to restrain spending using the techniques of managed care. But during the '90s voters expressed discomfort with having employers and large insurers ration their health care. The third option is to allow individuals to make their own choices between health care and other uses of money, through a vehicle such as HSAs.

The concept of HSAs is not conservative or liberal. It's an empowerment idea. It should appeal to liberals who want an alternative to HMO rationing. It should appeal to conservatives who want an alternative to government rationing. It should appeal to every individual who suspects that impersonal bureaucracies care less about us than we care about ourselves.

Since 1996, a pilot program has made Medical Savings Accounts available to small businesses and the self-employed. But because there have been so many restrictions, only about 70,000 people have these accounts. A Treasury ruling a year and a half ago allowed large companies to establish Health Reimbursement Arrangements, and at last count, 1.5 million employees had enrolled. But these accounts are also unreasonably restricted.

HSAs will be the most flexible, consumer-friendly accounts yet devised. They will allow individuals and their employers to make deposits each year equal to their health insurance deductible. The funds will grow tax free and people may use them to pay expenses not covered by insurance, insurance premiums between jobs, and health expenses during the years of retirement.

The new law is not perfect, and one hopes there will be opportunities for further refinement. But the new age of consumer-driven health care will be a vast improvement over what we have today.