As noted in the last issue of UpDate, the tax-advantaged medical savings accounts (MSAs) proposed in this year's round of congressional health care legislation would have a mixed impact at best on health care spending levels. However, until recently, they have provided a valuable political service.
MSA proposals threatened misguided efforts to impose insurance "reforms" like community rating, guaranteed issue, and portability. (At press time, a last-minute congressional deal appears to have surrendered that tactical card as well). As long as some form of broad-based MSA/catastrophic insurance option remains available, efforts to ignore individual health risk differences in the service of "fairness" will run aground. Better risks will resist imposition of involuntary cross-subsidies.
MSA plans also remain at cross purposes to more expansive mandated health insurance benefits, because the latter complicate the availability of high-deductible coverage. Not surprisingly, the proponents of incremental insurance reform at the federal level this year have resisted tenaciously any further legislative expansion of MSA options.
Although MSA proposals at least temporarily derailed the incremental insurance reform express train that roared down the greased tracks of Congress earlier this year, it did not appear to be due to clever legislative strategy. Indeed, many MSA advocates have either minimized the dangers of such incremental measures or suggested shallow and mistaken shortcuts around them.
The first response essentially assumed that as long as tax-advantaged MSAs are instituted, any additional health-insurance-related nonsense attached to the rest of the health care system would matter little. It overlooked how difficult it would be to outrun inherent policy contradictions premised on surrender of fundamental market principles.
The second response hid from the "adverse selection" bogeyman by retreating to the illusory cover of employer paternalism. Rather than leave individuals free to find the best price quotes and contractual configurations for the risk-based, market cost of their insurance coverage, even some of the foremost proponents of "Patient Power" preferred to rely on omniscient employers to control risk selection by unilaterally limiting health insurance choices and restoring cross-subsidies within employer-formed groups. When an estimated 83 percent of companies offer their employees only one health insurance policy, and part of the higher cost of non-employer-paid insurance options is due to tax policy preferences and regulatory limits on more widespread voluntary risk pooling, however, that should be termed a problem, not a solution.
The best market-based ways to minimize artificially induced risk selection are to eliminate the public policy constraints on risk classification and risk-based pricing that creates it, and to restore tax neutrality for the financing of all health insurance purchases. Vigorous deregulation of health insurance and greater encouragement of voluntary health risk pooling, both within and outside the workplace, would facilitate more creative long-term protections for consumers seeking to minimize exposure to health risk redefinition in insurance markets. The adverse selection "problem" must be challenged directly and addressed convincingly by market-based alternatives. It poses even greater political and economic obstacles for future efforts to reform Medicare via defined contribution/individual choice alternatives.
Thus, despite initial success in gaining a beachhead of political support, MSA-based proposals require further refinement before they can offer the prospect of true market-oriented health care reform. In order to provide appropriate cost-conscious incentives and restore the economizing trade-off between a dollar of health care spending and a dollar used for other purposes, funds deposited in MSAs should be treated on a post-tax basis, with only their interest/investment earnings ("inside buildup") considered tax exempt. No withdrawal penalties should then be imposed, regardless of how such funds were spent or how long they were saved (a minimum balance requirement, however, might be desirable). Accumulated funds in MSAs should be available for payment of all forms of health insur-ance premiums, not just restricted to payments for COBRA premiums, or for interim coverage while receiving unemployment compensation, as provided under the current House legislation.
The proposal of Mark Pauly and John Goodman to facilitate voluntary substitution of a flat tax credit in place of the graduated-rate tax exclusion for employer-paid group health insurance coverage offers another thoughtful first step in unraveling current tax distortions of health care spending. Perhaps the greatest potential for market-based health care reform remains in enactment of broad-based tax reform that focuses on a single tax rate and elimination of double taxation of saving.
Many problems of health care policy remain outside the limited therapeutic powers of MSAs. They will have to be addressed through such policy options as legal reform of health insurance contract enforcement, encouragement of voluntary purchasing pools, targeted income-based subsidies, preemption or repeal of state mandated benefit laws, disclosure-based reform of managed care abuses, and broader deregulation of health care markets. Moreover, many of the factors that determine one's personal health are outside the control of either health insurance coverage levels or more intensive application of discretionary medical care.
The latest compromise regarding tax-advantaged MSAs would not only restrict their initial application to the self-employed and small employer groups with fewer than 50 workers, but set a maximum cap of 750,000 participants in a four-year "experiment." Given the current insurance coverage problems and health care policy distortions in these markets, wider availability of MSAs for such insurance purchasers should offer significant savings opportunities and improved health benefits. Unfortunately, the congressional compromise not only places too many artificial barriers to an honest market test of MSA alternatives, but it facilitates adoption of accompanying health care legislation that is unwise and harmful. Republican "dealmakers" succeeded in adding self-inflicted injury to insult.
More widespread enactment of tax advantages for MSA plans would be a mixed bag. It would help preserve more autonomy and personal control for individual consumers and frustrate the centralizing imperatives of health care socialists. However, such MSA options would be more likely to increase overall health care spending than reduce it. That well may be the long-term preference of most Americans in the final analysis, but it would be better to make that choice consciously, rather than slide into it while trying to have our cake without paying for it.
Meanwhile, the wiser course would be to avoid imposing rules that obstruct voluntary experimentation with any alternative insurance arrangements that, at least, have the virtue of not being invented in Washington.