Friday, September 17, 2004

More Healthcare Blogging

For anyone who likes healthcare-related blogging (and don’t we all?), I have three sites to recommend. The first two, Proximal Tubule and Galen’s Log, both have a free-market perspective. The third, Matthew Holt’s Health Care Blog, is somewhat less market-friendly but still informed by a sensible perspective (one that does not, for instance, assume that everyone has a fundamental right to free stuff). Thanks to Trent McBride, who posts on the first two, for bringing all three to my attention.

And now that I’ve thanked Trent, I’d like to disagree with him about something. He apparently shares Tyler’s concern that HSAs will tend to inflate healthcare spending:
But Matthew [Holt] is right to point out that, in a world with HSA's, people will purchase more health care than they "need." Tax breaks for certain behaviors or purchases does falsely increase the demand for those things.
Trent’s agreeing with part of Matthew Holt’s negative assessment of HSAs, in which he says:
There is no reason that health care premiums should be bought with pre-tax dollars (and for that matter there's no reason that housing loans should be too). … It also means that we spend marginal dollars on health care when we should be spending on something else. But I guess they [the WSJ] missed that day in micro-economics class when MR=MC was brought up.
The basic complaint is correct: when you give a tax break to health services without giving the same tax break to other goods and services (like food, clothing, and entertainment), you encourage people to consume too much healthcare and too little of those other things. Matt and Trent’s point, if I reconstruct it properly, is that tax-free HSAs expand the tax break on healthcare even further, and that will exacerbate the problem.

Why doesn’t this bother me? Because the status quo ante (that is, the tax code prior to the new HSA provisions) allowed people to get as much healthcare as they wanted tax-free anyway, so long as they got it in the form of health insurance. There is no additional health service that is made tax-free under HSAs that couldn’t have been gotten tax-free in a comprehensive (low deductible) health insurance plan. And that was (and still is) precisely the problem: people can and do purchase health insurance plans covering all varieties of health service, including routine care, prescriptions, therapy, ad infinitum. Allowing people to buy the very same health services with HSA funds does not constitute an expansion of the tax distortion. It just means they can get the same tax-free services by a different route – one that, as I’ve argued before, has more efficient incentives.

I would feel differently if HSAs increased the size of the tax advantage or gave tax-free status to some variety of health service that didn’t have it before. But that’s not the case. The health services in question are the same; only the manner of purchase is at issue.


Anonymous said...

That's an interesting claim; The only problem is that it's not really true: For instance, my health insurance program at work, even though I have optical coverage, does NOT cover Lasic eye correction. (Really foolish, since in several years I'll spend the equivalent money on glasses, which are covered.) The medical savings account does. So I saved the money for the eye correction, found that I was medically unqualified for it, and wound up having to get a totally elective EBT so that the money wouldn't be confiscated at the end of the year. Which never would have happened without the account.

Glen Whitman said...

The money getting "confiscated" at the end of year is an artifact of the old system. Under the new rules, the money will roll over into an IRA instead. Thus, you'll no longer have to use-it-or-lose-it.

Also, my point was not that every insurance plan covered every health service under the status quo ante. My point was that they legally *could*, so the tax-free status was potentially available for any health service. Your employer, in negotiations with employees and the insurer, could have decided to include Lasik in the benefits package (along with lower after-tax wages).

It is true that HSAs will give individual employees more flexibility than plans with a specified set of covered benefits. That will tend to increase spending on some activities (such as your Lasik surgery if you'd been medically eligible), but also decrease spending on package benefits that people use just because they've effectively already been paid for.

matthew said...

Thanks for the link/comments. Let's be clear, while I don't believe that the market works in health care without some extremely tight constraints that most libertarians would object to, I am in total agreement that it is the tax deductibilty of health insurance payemnts (mostly as a business expense) that has driven the fast increase in health care costs over the past 50 years. If you get $1 in extra compensation from your employer, it's taxed. If you get $1 in health insurance from them, it's not. That is simply wrong, and encourages the growth of the health sector over other sectors. On a secondary point, it is even more wrong because it'ss regressive and discriminates in favor of the aready better-off. An additional insurance dollar is worth relatively more to those earning more money as they are taxed at a hihger marginal rate (Same thing is true for mortgages).

Of course no politician will dare say either thing.