Nix Insurance With a Tax Break : Health care: High deductibles won’t reduce costly hospital stays and tests, the most expensive segment of care.
At least four members of the California Legislature have copied some federal lawmakers and introduced bills that would create tax-favored medical savings accounts designed to be used in combination with high-deductible or “catastrophic” insurance (for example, the patient pays the first $3,000 a year) to encourage people to set aside the money needed to pay for care below the deductible. (The new, tax-favored MSAs differ from tax-free accounts available to some people now through their employers because they would be available to everyone, and money not spent at the end of the year would accumulate rather than being forfeited.)
The idea is that if consumers use their own money, they would be more cost-conscious in their use of care. And, if they could have tax-favored MSAs, they would be more likely to accept high deductibles.
But this is the wrong way for the federal government to solve health-care cost, access and quality problems and an even worse solution for California alone.
Exempting MSAs from state taxes probably would be ineffective, because people’s behavior is driven mainly by federal tax considerations. And even if favorable state tax treatment persuaded people to adopt MSAs, high-deductible coverage would do little to moderate cost growth in the long run, since most spending is concentrated on a few sick people who are beyond the cost-reducing incentives of the deductible. In 1993, 80% of health-care spending went for the 15% of people with the highest costs, exceeding $3,050. When someone is diagnosed with a condition he knows will cost more than $3,000 to treat, more care for his whole family is “free.” The incentive to economize is gone.
The important opportunity for savings is not in deterring mothers from taking their children to the pediatrician for the sniffles, but in motivating doctors to provide high-cost care efficiently, and only when it is appropriate. Once hospitalized, patients’ spending is unaffected by coinsurance and deductibles, because catastrophic coverage has no impact on doctors’ incentives. If everyone had $3,000-deductible insurance, doctors and hospitals would focus on the segment of care in which financing was still open-ended. Pediatricians would leave primary care and go into neonatology. Costs would increase due to lack of preventive services and early treatment. For example, a recent study of acute appendicitis patients in California found that patients covered under indemnity insurance were 20% more likely than those in prepaid (first-dollar) plans to develop ruptured appendixes.
Another important problem with catastrophic coverage is that the $3,000-deductible policy would be relatively attractive to the healthy and wealthy. Those who could afford it would be ahead financially so long as they did not need to use their deductible. This would increase costs for the sick and high-risk, left in comprehensive coverage. Making the contributions to an MSA tax-preferred would make catastrophic coverage even more attractive to more people. The bad risks would increasingly bear the cost burden of their care. In a spiral of increasing costs and higher risks, first-dollar coverage would be driven from the market--a desired outcome, in the view of tax-preferred MSA proponents. But do we want a woman in a five-year struggle with breast cancer to have to spend $3,000 per year more than someone who has the good fortune to be healthy?
Tax-favored MSAs raise other problems. At a minimum, the additional money going into MSAs would increase state tax losses. Money not spent on Internal Revenue Service-eligible medical expenses could be withdrawn without penalty, so people could accumulate interest on money in MSAs tax-free, paying taxes on the money only when they withdrew it.
Some of the enthusiasm for catastrophic coverage comes from insurers that have not developed managed-care capabilities and depend on indemnity insurance. They think that this approach would give indemnity insurance a better chance to survive against managed care. But catastrophic insurance would not save indemnity insurance. Managed-care organizations would develop competitive products, taking advantage of their superior ability to control the costs of high-cost cases.
The federal government could try an after-tax MSA approach that would be strictly neutral with respect to the type of insurance people choose. But California should not, at least not until the federal government acts first.
