American health spending continues its rapid increase while millions of Americans lack health insurance. President Bush and Sen. John Kerry agree that these are the major problems facing our health care system, but they do not agree on the solution. Should we expand the size of federal health programs and increase direct government regulation of private insurance or should we rely on market incentives to rein in costs and make health insurance affordable?
For a change, we could try something really new--get the consumer involved in making economic decisions.
In most markets the consumer is the dominant economic force. Any seller, be it a giant transportation company or the corner vegetable market, cannot survive long unless he provides what the consumer wants at a cost the consumer can afford. This is not the situation in most medical markets. The health care consumer has little reason to shop for value when an insurer is paying the bill.
Health Savings Accounts (HSAs) have the potential to lead this kind of market-based health care reform. Consumers can establish tax- preferred savings accounts in conjunction with high-deductible health insurance. Money from these accounts can be used to pay the deductible, copayments, and other medical expenses. Since the HSA account belongs to the individual, he or she has a strong incentive to spend the money wisely. Any amount not spent in one year can be rolled over to the next, a feature that allows a prudent or young consumer to accumulate funds for expected medical expenses in later years.
The President would make HSAs more attractive. He would make the cost of the insurance premiums deductible against one's taxable income, an advantage similar to that currently enjoyed by anyone getting insurance from their employer. He would also give a tax credit to small businesses for the cost of establishing an HSA for their employees.
There is a simple logic behind HSAs that is supported by volumes of empirical research--consumers will be more careful in spending their own money than they would be spending someone else's money. They will begin to demand more information about the comparative costs and quality of the providers and treatments--the kind of information that is extremely difficult to get in the present market. Rather than focusing solely on lower costs, consumers will seek the best value for their money.
Critics argue that HSAs will appeal only to the healthy and wealthy while leaving the poor and unhealthy with even higher insurance costs. On the contrary, people in poor health would welcome the opportunity to direct their care without going through a thicket of regulators and red tape.
The test of HSAs is how they will fare in the market. If they appeal to enough people, they can start a sea change in health care that slows the growth of health spending and increases the value of our health dollar.
The regulatory alternative to controlling cost has been tried, and it failed. Health planning to control the supply of facilities had no effect on costs and ended up protecting the economic interests of the established providers by keeping out new entrants.
Direct price controls in Medicare and Medicaid, when they were effective, ended up causing shortages and poor quality, and advantaged some consumers and providers while leaving others worse off.
Aggressive managed care, which showed some effect on costs in the 1990s, was extremely unpopular and has now been largely abandoned.
In the last few years, many employers have turned to requiring their workers to pay a higher portion of their insurance premium, a policy that is also unpopular since it reduces the ability of the employer to use tax-free health benefits as a way to compete for scarce labor.
It is now time to try a new approach to health policy by giving consumers strong incentives to become prudent purchasers. It is a system that has a recorded history of success for centuries in almost all economic markets except modern health care. Markets can work when consumers have power and suppliers are forced to compete. Health care markets are no exception.
Robert B. Helms is a resident scholar at the American Enterprise Institute.