Con: Individual health savings accounts are better

Posted: Friday, February 19, 2010

WASHINGTON - In his recent State of the Union address, President Obama said, "If anyone from either party has a better approach" to reforming health care, "let me know."

We volunteer! The challenge in health-care policy is to balance compassion with personal responsibility. Americans should have access to necessary care while also paying their fair share.

Compelling individuals to purchase health insurance, as President Obama currently wishes, is one approach. But it's the wrong one. And almost certainly unconstitutional.

What is called health insurance today is not really insurance at all. True insurance pays claims rarely, only in extreme catastrophic instances, and it has low premiums. What is called health insurance is instead more like a pre-paid service plan, with frequent small claims and high premiums.

American health insurance was originally created by health-care providers for their benefit. It encourages individuals to consume health-care services and it ensures payment for those services. Health-care providers lobby their state regulators to require that their services be covered by insurance.

As a result, health insurance gets more expensive every year.

From the standpoint of protecting consumers from financial risk posed by unanticipated, large health-care expenditures, however, the coverage of today's insurance is inadequate. Just ask anyone who ever contracted a serious illness and subsequently lost a job.

By and large, Americans reject today's health insurance when they have to pay for it themselves. Of the people who are not on government or employer-provided health plans, the majority choose to be uninsured. Forcing consumers to buy this product may benefit insurance companies, health-care providers and other special interests, but it is not good public policy.

Instead, a better idea would be to move toward a health-care safety net. This should have two components: universal progressive catastrophic insurance; and health-care savings accounts.

Here's how the first component would work. Universal progressive catastrophic insurance would be a collective sharing of extreme financial risks associated with health. As taxpayers, we would share the cost of this insurance. As individuals, we would be protected in the case of large, persistent medical expenses.

There are many ways to implement universal progressive catastrophic insurance. One approach would be to say that once a family's medical expenses over a three-year period exceed 25 percent of that family's income over that period, the taxpayer-provided insurance would pay 80 percent of any additional expenses up to 50 percent of the family's income, and all remaining expenses after that.

This provides universal insurance for necessary care. However, all Americans would have responsibility for paying for most the medical services they use, either by paying out of pocket or by purchasing additionalinsurance.

As for the second component: consider that today, federal taxpayers subsidize state Medicaid programs that serve low-income Americans. Taxpayers also subsidize employer-provided health plans because that form of compensation is exempt from tax. We believe that both of these subsidies should be eliminated in favor of individual health savings accounts.

Give people currently eligible for Medicaid vouchers enabling them to fund health savings accounts. And the tax break for health savings accounts should be in the form of a tax credit. The voucher or tax credit might be $2000 for individuals and $5000 for families. In the years when consumers are healthy, they can build up savings for the years when they require expensive medical services.

This two-pronged system is just one possible approach to providing a healthcare safety net. The important point is that health-care policy should be designed to protect vulnerable individuals while maintaining the principles of free choice and personal responsibility. The health insurance mandate is the wrong way to go - and likely unconstitutional to boot.

• Arnold Kling is a member of the Mercatus Center's Financial Markets Working Group at George Mason University in Fairfax, Va. and Nick Schulz is DeWitt Wallace fellow at the American Enterprise Institute ( They are authors of "From Poverty to Prosperity: Intangible Assets, Hidden Liabilities, and the Lasting Triumph over Scarcity." Readers may write them at AEI, 1150 17th Street NW, Washington, D.C. 20036.

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