In a prior quote, Victor R. Fuchs, Ph.D., Professor of Economics (Emeritus), Stanford, stated, “National health insurance will probably come to the United States after a major change in the political climate – the kind of change that often accompanies a war, a depression, or large-scale civil unrest.”
Theodore R. Marmor, Ph.D., Professor of Public Policy and Management and Professor of Political Science, Yale University School of Management, responds:
“I am always amused to read the political analysis of economists. Fuch’s heart is in the right place, but his suggestion that war, etc. will be needed is, I believe, just plain wrong. It did not take war or depression to get Medicare; it took a shift in the political balance of power, which might have emerged from such tragedy, but did not in that instance. This is why Oberlander and I wrote the piece we did on progressive reform. Note that if these were the preconditions, we all should either stop thinking about it or push for tragedy. It is a call for hopelessness in part. The discussion of the rise of menu health insurance is much more useful.”
USA Today
June 26, 2002
IRS rule may foster new type of health plan By Julie Appleby
New types of health insurance plans aimed at getting patients to act more like shoppers could get a crucial boost from the Internal Revenue Service this week.
The IRS is widely expected to formally allow employees to roll over, tax-free, money employers give them each year to help pay the out-of-pocket costs for certain high-deductible health care insurance policies.
Here’s how the plans work: Employers provide high-deductible health insurance policies, whose premiums are cheaper than those for typical low-deductible health insurance. At the same time, companies also give employees a set dollar amount in individual worker accounts to help cover those deductibles. If the worker’s account falls short of the deductible, the worker makes up the difference.
Any money left in the accounts at the end of the year generally rolls over to the next, an added incentive for employees to be judicious about their use of health care services.
Jon Camola of the Wye River Group, a think tank that promotes the policies as a way to slow rising health costs:
“We’ve learned the IRS wants to support what’s currently taking place in the market.”
Comment: Is this health policy or tax policy or something else? Let’s look at some numbers. It is important to note that, although these numbers are hypothetical, they very accurately demonstrate the nature of the distortion of the insurance risk pool that takes place when switching from a single risk pool to a combination of personal health accounts and a catastrophic risk pool.
Hypothetical assumptions:
Health care costs average $5000/person (actually $5427 per CMS)
Our hypothetical pool contains 200,000 people
Therefore, the health care costs for this pool are $1 billion
40% of funds are placed in the personal health accounts -$400 million
The other 60% pays for catastrophic coverage – $600 million
The insurance plans have administrative costs of 20% -$120 million Thus $480 million is available to pay catastrophic health care costs
80% of the insured are healthy and account for 20% of costs – $200 million 20% are unhealthy and account for 80% of costs – $800 million
The 20% that are unhealthy use their own accounts – $80 million And they use the catastrophic funds – $480 million Spending the total of available funds – $560 million
But, their costs are $800 million This leaves a deficit of $240 million
To cover the deficit, with added administrative costs, catastrophic premiums would increase by $300 million Adding to the original $600 million, total catastrophic premiums would be $900 million This is 90% of the total health care costs
But the claim is that catastrophic insurance is cheap, priced at maybe only about half of the amount paid for more traditional insurance. Yet we see that the premiums charged in this hypothetical example would save only about 10%. How could that be?
The fundamental principle is very simple. Equitable insurance risk pools are funded by everyone, with each paying a modest amount to assure the financial security of those with high health care needs. The individuals with high costs consume a large percentage of the health care funds. Removing the personal health account funds from the risk pool significantly reduces the total funds available. The funds in these personal accounts are permanently sequestered away from the global risk pool, and, presumably, the healthy would eventually divert them to other personal uses. Yet the health care costs must be met. That means that these sequestered funds must be replaced by higher premiums, or worse, by making care unaffordable for those with high needs through increased out-of-pocket expenses.
This is not good health policy and it’s not good tax policy. Let’s reject this terrible idea and adopt an equitably-funded universal risk pool. We’re already paying for it. We should have it.
Clarification – Health Reimbursement Arrangements (HRAs)
Today the Department of the Treasury released its rulings on Health Reimbursement Arrangements (HRAs). HRAs that meet specified requirements are not taxable, and the funds can be carried forward even into retirement. However, if the funds are used for other purposes, they become taxable. They are not the same as Flexible Spending Arrangements (FSAs).
In today’s Quote of the Day message, reference was made to “personal health accounts.” A few of the details included might not apply to the HRAs. Nevertheless, these programs do remove funds from insurance risk pools and segregate them for individual use. So the analysis presented, demonstrating the negative impact on the insurance risk pool, still definitely applies.
Regardless of their tax treatment, the high-deductible plans associated with these products will either require higher premiums, or will shift costs to individuals that have high health care needs. They are not a solution for any of the major health care problems that we face today, and are detrimental for those with severe acute and chronic disorders.
For the Department of the Treasury release on HRAs: