President George W. Bush is expected to make consumer-driven health care a centerpiece of his State of the Union speech this evening. For aficionados of free markets, the idea of empowering consumers to take control of their own health care and health insurance needs sounds wonderful. After all, the dysfunctional system of third-party payments for employer-based health insurance (in which neither patients nor doctors have much incentive to keep costs under control) has led to ever higher health care expenditures. As a result, by 2004, U.S. health care spending rose to $1.9 trillion, or about 16 percent of the gross domestic product (GDP). Health insurance premiums have risen at nearly double-digit rates for the past several years, too. General Motors and Ford blame rising health insurance rates for making them uncompetitive and forcing them to fire thousands of workers to cut costs. These companies are now clamoring for a federal bailout for their health care obligations.
The idea of consumer-driven health care is appealing. In other sectors of the economy where consumers get to choose, one usually sees falling costs and increasing productivity. Why not open up health care to the same beneficial influences? Give consumers incentives to shop around for medical care and insurance and let them balance costs and quality to fit their desires.
In his State of the Union message, President Bush will reportedly offer one proposal that allows individuals to buy health insurance with pre-tax dollars (just as corporations are allowed to do now) and another to let people deduct all of their health expenditures from their federal income taxes. If individuals enjoy the same tax breaks as people who get their insurance through their companies, employees will eventually demand that their employers just give them the money and let them pick policies for themselves. The second proposal—allowing people to deduct all health expenditures from their income taxes—puts more money in their pockets. This extra money would enable many of the currently uninsured to buy insurance. These are swell ideas and they should be enacted.
But the main idea behind consumer-driven health care is a proposal to expand the use of high-deductible health insurance policies combined with health savings accounts (HSAs). With HSAs, consumers can put pre-tax money to pay for routine medical expenses into IRA-like accounts. Insurance policies qualify beginning with a deductible at $1,050 for an individual and $2,100 for a family. Individuals may annually salt away in HSAs any amount below or matching their deductible up to a maximum of $2,700. For families the limit is $5,450. This encourages Americans to invest in high-deductible policies, which typically cost about 40 percent less than traditional indemnity insurance policies.
Such policies do save companies and individuals money, according to a report released last week by the consultancy Deloitte Center for Health Solutions. The study found that premiums for high-deductible health insurance policies rose an average of 2.8 percent between 2004 and 2005 compared to an average of 7.3 percent for all types of health insurance plans. That means the high-deductible premium increase was less than the rate of inflation (3 percent) in 2004. So far, so good.
However, health insurance works by having the healthy pay for the treatments of the sick. A 2004 case study looking at when Humana Inc. began offering a high-deductible option found that this scheme broke down. The employees who chose to enroll in the high-deductible plan were, on average, 60 percent less likely to have used a variety of medical services in the prior year. In other words, healthy employees chose to take the high-deductible option and squirrel away some pre-tax money in HSAs. This finding supports critics who worry about the problem of adverse selection. They fear that people who expect to remain relatively healthy will overwhelmingly pick the cheaper high-deductible policies and leave the sick to pay ever higher premiums for traditional low-deductible policies.
My advice to President Bush on how really to jumpstart consumer-driven health care: mandatory private health insurance. Poor Americans would be offered a voucher with which they would buy private health coverage. Such vouchers could be paid for by abolishing Medicaid and the State Children's Health Insurance Programs. A similar system already works in Switzerland where, Harvard Business School professor Regina Herzlinger notes, "The Swiss enjoy excellent health status, ample capacity, and high quality resources at costs 30% lower than those of the United States." Mandatory private health insurance would avoid the problem of adverse selection, provide insurance for the currently uninsured and make consumer-driven health care work for every American.