Texas health resource credit union

President Bush has proposed what appears at first glance to be a relatively modest agenda of health care reforms. But if passed by Congress in its entirety, the administration's plan would fundamentally restructure the health care system. It would turn upside down--actually, rightside up--almost all of the current perverse economic incentives that plague the U.S. health care system.

And that's why the president will get nothing but hand-wringing, nay-saying, and eye-rolling from the liberals and elitists.

Make no mistake: The battle over health care reform is a battle of competing visions about markets, individual responsibility, and accountability. Can people make good, value-conscious decisions in the health care marketplace? Or must we all rely on someone--a bureaucrat, politician, academic, or clerk--to make health care decisions for us?

Will President Bush's ownership society extend to patients and the health care system, or will the nannies seek to undermine the president's plan and resume their drive toward government-run health care?

To understand the problems inherent in the U.S. health care system, you must first understand that it is fraught with perverse incentives. Fix the incentives and you will largely fix the system.

In a normal market, buyers and sellers enter voluntary agreements that each believes make him better off. Sellers cater to buyers--providing them with information, reasonable prices, package deals, and emphasizing quality and service. Why? Because buyers control the money that sellers want.

Not so in health care. In the vast majority of cases, patients--the customers--don't control the money, their insurance does. As a result, health care providers--doctors, hospitals, clinics, etc.--don't know who their "customers" are. Are they the patients who use the service or the insurers, employers, or government programs that pay for the service? In short, the normal buyer and seller roles that make markets work are dysfunctional in the health care system, and no one is very happy.

The system wasn't always so convoluted. But years of ever-increasing insulation from the cost of health care and health insurance have brought us to this point.

It all started in 1943, when the IRS allowed businesses to provide health insurance as a tax-free benefit to employees. Employers were looking for a way to attract good workers during wartime while operating under government-imposed wage and price controls.

The growth of employer-provided health insurance after World War II insulated workers from the cost of both health care and health insurance. As a result, most workers have no idea how much either costs. Because someone else is paying the bill, workers want access to virtually any procedure or product available. And because employers pay for most or all of the cost of coverage, workers (who are actually paying the cost of coverage in the form of lower wages) want the most comprehensive and expensive policies.

The result is a health care entitlement mentality in the United States such that the majority of Americans seem to think they should be able to walk into any hospital, doctor's office, or pharmacy, get whatever they want or need, and pass the bill along to someone else.

Consider the four-day strike last spring by the Communications Workers of America (CWA) against SBC Communications, Inc. One of the primary issues was health care benefits. Mercer Human Resource Consulting recently reported that the average per employee cost of health care rose to $6,679 in 2004.

How much do CWA workers pay in monthly premiums at SBC? Zero. The company covers the entire cost of the premium for CWA workers and their families, and it had not passed on any of the double-digit health care cost increases over the several years preceding the strike.

So in contract negotiations, the company proposed to increase the employees' copayments from an average of about $35 a month to about $70 a month. Even though the average CWA worker at SBC Communications was earning more than $60,000 a year with overtime, the union would not tolerate the extra $35 a month.

Economics teaches that when people are insulated from the cost of something, they will use more of it. In every other sector of the economy, people bear the marginal costs of their decisions; in health care, a third party (the insurer, employer, or government) usually bears the marginal costs. That, in a nutshell, is why health care costs are growing much faster than inflation.

As health insurance premiums rise to cover exploding health care costs, many employers and individuals drop their coverage, especially in economic downturns. As a result, the number of uninsured grows.

As the number of uninsured rises, politicians, with the help of the media, see a "crisis" that must be fixed. Ironically, the fixes have almost always made matters worse, because so many politicians think the solution is to further insulate people from the cost of health care.

There is only one way to fix this system: Change the economic incentives. That is what the Bush plan does.

President Bush has identified six areas to be reformed. Each proposal is a relatively modest legislative change, but taken together they will fundamentally restructure the incentives in the system.

(1) A Tax Credit for the Uninsured -- Nearly 90 percent of the population under 65 with private health insurance get it from an employer. Workers like this arrangement because the money employers spend on health insurance is tax-free to the employees. In addition, the self-employed now get a 100 percent tax deduction for what they spend on health insurance.

The journal Health Affairs estimates that, all together, the government "spends"--that is, forgoes--about $188 billion each year on those tax breaks. However, workers whose employers do not provide health coverage get no tax break.

To level this playing field, President Bush has proposed a means-tested, refundable tax credit of $1,000 per adult and $500 per child, for a maximum of $3,000 per household, for anyone who buys health insurance and does not get a tax break on health insurance through his employer. The tax credit effectively lowers the cost of health insurance, making it more affordable and reducing the number of uninsured.

Critics of a capped tax credit complain that it is not enough money to help families buy a comprehensive health insurance policy, which might cost $10,000 a year. But that is exactly the point. Most families would buy a less-expensive, high-deductible policy--which is what the self-employed usually buy. Such a policy would cover major health care expenses, while leaving smaller, routine expenses to be paid out of pocket or out of a tax-deferred account such as a Health Savings Account.

This limited tax credit gets the incentives right. Families would begin to use health insurance the way we use most other kinds of insurance: to cover large, unforeseen, catastrophic costs. Reinstilling this notion in the public mind would go a long way toward countering the country's health care entitlement mentality.

(2) Health Savings Accounts -- President Bush has already opened the door for the expansion of consumer-driven health care by championing the new, improved Health Savings Accounts in the Medicare bill that took effect in January 2004. These HSAs are tax-free, personal accounts that are used for everyday health care expenditures and must be combined with high-deductible health insurance coverage. They replace the older, restricted Medical Savings Accounts enacted in 1996. Health Savings Accounts put health care dollars back in the hands of patients. With the consumers controlling the money and the decisions, health care providers are more alert to patients' needs.

Patients, meanwhile, get to keep any money in their HSAs that they don't spend on medical bills, and thus have a reason to be value-conscious shoppers for health care. Golden Rule, an insurance company that made a point of promoting the old MSAs and has hit the ground running with HSAs, announced recently that its customers had saved more than $110 million in their health accounts, and that the number of applications for such accounts was up 133 percent since the new law took effect. With the administration promoting HSAs for federal employees (see www.opm.gov/hsa/), the new accounts may take off.

Now President Bush wants to expand on that reform by allowing people to get a full, above-the-line tax deduction for the cost of a high-deductible health insurance policy linked to an HSA.