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Wednesday, July 28, 2004

Bush's Health Plan: Tax Breaks for the Rich

I've argued before that one of Bush's goals in putting forward a health-care plan is simply to match Kerry. The press can pretty much be counted on to cover policy proposals as "he said/she said" and ignore the fact that Kerry's proposal would cover about 70% of the uninsured, and Bush's would cover about 5%. In a future post, I'll discuss another of Bush's goals, to use "health savings accounts" (HSAs) to undermine Medicare. This post is about a third goal: to sneak by some more tax cuts for the rich.

Bush has already been very successful in wrapping tax cuts for the wealthy into his health package. A little-noticed provision of last year's prescription drugs bill created HSAs, which are essentially a super-generous IRA tied to a high deductible health insurance plan. One of Bush's campaign health care proposals is to make premiums for privately purchased HSA-tied insurance deductible too.

There, now you already know more about the Bush health care plan than conservative commentators, who confuse HSAs with Health Reimbursement Accounts (a less generous version of the same scheme authorized by the Bush administration two years ago), or who aren't aware that HSAs are tied to high-deductible health insurance.

Employers or employees can make contributions to HSAs up to the amount of the insurance deductible, with a maximum of $2,600 for self-only policies and $5,150 for family policies (indexed annually). Older people can make additional "catch-up" contributions. More details can be found here.

HSAs are actually more generous than IRAs, because not only are contributions tax-free, but so are withdrawals, as long as they're used for medical expenses. Unspent HSA money can be invested by the employee; withdrawals can be made after retirement penalty-free, although they're taxed (making the HSA equivalent to a traditional IRA). In fact, HSAs probably will be used more as savings vehicles than to pay for health care. You'd be foolish to contribute any money to an IRA until you've maxed out your HSA contributions, because HSAs provide a bigger tax break. Similarly, anybody with unsheltered savings will tap the savings to pay medical expenses before the HSA money. So, for people in high tax brackets, who are saving for retirement, HSAs will be very attractive, even if they are combined with a high-deductible health plan.

HSAs: Potential Disaster?

So HSAs certainly amount to yet another tax cut for the rich. But I think they're potentially worse than that. After my last post on this topic, I worried that my rhetoric about Bush undermining everybody's health insurance was a little overheated. But the more I think about it, the more I worry that I might be right. HSAs are really something quite new: we've never tried combining health insurance with tax breaks for the savings of the rich before. Just as we've never had an administration that was so willing to subordinate good policy to the narrow interests of its supporters before. Big changes to our health insurance system seem quite possible to me.

HSAs create conflicts between the interests of high and low paid employees that weren't there before. Even when they offer health insurance, many firms offer only one plan -- including over 2/3 of firms with less than 200 employees. Multiple plans are expensive to administer, and there are legal restrictions requiring the same plan (or choice of plans) to be offered to all employees. Before this year, health insurance plans were just about paying for health care, and it was relatively easy (or at least possible) to find a compromise that all employees in a firm could live with.

But now, by bundling together an IRA and a health insurance plan, HSAs create a package that's quite attractive to high-income employees. But HSAs are much less appealing to low-paid employees, who are in too low a tax bracket to benefit from the deduction, probably aren't saving much anyway, and won't be pleased about the high deductible. So imagine a small firm where the managers would like an HSA, but the workers want a plan with a lower deductible. I'm betting a lot of those firms will switch to HSAs, perhaps compensating lower-paid workers, perhaps not. And a lot of those firms will require an employee contribution. Many low-paid workers won't find worthwhile to pay for a policy that only covers catastrophic expenses, and will go without health insurance. So people in the top tax bracket will end up with a nice nest-egg, and everybody else will get limited health insurance, or none at all.


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