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Akron Univ. School of Law

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Thursday, May 1, 2008

Ezra Klein on McCain's Health Plan and HSAs

Today, Ezra Klein provides some analysis of McCain's proposed health plan.  He writes,

. . . "I am convinced," said John McCain at Miami Children's Hospital, "that the wrong way to go is to turn over your lives to the government and hope it will all be fine. It won't." Spoken like a 71-year-old whose government health coverage has kept him healthy enough to run for the presidency.

Government health insurance, like large employer health insurance, is based on a simple concept: Risk pooling. The more of us in this together, the more our health risks will average out among the population. When I'm sick, many more will be well, and so the group will be able to bear the costs of my illness. Moreover, the greater the size of the pool, the greater our ability to negotiate better deals, demand fairer treatment, and generally find market strength in numbers. . . . .

In contrast, McCain would like to take the health-care system in the opposite direction, toward an individual market where individuals seek coverage without the protection of large insurers or the government. Thus, the core of McCain's health-care proposal is a tax credit designed to ease people out of employer insurance and help employers pull away from offering coverage. McCain would give individuals a $2,500 tax credit and families a $5,000 tax credit meant to help them seek cheaper coverage options, such as health savings accounts, in the private market. And it is this cheaper coverage that is truly the point of McCain's health plan. "I would seek to encourage and expand the benefits of [health savings] accounts to more American families."

The benefits of those accounts are simple: low monthly premiums. The drawbacks are similarly clear: very high deductibles, lots of personal financial risk, and relatively sparse coverage. "These accounts put the family in charge of what they pay for," enthuses McCain. But that's not quite accurate. Individuals have no more autonomy under these accounts than in a traditional sense. They are just more acutely sensitive to the price of their care, which means they'll purchase less of it, and overall health spending will fall.

If you're young and unlikely to get sick, these accounts are a good deal, as you'll pay lower premiums. If you're not as demographically and genetically blessed, they're a bad deal, as you'll pay much more out of pocket for your care. They are, in other words, the logical extension of the modern health coverage marketplace: They're health insurance for people who don't need health care. . . . .

Ezra Klein also provides a helpful overview of the HSAs,

. . . HSAs, for those not yet acquainted, are the current conservative panacea for all that ails our health system: They are high deductible, low premium insurance plans that offer a tax sheltered account where folks can sock away money with which to pay their high deductibles. The idea behind them is simple: If we pay directly for more care, we'll buy less of it, either because we can't afford the care or because we decide to spend the money on something else.

Implicit in that argument is the idea that we, as individuals, will know which care is worth buying and which care is worth skimping on. But, of course, we don't know that. So instead, HSAs ask for a much cruder economic calculation: Do you think you'll need care or not? If you do think you'll need care, you're better off with traditional insurance, which pays for you to get care. If you don't think you'll need much care, an HSA might be the way to go, as your premiums will be lower. . . .  HSAs are health coverage for people who don't need health care. But I left out one group who also find HSA's useful: The rich. . . . .

According to the report, "the average adjusted gross income for those reporting HSA activity in 2005 was about $139,000, compared with about $57,000 for other filers." To be fair, some of that probably reflects the fact that HSAs are a fairly new product and early adopters are probably high education, well-to-do types. But in a broader sense, this is to be expected. HSAs -- which reduce your financial protection from health costs -- are a perfectly good option if you don't really need financial protection from health costs. So they're more popular among the rich. . . .

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