AGENDA 2006: FIXING THE HEALTH-INSURANCE CRISIS IN CALIFORNIA

Health Savings Accounts Promise To Insure More Americans More Cheaply Than Traditional Insurance

Five million to 6 million Americans have enrolled in health savings accounts, authorized by the federal government in 2004, and about half of adult Americans have heard of these accounts.

But all Americans need to know this approach can work for them to improve health care.

HSAs are accounts into which employers or employees deposit pre-tax dollars. To open a health savings account, a person must have a health-insurance policy with a minimum deductible of $1,050 for an individual or $2,100 for a family, and maximum out-of-pocket costs of $5,250 and $10,500, respectively.

The maximum annual contributions to these accounts are $2,700 for individuals and $5,450 for families, or the amount of the deductible, if lower. If you use the money in your account for health spending, it is never taxed.

About two-thirds of firms nationwide offering high-deductible plans motivated their employees to switch by paying from $1,500 to $2,000 per family plan into employees' tax-advantaged accounts. They can do this because, in most states, premiums for high-deductible plans are lower than those of traditional plans.

Companies can offer health insurance to their employees as a tax-free benefit, but it was generally impossible for individuals to get tax-free insurance on their own.

Because out-of-pocket payments have been made with after-tax dollars for individual insurance, copayments and deductibles have been artificially low relative to the true price of health services. Most of the cost of those services is paid for by other people.

Obviously, if a group of 10 people decides that each of them will pay for only 10 percent of everything he or she buys and will bill the balance to the other nine, the group will enter a "death spiral" of overconsumption.

The only way to manage costs has been to impose vast corporate bureaucracies on top of the doctor-patient relationship. This has irritated both of those parties and failed to moderate health-cost inflation.

This flaw was mitigated in the last decade through health reimbursement accounts (or flexible spending accounts), which allowed employers to give some money to workers to spend, tax-free, on health care. These accounts' effects were limited because health reimbursement accounts have a "use it or lose it" characteristic. Unable to save the unspent dollars in their accounts, individuals tended to wait until the year end and then spend the balance on designer sunglasses.

Your health savings account, however, is your property. If you don't spend the dollars today, they earn interest, and you can spend the money on future health needs.

These accounts empower patients - a good thing, because physicians are reforming their practices to focus on the needs of patients rather than insurers.

For HSAs to exert their full influence on health care, many other regulations must change. California needs to follow the lead of 41 other states and make health savings accounts deductible from state income taxes. States must deregulate health insurance in order to have a more competitive market. Also, the federal government needs to change its rules on hospital payments, which prevent hospitals from lowering prices for those with HSAs who want to negotiate prices.

Nevertheless, for a glorified bank account, HSAs are an outstanding step on the long road of health reform.

John R. Graham is director of health care studies at the Pacific Research Institute in San Francisco (www.pacificresearch.org).