Investor's Business Daily, November 27, 2005

The President's Advisory Panel on Tax Reform unloaded 272 pages of analysis and recommendations to reform the federal tax code. Like any major effort, it offers something for everyone to love and something for everyone to hate.

This is true with health policy, an area of public policy that has as much to do with taxes as it does with the actual delivery of health care.

In its attempt to simplify the tax code, the panel recommends abolishing health savings accounts, an option made available in 2004 that allows people to save, tax free, for health care expenses in addition to relying on expensive third party insurance.

This minor change in tax law would be a major blow to health care policy.

The panel correctly recognizes that the current tax code provides Americans with powerful incentives to purchase comprehensive, or what it refers to as "Cadillac," health insurance through our employers.

Since employer provided health insurance is free of both federal, state, and payroll taxes, an average family policy costing $10,000 saves a family in the 25% tax bracket nearly $5,000 in federal and payroll taxes.

Another way of looking at it, the same family, if purchasing an identical policy in the individual market, would have to earn $15,000 and pay $5,000 in taxes to purchase the same policy on its own.

This tax deductibility is also the reason that health insurance, unlike other insurances, covers even the most minor of expenses. Car insurance, for example, covers only major damages as does homeowners' coverage. Neither pays for routine maintenance.

Although consumers have a choice, financial planners recommend that consumers elect significant deductibles on these policies. It's simply not cost efficient to run minor expenses through third party insurance.

Yet that is exactly what we do with medical insurance, which processes bills for everything from routine checkups to major surgery. Thanks to the current tax code, if a family pays for $2,000 of routine care out of pocket, it costs them $3,000 in wages.

Funnel the spending through a health plan, and it's a straight $2,000. The side effects are increases in administrative costs and overconsumption of health care.

Starting in 2004, with the strong support of President Bush, health savings accounts emerged to level the playing field for comprehensive insurance and self-pay medicine.

HSAs offer an immediate tax break for every dollar saved, up to maximum deductibles in 2005 of $2,650 for individuals and $5,250 for families. Money not used in one year accumulates for future use, growing tax free.

By providing employers and families with a way to benefit from not consuming health care, HSAs promise to put insurance back in health insurance and harness market forces to control health spending.

HSAs remove the use-it-or-lose-it features of health insurance and equalize the incentive for current consumption and accumulation for future needs.

To date, more than 1 million have been purchased, 37% by individuals who were previously uninsured. HSAs are taking hold in the group market. Cutting-edge firms like Whole Foods adopted them early and have reaped significant benefits. Surveys indicate that nearly a third of large employers will offer HSAs as an option to employees in 2006.

It is unfortunate, then, that in its attempt to shift America away from employer-sponsored insurance, the president's tax panel recommends jettisoning health savings accounts, the most promising reform to do just that.

It would replace tax-deductible HSAs with a mutli-purpose savings account that offers no upfront tax advantages.

This would take us back three steps in the attempt to transform health insurance from its current status as a prepaid medical plan to actual health insurance.

The panel's recommendations are the first, not the last word on comprehensive tax reform. Upon further reflection and input from health policy experts, policymakers will most certainly find a place for health savings accounts in a simplified and fairer federal tax code.

Sally C. Pipes is president and CEO of the Pacific Research Institute, a San Francisco-based public policy think tank. She is the author of "Miracle Cure: How to Solve America's Health Care Crisis and Why Canada Isn't the Answer" and can be reached at spipes@pacificresearch.org.