Overcoming Obstacles Facing the Uninsured:
How the Use of Medical Savings Accounts, Flexible Spending Accounts, and Tax Credits Can Help


Good afternoon, Mr. Chairman and Members of the Subcommittee. Myname is Tom Miller. I am director of health policy studies at theCato Institute. It is a pleasure to appear before you today toexamine how potential changes to tax-advantaged mechanisms forfinancing health care spending can address problems faced by theuninsured.

Medical savings accounts (MSAs), flexible spending accounts(FSAs), and tax credits represent three types of tax-advantagedvehicles that could play a larger role in improving access toaffordable health insurance and health care for millions ofuninsured Americans. Removing or redesigning restrictions on theavailability of each one of them would help reduce the number ofuninsured individuals and families. Even more progress could beachieved by providing broader parity in the tax treatment of healthinsurance financing for all purchasers; reducing artificial tax andregulatory barriers to market-based, value-maximizing choices; andempowering all health care consumers to match their own needs andpreferences to a wider variety of affordable options.

Before focusing more specifically on the three tax-advantagedvehicle options noted above, I first would like to frame theoverall issue of health insurance availability and affordabilitywithin the context of the small-employer market and then the healthcare system as a whole.

During the recent period of annual double-digit percentageincreases in the health insurance premiums, the cost issue hasdriven everything else within our health system. Health insurancepremium expenses have been particularly difficult to afford for themany smaller employers that teeter on the edge of decisions whetherto drop current coverage, reduce its scope and scale, or offer somesort of coverage for the very first time.

Small employers - those with fewer than 50 workers - employalmost one-third of the private sector workforce. The smaller theemployer, the less likely it will be to sponsor health insurancecoverage - particularly at the threshold levels of below 50workers, and below 10 workers.

The relatively higher cost of small group insurance coverage forcomparable benefits is one of the primary reasons why many smallemployers don't offer it and/or some of their employees don'tdemand it. It's generally more expensive to sell and administerinsurance for small employers. About 20 to 25 percent of smallemployers' group insurance premiums go toward expenses other thanhealth benefits - compared to about 10 percent for large employers.However, the administrative cost differential for small employershas been reduced over the last decade or two - it used to be closerto 40 percent of group insurance premiums, but growth in managedcare and improvements in information technology narrowed some ofthat gap.1 Even though basic demographic andself-reported health characteristics of individuals insured throughthe average small employer and the average large employer do notvary significantly, it remains harder for an insurer to predict thehealth status and the accompanying health costs of any particularsmall group. Hence, various degrees of medical underwriting areused for small groups because the law of large numbers does notkick in for actuarial predictions of future costs until a groupapproaches about 500 covered lives - although limited versions ofexperience rating begin to replace medical underwriting well belowthat level.2

Although some states do not allow private insurers to adjustpremiums for the health characteristics of employee enrollees, GAOfound that small employers in those states had average premiumsabout 6 percent higher, compared with other states, when adjustedfor geographic differences in the cost of physician services. Yetthose states prohibiting insurers from setting premiums based onhealth status did not gain anything in terms of covering morehigh-risk employees. Those states did not have a higher proportionof high-risk individuals insured through small employers thanstates with more flexible restrictions.3

Lower- income workers in small firms bear the brunt of this andother forms of excessive state health insurance regulation. Theiremployers generally are unable to selfinsure and thereby gain ERISAprotection from costly state benefit mandates, restrictions onrating and underwriting, and other regulatory burdens.

Market-based public policy cannot, and should not, overcome allof the natural cost differentials between large and small employersthat may be due to the stability, size, and composition of a givenemployer's pool of insurable workers, as well as any relativeeconomies of scale in benefits administration. But tax andregulatory policy should, at a minimum, avoid making those costdifferentials greater than they need to be.

We should also consider whether improving health outcomes andhealth status for lower- income individuals, rather than justreducing the total number of uninsured Americans, should be theprimary goal of health care system reform. Increasing healthinsurance coverage levels per se remains at best an imprecise toolof limited effectiveness in achieving that objective. Hence, I havesuggested elsewhere that it may well be more efficient, on balance,to improve the overall affordability of insurance coverage byencouraging it to be less comprehensive, while selectivelytargeting expansion of safety net care, than to subsidize expansionof conventional health insurance coverage.4

Making the market-based cost of care more transparent to allparties involved in health spending decisions would encourage itsmore efficient consumption and delivery. Reducing the long-termrate of growth in the cost of health care remains more importantthan (and, beyond a certain point, operates at cross-purposes to)expanding the scope and scale of subsidized health insurancecoverage. Past levels of health insurance subsidies have increasedmedical costs and the demand for health insurance, creating netwelfare losses estimated at 20 percent to 30 percent of totalinsurance spending.5 The consequences of failing toreduce, let alone further increasing, the effects of comprehensivethird-party insurance in raising costs and limiting access tohealth care would do more overall harm than any modestdisincentives to obtain insurance protection that may be caused bydirect provision of more charity care. When rising health careexpenditures outpace wage increases, their strongest effect is toreduce health insurance coverage for low-income workers. Hence, atthe margin, increasing incentives to purchase less-comprehensivehealth insurance and filling in urgent gaps in direct delivery ofhealth care through safety net mechanisms may produce moreaffordable and accessible health care.

If the rate of cost growth dips lower, other complaints aboutaccess, quality, and equity become much more manageable.


One of the primary factors driving health care costs higher inthe past has been the increased share of medical bills paid bythird-party payers such as private health insurers, employers, andgovernment health program administrators. Whereas out-of-pocketpayments by individual consumers accounted for about 50 percent oftotal health care spending in 1960, the share of third-partypayments (by private health insurers, employers, and governmentagencies) for health care has grown to over 80 percent. Third-partypayment of health bills insulates individual consumers from thereal cost of their health care decisions and treatment. Consumershave less reason to avoid unnecessary care, question costs, or shoparound for the best treatment available at a reasonable price, butthey have every incentive to demand more services. Excessivethird-party coverage with low deductibles also increasesadministrative costs, because every small bill must be submittedfor review and checked for accuracy.

The centerpiece of market-oriented health care that can reversethis trend remains MSAs. They combine two elements-a savingsaccount controlled by the insured individual to be used to pay forroutine health care expenses and a high-deductible (catastrophic)insurance policy to cover more substantial health care needs. Thesavings account is controlled by the insured person and used to payroutine health care expenses. The accompanying catastrophicinsurance policy covers more substantial health care costs. Becausethe cost of such a policy is usually significantly less than thecost of a low-deductible policy, the money saved may be used toincrease contributions by an individual (or his employer) to an MSAadministered by a designated trustee or custodian. Unspent MSAfunds, including any interest or investment earnings, accumulatefrom year to year, providing money to cover possible medicalexpenses in the future. This feature also expands the time horizonsof MSA consumers to look beyond a single year at a time ofinsurance coverage in order to maximize the value of their healthcare dollars.

The evidence is overwhelming that increased cost sharing reduceshealth insurance premiums substantially. For example, Jason Lee andLaura Tollen noted in a June 2002 article in HealthAffairs that increasing cost sharing from a plan with $15copays and no deductible to one with 20 percent coinsurance and a$250 deductible reduces premiums by about 22 percent; and acombination of 30 percent coinsurance and a $1000 deductible wouldreduce premiums by 44 percent.6

Because MSA plans are linked to high-deductible insurance thatcovers health claims that are more catastrophic in nature, theymake the cost of insurance coverage more affordable for mostAmericans. Less-comprehensive coverage will mean lower premiums fora larger fraction of people with low incomes. The majority ofstandardized insurance policies currently available are generousand expensive - making them unaffordable to low- income people. Onthe other hand, catastrophic insurance for very large,less-predictable health care expenses forces consumers to bear thefull marginal costs of health care up to the point where their useof health care exceeds the deductible.

Because MSAs funnel a much smaller share of health care spendingthrough third-party insurance, they provide workers strong marketincentives to control the costs of their health care. Accountholders are effectively spending their own money for routine healthitems. That, in turn, stimulates real cost competition among andprice disclosure by doctors and hospitals.

Offering less comprehensive insurance plans with greaterenrollee financial responsibility is designed to encourageenrollees to be smarter consumers of health care services, limitdemand for less beneficial "discretionary" care, seek outhigher-value options, and save money for more critical medicalneeds in the future. Under many thirdparty health benefitarrangements, consumers have little incentive or ability to becomemore knowledgeable about health care. MSAs stimulate consumerdemand for information about the quality and price of healthcare.

A number of studies have illustrated that MSAs help controlcosts, improve access to health care, expand consumers' choice inand control of health care, and increase savings. Moreover, MSAsimprove health plan options not just for affluent and healthindividuals, but for all Americans.

In April 2000, RAND Corporation researchers examined the effectsof making MSA options available to small businesses. RAND rejectedthe assumption that MSAs appeal most to the wealthiest andhealthiest workers. It found that HMOs would remain more attractiveto higher-income workers, primarily for tax reasons, andexceptionally good health risks would be more likely to decline anyinsurance at all than to select the MSA option.7

A 1996 study by National Bur eau of Economic Research analysts(including current FDA commissioner Mark McClellan) concluded thatmost workers would end up retaining a substantial portion of thecontributions they made to MSAs by the time they retired.Approximately 80 percent of employees would have retained over 50percent of their MSA contributions by the time of retirement, andonly 5 percent of workers would have saved less than 20 percent oftheir contributions. Although workers with high health careexpenses in one year tend to have lower but stillhigher-than-average expenses in the next few years, theconcentration of annual expenditures declines continuously as moreand more years of expenditures are cumulated. High expenditurelevels typically do not last for many years.8

Another 1996 study of Ohio-based firms that offered MSAs thatdid not qualify for tax advantages under the Health InsurancePortability and Accountability Act (HIPAA) determined that theemployer's total cost for family coverage under those MSA plansaveraged 23 percent less than traditional family coverage, yet theaverage employee with family coverage also would be $ 1355 betteroff under the worst-case (maximum out-of-pocket liability)scenario.9

So, if MSAs are so great, why don't we see more of them in themarketplace?

In 1996, HIPAA authorized up to 750,000 "tax-qualified" MSAsover a fouryear period (later extended to December 31, 2003).Unlike previous MSAs, those socalled Archer MSAs featuredtax-deductible treatment of MSA deposits and tax-exempt treatmentof investment earnings accumulated with the MSAs. However, thepotential of Archer MSAs has been hampered by eligibility limitsand other design flaws mandated by HIPAA.

Congress still needs to permanently authorize federallyqualified MSAs; lift the enrollment cap and allow an unlimitednumber of people to have MSAs; expand MSA eligibility to includeemployees in businesses of all sizes, as well as employees withoutemployer-sponsored insurance (ESI); allow MSA plans to offer a muchwider range of deductibles; allow MSA holders to fund fully theirMSAs each year, up to 100 percent of the insurance policydeductible; allow employers and employees to combine theircontributions to MSAs at any time within a given year; and eitherpreempt first-dollar state- mandated benefits or provide theflexibility for MSA plans to adjust to comply with thoseconflicting mandates.

Even under the current handicaps imposed by HIPAA rules, MSAshave become particularly attractive to the uninsured. Last October,the Internal Revenue Service reported that 73 percent of taxpayersfiling MSA tax returns for the taxable year 2001 previously lackedany health plan coverage at some time within the six-month periodbefore their high-deductible/MSA coverage began. Archer MSAeligibility is not only prohibited for individuals who work forcompanies with more than 50 employees; it also does not extend toworkers in companies, of any size, that do not offer MSAsas a benefits option or even in companies that do not offer anykind of employer-sponsored health insurance at all!

Expanding MSA eligibility to all health insurance purchasers andpermanently authorizing tax-advantaged treatment for Archer MSAcoverage would deepen the potential market for MSA plan vendors andencourage larger insurers to invest the necessary resources todevelop and market such products. It also would increase the levelof consumer knowledge of the uninsured, or "cash market," pricesfor more discretionary health care services and products. Finally,it would help facilitate the potential convergence of MSA optionswith other tax-advantaged vehicles for health care spending, suchas health reimbursement accounts (HRAs) and FSAs.


FSAs have a longer history than MSAs. These tax-advantagedhealth spending vehicles were first approved by Congress in 1978.FSAs allow an employee to authorize a pre-tax salary reductionamount, generally in the first month of a given calendar year, thatwill be transferred into an account to be used to pay directly forhealth care expenses, as defined quite broadly by section 213(d) ofthe Internal Revenue Code. FSA contributions are exempt from bothincome and payroll taxes.

Access to FSAs and greater use of them are limited by severalrules. Eligible employees must work for a company that decides tooffer an FSA benefit option; they cannot set up a personal FSA ontheir own. They also must lock in their annual contribution amountearly in the year and cannot adjust it later. Any unspent balancesin a worker's FSA at the end of the calendar year are subject to"use it or lose it" penalties. Forfeited funds revert back to theiremployer.

According to James Cardon and Michael Showalter of Brigham YoungUniversity, major U.S. firms are the most likely employers to offerFSAs.10 Actual participation rates by employees remainrelatively low. Decisions regarding whether to participate, as wellas how much to contribute, tend to be quite conservative, and theyare primarily based on employees' foreknowledge of their likelyhealth expenditures in a given year. Participants tend to spendtheir FSA amounts relatively early in the year (Cardon andShowalter note that January 1 appears to be busiest day of the yearfor FSA charges and that nearly 11 percent of FSA expenditures forthe year are incurred in the first week of January). They then runa negative account balance for most of the year until theirperiodic contributions to the FSA catch up.11 Thisincentive to use FSAs as interest- free loans from bene fitsadministrators also places a sponsoring employer at risk for theportion of any upfront FSA expense reimbursements that would not befully repaid if an employee left the firm before the end of theyear.

Although the median exha ustion date for the FSAs in theCardon/Showalter sample was early October, some portion of all FSAholders are likely to miscalculate their ability to hit theirhealth spending targets. As the end of year nears for them, the useit or lose it penalties provide strong incentives to spendremaining funds on less valuable health services (triggering theso-called "designer sunglasses in December" syndrome).

Changing FSA rules to allow unspent balances to carry forwardinto the next year without being forfeited or subject to taxeswould remove the most flawed incentives under current rules.Eligible workers would become more likely to participate in FSAoptions and to dedicate more funds to them.

Increasing the size of average FSA contributions also would helpabsorb more of their relatively high administrative costs for claimfiling. Ideally, expanded use of smart card technologies by FSAadministrators and improved disclosure of comparative priceinformation in the market for out-of-pocket health spending wouldprovide other compensating efficiencies and increased point-of-saleconvenience.

Although FSA critics may presume that wealthier workers takegreater advantage of current FSA options than less affluent ones,Cardon and Showalter find that is not true. They also conclude thatan increase in a worker's level of risk aversion increases thelikely amount of their FSA contribution. In that case, FSA benefitsoperate in a manner similar to stop-loss provisions in standardhealth insurance policies.12

In any case, the full potential of FSAs should be unleashed.Allowing FSA holders to accumulate tax-advantaged funds on a multi-year basis, enabling workers to invest fund balances, and providingfull portability as employees change jobs would encourage a furtherrestructuring of private health insurance markets. FSAs couldbecome the primary vehicle for financing medical procedures andhealth services that involve relatively predictable expenses andare easily foreseeable in the near future.13Value-conscious employers and employees also could insist thatinsurers "spin off" (not insure) those items for which the typicaltreatment cost is relatively low compared with the paperworkrequired to process the claim. Self- financing those items throughexpanded FSAs would be more efficient than covering them undercomprehensive health insurance plans.

Multi- year, portable FSAs also could provide a backdoor routeto greater firstparty control of health spending decisions forworkers who continue to lack access to full-strength MSA products.Even the currently authorized version of FSAs could be cleverlycombined with employer-financed HRAs to allow jointemployee/employer funding of much larger tax-advantaged healthsavings accounts to handle higher levels of out-of-pocket spendingand encourage greater use of high-deductible insurancecoverage.

Tax Credits

The last few years of political debate over the relative meritsof refundable, fixeddollar tax credits versus expanded publicprogram coverage for assisting the uninsured have generated asuperficial consensus to "do something" with little agreement onwhich path to take. Rather than simply repeat the steps of othersdown that well- worn policy path, I would prefer to offer a fewcautionary no tes regarding what has been overlooked in thatdiscussion and then suggest an alternative approach that bothlimits and expands the conventional tax credit approach.

First, we should remember that the primary goal of tax policy inthis area should not be to steer health care consumers towardfinancial arrangements that make most health care spending choicesappear to cost significantly less than their market value.Extending the longstanding distortions of the tax exclusion foremployer-sponsored group insurance to other forms of healthspending may become necessary in a world of thirdbest andfourth-best policy alternatives, but we should try harder to aim ata version of tax parity for health insurance purchasers that holdsthe resulting collateral damage to a minimum.

More than fifty years of health policy history should remind usof the costs, as well as the benefits, of the special tax treatmentof ESI. The tax exclusion forced many working Americans to acceptthe only health plan offered by their employer, or pay highertaxes. Job-based tax benefits for health care spending putemployers, instead of employees, in charge of selecting health carebenefits. They also raised the comparative after-tax price of othernon-employer-based insurance alternatives.

The tax exclusion continues to distort health care purchasingchoices today by favoring the financing of medical services throughinsurance and providing the greatest tax benefits for the mostcostly versions of employer-sponsored coverage. It encouragesworkers to think that someone else (their employer) pays for theirhealth care, and it reduces their sensitivity to the cost of healthinsurance choices. It disconnects the consumption decisions ofinsured workers and their families from the payment decisions ofemployers and their insurers. Tax subsidies for health insuranceoverstimulate the demand for health care and, perversely, increaseits total cost. Because the current tax subsidy for healthinsurance is inefficient and unfair, it should be reformed to placeindividuals, not employers or government, in charge of choosingsomething as personal as health care.

The best way to remove tax policy distortions in the healthinsurance market would be to eliminate tax subsidies foremployment-based health insurance altogether.

Employers that continued to offer ESI should be required toreport the value of the employer- financed share of that coverageto individual employees on their regular periodic pay statementsand annual W-2 forms. The default setting for such disclosure wouldassume that workers in employer-group plans are community ratedwithin the firm and the employer contributions for coverage areidentical for each worker (such as the periodic equivalent of thefirm's per-employee COBRA premium). In the event that employerswere allowed to adjust health plan contributions to reflect factorsspecific to individual workers, they could report those differentamounts instead. The new tax credits should be assignable toinsurers and advanceable, but not refundable. The maximum taxcredit available to any eligible individual would be no greaterthan that individual's total federal income tax and FICA payrolltax liability (including both the employee and employer shares) forthe previous calendar year. Only taxpayers would receive tax credit"relief" for health insurance costs.

The net effect of the above tax reform would be to encourageworkers and their families either to move from ESI coverage toindividually purchased insurance or to ensure that the ESI planthey select represents the best competitive value they canfind.

Even if an employer were no longer "paying" directly for anemployee's insurance coverage under an employer-sponsored groupplan, the employer still could facilitate delivery of health taxcredit assistance through several mechanisms. An employer couldchoose to include in an employee's gross wages an amount equivalentto what the employee otherwise would have received as thenon-taxable employer's contribution to the employee's applicableshare of any group coverage offered under the employer's healthbenefits plan. An employer could "list bill" and allow employeesusing the tax credit option to pay their individual insurancepremiums through payroll deduction (that is, an insurer bills theemployer for a list of designated employees who have opted fornonemployer-sponsored coverage). In the latter case, the workerswould bear the entire premium, but apply their tax credit to reducethe net payment due.

Congress should consider using the new tax credit option toleverage other market-opening reforms. In that case, consumerswishing to use the tax credit would have to purchase an insurancepackage that covered a minimum set of health services and includeda minimum, but significant, front-end deductible (along withmaximum out-ofpocket "stop- loss" limits). Qualified insurancepolicies might provide separately priced guaranteed renewal optionsin return for exemption from HIPAA's guaranteed renewalrequirements. Those policies also should be exempt from individualstate benefit mandates.

New voluntary purchasing pools also could be authorized toaccept tax credit funds to pay for such qualified insurance inreturn for federal preemption of state benefit mandates, fictitiousgroup laws, or rating laws that would otherwise interfere withtheir operations. Those pools would need to meet certain minimumcriteria that include capital and solvency requirements. They wouldhave to provide annual open seasons and be open to all willingpurchasers who use the health tax credit option.

Such purchasing pools would have the potential to provide anefficient mechanism for workers to gain a wider choice of healthplans than many employers (particularly smaller ones) can offer ontheir own. Indeed, they might provide effective alternatives topoorly performing employer-selected health plans. For that reason,pool participation should not be limited just to business firmbuyers making collective decisions for all their employees.Membership in "voluntary" purchasing pools should reflect thepreferences of individual workers and other health care consumers,not just the interests and convenience of employers.

The role of purchasing pools would be to provide a single,stable source of ongoing coverage. They would ease the burden ofchoosing and buying coverage, particularly for people seekinginsurance without the assistance of an employer. Pooladministrators would help design benefits packages offered toindividual pool participants. They would negotiate contracts andpremiums with the health plans choosing to sell to pool members. Inshort, pool administrators would and should be effective purchasersand advocates on their behalf.

Providing a new tax credit option could jump-start the evolutiontoward an employee benefits environment in which workers moredirectly control their healthcare benefits and insurance choices.It would ensure sufficient consumer demand for individuallyselected insurance arrangements and provide a competitivealternative to ESI coverage.

Any new tax credits for health care should not try to financecomprehensive insurance for all uninsured, low-income Americans.When most refundable tax credit proposals award tax "cuts" toindividuals who pay little, or no, federal taxes, they blurnecessary policy distinctions between how to set the appropriatelevel of income-based welfare assistance and how to neutralize themany distortions caused by our complex tax system. The politics ofrefundable tax credit proposals also have unfortunately steeredrecent health care debates away from broad, individual-empowermenttax reforms and toward a narrow, cramped version of targetedhandouts to smaller slices of the lowerincome, uninsuredpopulation.

Refundable tax credits combine bad tax policy, bad welfarepolicy, and bad health policy. They reinforce the mistaken stanceof those who argue that cuts in marginal tax rates are somehow''unfair'' when they provide most of their benefits to those whopay the largest share of federal income taxes. Refundable creditsalso are prone to carrying the lumpy baggage of complexincome-based, phase-out levels; tight restrictions on the contentsof eligible health benefits packages; and narrow rules for eligibleinsurers.

Making health tax credits refundable would endorse expansion ofcurrent taxpayer- financed ''entitlements'' to health insurancecoverage. It would adopt the view that health insurance is a''merit good'' for everyone and that necessary access to healthcare cannot be adequately financed without even greater subsidiesfrom taxpayers for insurance coverage. Many lawmakers who salutethe remarkable benefits gained from limiting the magnitude andduration of cash assistance to low-income beneficiaries on thewelfare rolls nevertheless appear poised to dole out a new round ofpermanent "welfare" checks to the working poor, hidden beneath arefundable health tax-credit label.

For low- income individuals lacking access to health insurance,the better policy solutions include safety net reforms thatstrengthen state high-risk pools and encourage charitablecontributions to provide health services through nonprofitintermediaries. Dollar for dollar, investing in safety netassistance that directly delivers care to the uninsured is moreeffective and productive than trying to coax them to purchasehealth insurance with modest tax subsidies.

The current market for charity care operates quite rationally inmimicking the effects of private catastrophic insurance policies.The proportion of health care paid outof- pocket by the uninsureddecreases considerably as utilization and total "spending"increases. Proportionately more charity care is available foruninsured individuals who incur larger medical expenses. And thelow-income uninsured with high medical bills (above $10,000) payabout half as much out-of-pocket for their care as do high- incomeuninsured individuals with similarly sized bills. (The low-incomeuninsured with such high bills receive 90 percent of their care forfree.)14

In the long run, improving the quality of education that lower-income individuals receive, expanding their personal control ofhealth care decisions, and reversing regulatory policies thatincrease the cost of their health care will yield even greaterreturns in improved health outcomes.

If Congress nevertheless feels compelled to provide refundabletax credits to lower- income Americans for reasons that bluruniversal coverage goals with income redistribution objectives, itshould first answer the question: Why not simply provide equivalentincome support through more targeted delivery of fungible cashvouchers and then concentrate on implementing broader health policyreforms that improve the availability in private markets of moreaffordable health insurance purchasing options? Sorting out theparameters of income support policies from the opportunities forbroader health care market reform would target better theappropriate policy instruments for each of these distinctobjectives.

Refundable tax credit subsidies directed primarily at uninsuredlower-income workers obviously would provide some increase inoverall health insurance coverage. But they still will need to befinanced at a higher enough rate - perhaps 50 percent or more ofpremiums for relatively limited benefits - to have any substantialeffect on levels of uninsurance in the target population.Fixed-dollar credits might be easier to score for budget purposesand to provide higher coverage take- up rates, but proportional taxcredits would be more effective in targeting uninsured individualsat the highest risk and in the greatest need.

In any case, new tax subsidies for health insurance purchasingshould pass through directly to individual consumers, rather thanbe used as initial sweeteners to induce employers to maintain orestablish job-based coverage. The current tax code already allowsemployers sufficient opportunity to deduct the full cost ofproviding group insurance coverage to their employees, if theychose to do so, as an ordinary business expense.

Other Policy Tools to Help the Uninsured

The inevitable tendency of conventional politics is to latch onto facile fixes for chronic and complex problems by channelingseemingly "free" sources of budget dollars into narrow programsilos. But attempts to provide sufficiently generous tax creditsfor the uninsured, with an end goal of near-universal healthinsurance coverage, will quickly bump up against other competingclaims on public resources. Expanding the availability of MSAs andacknowledging the tradeoffs between catastrophic insuranceprotection and subsidies for early-dollar health spending wouldallow us to accomplish more by aiming to do less. Other promisingpolicy tools beyond the scope of today's hearing might includeproviding "competitive federalism" incentives to deregulatestate-based insurance regulation, facilitating the convergence ofvarious tax-advantaged savings vehicles for future health careneeds, and clearing away remaining policy barriers toconsumer-driven health care options that can travel through allterrains.15

It would also help to keep the chronic problem of the"uninsured" in perspective. Last September's annual Census Bureauestimate of the number of uninsured people in the U.S. found thatAmericans lacking health coverage during 2001 increased by 1.4million, to 41.2 million, or 14.6 percent of the population. Thatnumber by itself was disappointing and needs to be improved.However, it occurred during a year in which an economic recessionbegan, it represented a smaller share of the population beinguninsured than was the case from 1992 through 1998, and more thanhalf (approximately 58 percent) of the year-to-year increase in theuninsured came from members of households with annual incomes of$75,000 or more.

Our society may well decide to spend ever greater shares of ournation's resources on health care in future years - for theuninsured, perhaps, but certainly for the worried well of themiddle class - as long as someone can be found somewhere to footthe bills. But American consumers will receive more value for eachdollar they spend only if the distorting effects of government'smultiple roles as a regulator, purchaser, and subsidizer of healthcare are reduced. Our objective should be neither to artificiallykeep spending levels higher, nor to keep them lower, than theirmarket-determined costs. Instead, we should allow individualconsumers to seek the best value that balances their spendingpreferences and priorities with the resources that they cancommand.

  1. U.S. General Accounting Office, "Private Health Insurance:Small Employers Continue to Face Challenges in Providing Coverage,"GAO-02-08, October 2001, pp. 13-15.
  2. Ibid., pp. 10-16.
  3. Ibid., pp. 16, 17.
  4. Tom Miller, "Improving Access to Health Care withoutComprehensive Health Insurance Coverage: Incentives, Competition,Choice, and Priorities," in Covering America: Real Remedies forthe Uninsured, ed. E.K. Wicks and J.A. Meyer. Washington:Economic and Social Research Institute, 2002.
  5. See, e.g., Martin Feldstein. Hospital Costs and HealthInsurance. Cambridge, MA, and London: Harvard UniversityPress, 1981, pp. 88, 201-03, 239-44; Martin Feldstein. "The WelfareLoss of Excess Health Insurance." Journal of PoliticalEconomy 81 (2) (1973): 251-80. See also Edgar A. Peden andMark S. Freeland. "A Historical Analysis of Medical SpendingGrowth, 1960-1993," Health Affairs 14 (2) (1995): 236-47(finding that about half the growth in real per capita medicalspending from 1960 to 1993, and twothirds of its growth from 1983to 1993, resulted from either the level or growth of insurancecoverage).
  6. Jason S. Lee and Laura Tollen, "How Low Can You Go? The Impactof Reduced Benefits and Increased Cost Sharing," HealthAffairs web exclusive, June 19, 2002, www.healthaffairs.org/WebExclusives/Lee_Web_Excl_061902.htm.
  7. Dana P. Goldman, Joan L. Buchanan, and Emmett B. Keeler,"Simulating the Impact of Medical Savings Accounts on SmallBusiness," Health Services Research 35 (1) (2000): 53-73.
  8. Matthew J. Eichner, Mark B. McClellan, and David A. Wise,"Insurance or Self-Insurance? Variation, Persistence, andIndividual Health Accounts," National Bureau of Economic ResearchWorking Paper no. 5640, June 1996.
  9. Michael T. Bond, Mary W. Hrivnak, and Brian P. Heshizer,"Reducing Employee Health Expenses with Medical Savings Accounts,"Compensation and Benefits Review 28, no. 5(September-October 1996): 51- 56.
  10. James H. Cardon and Mark H. Showalter. "An Examination ofFlexible Spending Accounts," Journal of Health Economics20 (6) (2001): 935-54.
  11. Ibid., p. 944.
  12. James H. Cardon and Mark H. Showalter, "Flexible SpendingAccounts as Insurance," Journal of Risk and Insurance 70(1) (2002): 49-50.
  13. Cardon and Showalter suggest that such items might includeorthodontic care, prescription drugs for chronic conditions, dentalcare, optical care, and other elective health services. "AnExamination of Flexible Spending Accounts," pp. 936, 953.
  14. Bradley J. Herring. "Does Access to Charity Care for theUninsured Crowd Out Private Health Insurance Coverage?" YaleUniversity Institution for Social and Policy Studies working paper.September 7, 2001, p. 10.
  15. See Miller, 2002.

Tom Miller

Subcommittee on Tax, Finance, and Exports
Committee on Business
United States House of Representatives