End tax incentives for health spending

January 26, 2007|By Jim Jaffe


President Bush's suggestion that markets be introduced into medicine by taxing extraordinarily expensive employer-provided health insurance is a positive initial step. What would come next?

A logical follow-up might be to reverse course and withdraw support for other tax incentives that lower what people pay for medical services and, economists tell us, thus increase demand and fuel inflation.

The culprits are the increasingly popular flexible spending accounts that allow workers to avoid taxes on compensation that is put aside to pay medical expenses, and the newer, more expensive health savings accounts that deposit deductions into IRA-like accounts that can accumulate over time to pay bills.

Both effectively cut the cost of care and, arguably, make people less likely to shop for the best possible price or evaluate whether the expense is needed at all.

The problem is particularly acute with flexible spending accounts, or FSAs. Money can't be carried over from year to year, so there's an incentive to buy marginal services lest the saved money simply disappear. Drug stores typically post reminders to boost December sales.

People with these accounts also may overspend because they have immediate access to the full amount they're committed to saving over the entire year. In other words, someone who commits to save $100 monthly can spend $1,200 in January, with the expectation that the account will balance by year's end.

Even without participants playing such angles, FSAs tend to encourage health spending by allowing the use of untaxed dollars, sometimes lowering the effective cost by about a third.

More than 40 million workers, including nearly all at America's biggest firms, have this option, and more than 15 percent have decided to use it. Their participation has been spurred by the growing use of debit cards that eliminate the need to file paper claims.

Health savings account rules allow money to be carried over from one year to another, thereby eliminating the "use it or lose it" pressure, but they similarly discount medical spending.

Such accounts aren't terribly relevant to people who are too sick to comparison shop and may confront six-figure bills. But there is significant individual discretionary spending that could be curtailed. Doing so would be in the public interest.

In an environment where doctors regularly report that one patient in four isn't sick at all, there's some benefit in having people think twice about whether a physician visit - which can result in unneeded, expensive and sometimes dangerous tests and drugs - is really required.

There's broad agreement that patient pressure for the use of generic drugs, when medically appropriate, can curtail costs by offsetting sophisticated marketing by pharmaceutical firms. Such patient pressure is generated by potential impact on the family pocketbook.

The president has appropriately opened a sophisticated and long-overdue debate about whether tax policy should be used to make medical services a more attractive buy than other purchases. A conversation about the impact of the tax-favored accounts he has favored in the past would be a constructive next step.

Legislators would then be forced to decide whether to protect their constituents from bearing the growing cost of care or to enlist the voters in the quest for cost containment by confronting them with the reality of what modern medicine costs.

Reducing tax subsidies would make consumers who are required to pay more uncomfortable. One unintended consequence, from the White House perspective, could be broader pressure for more-comprehensive reforms that might eventually reduce the national's overall health care bill.

Jim Jaffe worked for the House Ways and Means Committee during consideration of the Clinton health reform plan. His e-mail is jimjaf@gmail.com.

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