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Large Health Savings Accounts: A Step toward Tax Neutrality for Health Care Michael F. Cannon Director of Health Policy Studies, Cato Institute National Congress on the Un- and Under-Insured (Whatever That Means) Washington, DC, September 22, 2008
Taxes & Health Care • Health-related tax deductions • Employer-sponsored insurance (ESI) • Flexible spending accounts (FSAs) • Health reimbursement arrangements (HRAs) • Health savings accounts (HSAs) • Qualified medical expenses > 7.5% AGI • ESI: ~2x rev. loss of mortgage-int. ded.
ESI Exclusion ≈ Price Distortion • Reduces price of health expenditures relative to non-health expenditures • Reduces price of third-party health insurance relative to self-insurance • Reduces price of ESI relative to other third-party insurance
Effects of ESI Exclusion • Individual preferences • Efficiency • Excess coverage, low-value medical care • Labor market distortion • Equity • Horizontal • Vertical
Possible Reforms • Limit health-related tax breaks • Cap exclusion • Eliminate exclusion • Expand health-related tax breaks • Health savings accounts • Full deductibility of all health spending • Hybrid: limit and broaden • Tax credits • Standard health insurance deduction
Another Option: Large HSAs • Increase HSA contribution limits • Self-only coverage: from $2,850 to $8,000 • Family coverage: from $5,500 to $16,000 • Remove insurance requirement • Allow tax-free purchase of any health insurance with HSA funds
How Would Large HSAs Work? • Nearly all workers could take 100% of current tax-exempt health benefits as a tax-free Large HSA contribution • Workers could adjust contributions (FSA) • Workers could purchase any insurance from any source, or no insurance • Credit for those without payroll deduction
What Would Large HSAs Do? • Eliminate price distortions • Between ESI & other third-party insurance • Between third-party insurance and self-insurance • Broaden & cap price distortions favoring health savings, expenditures • Everyone could exempt $8,000/$16,000 • Margin creeps downward over time
Positives • Individual preferences • Efficiency • Reduce excessive coverage, consumption of low-value care • Reduce labor market distortions (job-lock)
Positives (II) • Horizontal equity • Place of employment • Quantity, source of insurance coverage • Vertical equity? • Cap the exclusion • Extend tax break to low-income workers, uninsurable • Feasibility?
A Feasible Cap? • Resistance to tax increases • Would increase taxes for very few (those with tax-exempt ESI above $8,000/$16,000)
How Much ESI Do Workers Exempt (2006)? 97.7% 95.5% Source: Lewin Group estimates using the Health Benefits Simulation Model.
How Much ESI Do Families Exempt (2006)? Source: Lewin Group estimates using the Health Benefits Simulation Model.
How Much ESI Do Workers Exempt (2006)? $8,000 $5,000 Source: Lewin Group estimates using the Health Benefits Simulation Model.
How Much ESI Do Families Exempt (2006)? $16,000 $11,500 Source: Lewin Group estimates using the Health Benefits Simulation Model.
A Feasible Cap? • Resistance to tax increases • Would increase taxes for very few (those with tax-exempt ESI above $8,000/$16,000) • Would give everyone much more control over the first $8,000/$16,000
A Step toward Neutrality? • Difficulties in moving toward tax neutrality for health care • Workers will resist if they smell a tax hike • Employers must value health benefits for each employee • Workers will resist if they think they’ll lose their health benefits • Two small steps rather than one leap
Potential Negatives • Federal revenue loss? • Effects on pooling • Free-riding?
Large HSAs vs. SHID • Standard health insurance deduction • Distortion only at initial margin • Requirement to purchase (and define) coverage • Opacity: potential short-term compensation loss • Large HSAs • Distortion within wider margin • No insurance requirement (uninsurables) • Transparent: immediate ownership of compensation
Michael F. CannonDirector of Health Policy Studies Cato Institute1000 Massachusetts Ave., NWWashington, DC 20001-5403Direct: (202) 218-4632Fax: (202) email@example.com