Consumer Power Report #139

Published August 8, 2008

I was in Chicago for three days this week for Heartland’s President’s Council Retreat. This was an appreciation of Heartland’s major supporters and it was a fabulous event. It didn’t go off without a hitch, but it certainly was memorable. I missed the Chicago Cubs game at Wrigley Field that was ended early due to near-tornado thunderstorms. But the people who had to take shelter in the 6th inning will be telling their grandchildren about it for years to come.

My role at the conference was mostly to moderate an issues panel on health care. I tried to make the point that there are two significant trends going on that are at war with each other — expanding government programs versus empowering consumers. We can look at the track record of each and measure how well they are doing.

The first, expanding government, has been a colossal failure everywhere. Medicare is fairly popular, but only because it has incurred $34 trillion (that’s trillion with a “T”) in unfunded liabilities that will be passed on to future generations. Medicaid and SCHIP are so unpopular that one-third of the uninsured are not only eligible for the programs, but many of them have already been covered by them and refuse to re-enroll because they don’t see any value — even when enrollment is free. Most of the big state reforms have already been repealed and the ones that are still in effect, like Maine and Massachusetts, are either far more expensive than predicted or have failed to enroll many people. Maine’s Dirigo Health has all of 11,000 people in it.

Contrast that with Consumer Driven Health Care, which is working exactly as we predicted. Patients are changing their behavior because they are now invested (literally) in their own health. That has resulted in lower costs, greater enrollment, and new demands for information services, price transparency, and more competition.

Three panelists discussed how their companies are serving this new market:

  • Rich Collins, CEO of Golden Rule, which pioneered the whole concept of MSAs and HSAs;
  • Paul Verberne, general counsel of HSA Bank, which pioneered bank financing of health care and HSA administration; and
  • Michael Gorton, CEO of TelaDoc, which pioneered an entirely new way for patients to access medical care.
  • I also asked Tony Dale, founder of the Karis Group, to tell the audience about his company, which is acting as a patient advocate in negotiating bills for high-cost services.

Overall, I was honored to be in such company. The people on my panel, as well as the other attendees of the retreat, are all people who are making a difference every day of the week in the real world where platitudes, promises, and posturing give way to bottom line success or failure.




American Enterprise Institute (click on “Consumer Response to a National Marketplace for Individual Insurance” for a pdf of Parente’s study)

An important new study was released at a briefing of the American Enterprise Institute last week. It looks at the potential reduction of the uninsured by moving to a national market as envisioned by the legislation introduced by Rep. John Shadegg (R-AZ) and Sen. Jim DeMint (R-SC) that would allow the interstate purchase of health insurance.

The study was performed by Steve Parente, Roger Feldman, Jean Abraham, and Yi Xu, all of the University of Minnesota. It simulates a national market under three scenarios — a national market in which each consumer can choose insurance from the least-regulated state in the country; a regional market where people are confined to choosing coverage from the least-regulated state in their region, and a large-state scenario in which only the five largest states are allowed to offer cross-border coverage. The study provides minimum, midpoint, and maximum estimates of the changes in enrollment under each scenario. It finds the national market model would have the greatest impact, and follows with more detailed results of the midpoint estimates under that model.

The results are astonishing. Due entirely to the avoidance of excess regulation in their states of residence, 12 million more people would become covered, cutting the rate of non-insurance by one-fourth. This is without any federal expenditures — no tax credits, no subsidies, no change in tax law.

The state-by-state impact is even stronger, especially for the most highly regulated states. New Jersey would increase its insured population 49 percent, Oregon 25 percent, Massachusetts 23 percent, New York 22 percent, and West Virginia 21 percent.

The study also simulates what might happen if a national market were supplemented with a tax credit proposal like that proposed by President George W. Bush in his State of the Union address in 2008. The authors conclude such a scenario would reduce the numbers of uninsured in the individual market by 70 percent for those with incomes below $45,000 and by nearly 100 percent for those with higher incomes. The group market would become 100 percent insured for all incomes. There would remain fewer than 8 million uninsured.

Obviously, this is an extremely complex simulation. The authors needed to calculate the cost of several areas of regulation including mandated benefits, guaranteed issue, community rating, and any willing provider laws, on a state-by-state basis, and apply those costs to several different types of coverage. But there is no team of economists in the country better equipped to tackle the challenge, and these results should be taken very seriously, indeed.



The Senate Finance Committee held a hearing last week on “Health Benefits in the Tax Code.” This was a remarkable event because the issues and concerns raised have clearly crossed party lines. Many of us have been saying for decades that the current tax code gravely distorts heath care financing and results in over-consumption and rising costs for everyone.

While economists are pretty much unanimous in agreement on these points, political advocates stayed in denial for a very long time, fearing that the ideas would lead to more individual ownership of health care and away from Big Brother.

This hearing marks a sea change in attitudes. Chairman Sen. Max Baucus (D-MT) opened the hearing with a short statement that said in part, “Economists tell us that the tax treatment of employer-sponsored health benefits creates an incentive for over-insurance. And they tell us that this incentive, in turn, promotes healthcare cost inflation.” He acknowledges that the current system was a mistake but also realizes that change can be disruptive and destructive. “We must fix what’s broken, without breaking what’s working.”

The star witness was Edward Keinbard, chief of staff of the Joint Committee on Taxation (also run by the Democrats), who delivered an exhaustive review of the various tax benefits provided by the federal government to health care. Much of this you are already familiar with, but the credibility of the source and thoroughness of the review is impressive and should be used as base-line information for a long time to come. He sets the federal tax expenditures for 2007 at —


  • Exclusion of employer-sponsored health care — $246.1 billion



  • Exclusion of Medicare benefits — $39.3 billion



  • Medical expense deduction — $8.7 billion



  • Self-employed premium deduction — $4.8 billion



  • Exclusion of TRICARE and military benefits — $2.1 billion



  • Exclusion of Medicare benefits for military retirees — $1.0 billion



  • Health Savings Accounts — $0.3 billion



  • Health coverage tax credit — $0.1 billion


Mr. Keinbard notes that the employer exclusion is the largest tax expenditure the government offers and the third largest expenditure, after Medicare and Medicaid. He says, “The current system of providing a generous tax subsidy for employer-provided health care with no or little subsidy in the case of insurance purchased outside of the employer market distorts taxpayer and market behavior. Unlike most tax expenditures, the large subsidy associate with employer-provided health care is subject to few statutory limitations.”

Drilling down into the numbers, Mr. Keinbard reports on the value of the exclusion to individuals in different income categories. He finds that the average saving per tax return is regressive, providing greater benefits for people with higher incomes —


  • AGI < 10K -- $625 in tax savings



  • 10K – 30K — $2,008



  • 30 K – 50K — $2,502



  • 50K – 75K — $3,106



  • 75K – 100K — $3,972



  • 100K – 200K — $4,504



  • 200K – 500K — $4,634



  • 500K — $4,385


In one item that I’ve never seen reported on before, Mr. Keinbard notes that the exclusion actually lowers income for people making under $10,000 because it reduces the amount of earned income “for purposes of the earned income tax credit, resulting in a decrease in refundable credits for some recipients.”

The rest of the paper is a very complete exploration of the consequences of this tax distortion and the various ways it could be reduced or eliminated. But he is very balanced in presenting the negative consequences of these actions as well as the positive.

There is only one section I would take issue with in Mr. Keinbard’s analysis. He assumes that employer-sponsored coverage is more affordable than individual coverage for the usual reasons — economies of scale, reduced selection due to pooling, better negotiating power for the employer. All of that should make employer-based coverage less expensive if everything else were equal. But everything else is not equal.

In particular, Mr. Keinbard completely overlooks the effect of varying regulations on coverage. In most states fully insured employers are massively regulated with benefits mandates, rating restrictions, enrollment requirements, marketing practices oversight, claims handling requirements, and so on. Large, self-funded employers are exempt from any of these regulations. Small employers are not. In fact in many states the individual market is less tightly regulated than the small group market, and individual premiums are lower as a result. As Mr. Parente finds in his study (above), the cost of regulation is a major driver in the affordability of health coverage.

The hearing also featured testimony of Katherine Baicker of the Harvard School of Public Health (and formerly with the Bush Council of Economic Advisors) and Jonathan Gruber of the Department of Economics at MIT (and board members of the Massachusetts Connector). These statements are pretty short and pretty readable so I won’t review them here.

SOURCE: Senate Finance Hearing


There has been an interesting back and forth between EBRI’s Paul Fronstin and Bill Boyles of the CD Market Report. This is all about an analysis Paul did in the August EBRI Notes newsletter that looked at the ability of HSA savings to offset the cost of health care post-retirement. He concludes that “while HSAs can be used to save for health care expenses in retirement, the maximum savings that can accumulated in an HSA will be far from sufficient to full cover the savings needed.”

That is not a surprising conclusion, but given EBRI’s past hostility to HSAs, Bill Boyles was very doubtful about its methodology. Some of Bill’s criticisms were legitimate, others were not well-founded. For instance, the EBRI text says that “catch up” provisions don’t kick-in until age 65. That was likely a typo because the calculations seem to include catch-up contributions starting at age 55. And it looks like Bill missed EBRI’s inclusion of interest income, which it set at 7.2 percent.

More importantly, EBRI assumes people don’t start saving for retirement until age 55, so have only 10 years to accumulate assets, and EBRI assumes a retired couple will need $376,000 in savings to cover their lifetime premium and out-of-pocket expenses. I won’t challenge this latter assumption because even if it is accurate, it is a composite of so many different situations that it is largely meaningless for any real family. Plus, the idea that all out-of-pocket health spending in retirement should be paid out of savings rather than out of current income is peculiar to begin with.

But the assumption that people will wait until age 55 to begin saving money in an HSA is clearly false. People have many reasons for keeping savings in an HSA at all ages, and in most cases the funds will still be in the account when they turn 55.

But I would never argue that HSAs are the panacea for retirement health — or anything else — in any case. So I am not impressed with the conclusion that they are not. Of course they are not. But they are, or can be, a substantial help for people who are thinking ahead. And one might think they should be celebrated for contributing to solving a problem that is otherwise intractable.

SOURCE: Employee Benefits Research Institute

I don’t believe any of this is generally available, but if you would like to communicate directly with the contenders, you may real Paul Fronstin at [email protected] and Bill Boyles at [email protected].