Free-Market Crisis and Opportunity

Published April 1, 2004

“Once millions of HSAs are established, it will be almost impossible to reverse this program,” writes Physicians for a National Health Program (PNHP) on its Web site (; thus, it calls for an immediate repeal of the Health Savings Accounts enabled in the Medicare Prescription Drug, Improvement, and Modernization Act.

Editorialists called HSAs “Teddy’s nightmare” (Wall Street Journal, 12/23/03) because a reinvigorated private medical insurance market could end the dream of Senators Kennedy, Clinton, et al. for Canadian-style socialized medicine.

The IRS has issued rules (available at, and Aetna, Fortis, and other insurers are writing policies. About 30 percent of employers are expected to start offering such plans, according to Helen Darling of the Washington Business Group on Health.

To be eligible, a person must have a qualifying high-deductible health plan (HDHP) and may not have coverage (even as a spouse or dependent)under a plan that is not an HDHP. An HDHP has an annual deductible of at least $1,000 and maximum annual out-of-pocket expenses of $5,000 for an individual or $2,000 and $10,000, respectively, for a family.

HSA trustees or custodians are not required by the IRS to determine whether an HSA distribution is used for qualified medical expenses. Individuals need to keep such records in the event of a tax audit. There is a 10 percent penalty on top of taxes for using the funds for non-qualified purposes, except after a beneficiary’s death, disability, or attainment of age 65.

As PNHP points out, the tax advantages are not great, especially for those who don’t pay taxes. The tax benefit ranges from $200 for a person with an adjusted gross income of $35,000 to $721 for a person with an AGI of $500,000 or greater (Wall Street Journal, 12/23/03). It’s the insurance premium saving that is, over time, supposed to fund the deductible.

Many will probably choose, as PNHP fears, to use their HSA as a form of individual retirement account (IRA). If a head of household contributes 100 percent of a $4,000 deductible each year starting at age 30, and withdraws $1,000 per year to pay medical expenses, a nest egg of $284,509 would accumulate in 35 years, assuming a 5 percent rate of return, according to a chart distributed by the Archer MSA Coalition.

This individual benefit, PNHP laments, would come at the expense of “fragmenting the health care risk pool.” If healthier subscribers withdraw from “comprehensive” plans, the cost of such coverage “may become so exorbitant that it doesn’t exist for you–or your employer may not be able to afford it,” stated Edwin Park of the Center on Budget and Policy Priorities. (Wall Street Journal, 12/23/03)

At present, there is no common risk pool, observes Greg Scandlen of the Galen Institute, but rather tens of thousands of little risk pools. Moreover, the cost of comprehensive coverage is already so high that more employers and workers are doing without insurance altogether.

What PNHP has in mind, of course, is to create a giant risk pool with national health insurance. However, “there is no pooling when government pays,” writes Linda Gorman of the Independence Institute. “Government payment is an entitlement, not insurance. Raw political power decides what government will spend on health care and who it is going to spend it on. Government has no contractual obligation to … allow you access to medical care. In the Netherlands, it simply encourages physicians to murder citizens judged to be consuming too many medical resources.

“Private insurance companies, on the other hand, have contractual obligations, and it is one of the wonders of the market system that they generally meet them.”

Reliance on force vs. trust in voluntary contracts is the key difference between “social insurance” (compulsory income redistribution) and true insurance. The new plans based on consumer choice are “another nail in the coffin of health insurance as a form of social insurance,” writes Victor Fuchs of Stanford University. He expects national health insurance to come to the U.S. in the wake of war, depression, or large-scale civil unrest (New England Journal of Medicine 2002; 246:1822-1824).

There may be only a narrow window of opportunity to avert a crisis in the affordability and availability of medical care, leading to cries for a government takeover from desperate patients and doctors trapped in the system. “Our society has been infected with a cancer called socialism,” writes Joseph Lee Pugh. “If it isn’t stopped this time, it won’t be stopped again.”

Talented physicians are opting out of third-party payment. Customers are demanding lower prices. The American Hospital Association is demanding a safe harbor from the Anti-Kickback Statute for giving uninsured patients a discount. Nonprofit hospitals are opening cash-based clinics. Prices are being posted on the Internet.

“The Health Care Rebellion” is well underway, writes Pugh. It could be, in Chruchill’s words, “the end of the beginning,” if not the beginning of the end.

Jane M. Orient, MD is executive director of the Association of American Physicians and Surgeons. A longer version of this essay first appeared in the February 2004 issue of the group’s newsletter, AAPS News.

For more information …

visit the Web site of the Association of American Physicians and Surgeons at, or write AAPS, 1601 North Tucson Boulevard #9, Tucson, AZ 85716.