Axing HSAs?

The Tax Reform Panel has caused an uproar among our health policy colleagues for recommending that Health Savings Accounts be replaced by new Save for Family accounts (page 120). What an outrage, our colleagues say, after all we did to get this free-market idea in place!

So here’s the story: Taxpayers can put $10,000 a year into these new Save for Family accounts for health care, retirement, education, or a down payment on a home. Earnings grow tax free, and distributions for qualified expenses are tax free. But the problem is that the money going into the accounts is after-tax, not pre-tax, money (like a Roth IRA). Clearly a worse deal than the current HSAs.

So why would they recommend this? Because one of the principles of the panel was to tax income only once. But HSA deposits aren’t taxed at all, creating their own kind of distortion in attracting funds that might otherwise go toward other spending.

So what about using the new deduction for health insurance to both buy health insurance and create an HSA? The panel said that individuals should be able to deduct from their taxes $5,000 and $11,500 for families a year for health insurance, whether they buy it on their own or get it at work.

Experts would argue that this $11,500 could be a combination of health insurance premiums and direct spending on health care. But in this new tax system, all of the money would have to be spent in that year to get the deduction. No roll over.

We have commended the panel for getting it right in justifying a cap on tax breaks for employment-based health insurance. And their principle of taxing income only once is sound tax policy. But without some extra help to boost the free-market in the health sector, like HSAs, we are likely to devolve toward more and more government spending. Clearly not an outcome that most of the people on the tax panel would want.

The commission’s recommendations have a long way to go before any action would be taken in Congress. If this issue is raised, we will argue that tax policy shouldn’t create a new distortion by allowing only immediate spending on health care and health insurance; we should also have an incentive for saving. Allowing some of the $11,500 to be put into a savings account that could roll over to future years gets the incentives right and likely would get a good hearing.


The Commonwealth Fund has published a new survey that vilifies the U.S. healthcare system, and it is, of course, getting widespread media coverage.

This multi-nation public opinion survey found that about one in three Americans with major health problems said they had experienced medical mistakes, medication errors, or inaccurate or delayed test results. People in every other country surveyed reported lower error rates. The study also said U.S. patients are more likely to forgo needed care, have to wait too long to get it, and are forced to spend too much.

This is so annoying. The study already is being represented as a scientific comparison of six nations’ health care systems. It is not. This is a subjective, opinion poll of what sick people in different countries think in a self-reported survey about the health care they get. There were no objective standards or control group.

Could it be that U.S. patients are more demanding and better informed about the care and medicines they were supposed to be getting than their counterparts in other countries? Possibly, but you’d never know that from reading this study. Yes, we do have problems and so do other countries, but this is clearly one more attempt to tear down the U.S. system in an effort to convince us that other countries’ government-run systems are better. Never!


The Galen Institute’s Consumer Choice Community has an exciting new conversation going on, led by our friend Dick Matthews, a guru on benefits design. Dick is leading discussions on our newly redesigned, members-only community forum, called the On-Line Coffeehouse.

We focus on some of the most important issues facing consumer-directed health care including: 1) Finding ways to deal with the practical problems of making HSAs a success, and 2) The challenges of electronic medical records. We will develop recommendations and tangible solutions to these and other challenges drawing on the best expertise of people on the front-lines of making this happen.

The CCC is a great network and information resource, with conference calls, conferences, and web-based tools for members. Join now and join the conversation!

Grace-Marie Turner


  • Trial Lawyers Inc. health care
  • Guaranteed future pain and suffering: The recent research on drug price controls
  • The Medicare Drug Benefit: Beneficiary perspectives just before implementation
  • Innovations in health information technology
  • HealthCast 2020: Creating a sustainable future
  • The cost and benefits of individual health insurance plans
  • Ceasefire video clips

Source: The Manhattan Institute, October 2005

“While the excesses of the litigation industry alone cannot explain America’s mounting medical costs, litigation is a large, and growing, contributor to our health-care bill,” according to this Manhattan Institute study on the impact of the lawsuit industry’s effect on American health care. The report details the impact on prescription drugs, medical devices, medical malpractice, hospitals, HMOs, and vaccines. “When our liability system punishes so indiscriminately, it does not efficiently deter bad conduct but rather reduces health-care access by reducing the supply of doctors; encourages expensive, unnecessary, and often dangerous procedures; and lowers the expected return from research into new medicines and medical devices that save lives.”
Full text:

Author: Derek Hunter
Source: The Heritage Foundation, 11/03/05

A review of current studies on price controls reveals that controls “would lead to less research and development in the pharmaceutical industry, fewer new prescription drugs, and the reduced availability of prescription drugs,” writes Derek Hunter of The Heritage Foundation. The Commerce Department recently found “that price controls in OECD countries caused a $5 billion to $8 billion annual reduction in funding for drug research and development” – funds that could have been used to develop three or four new molecular entities. Separate studies show that price controls “directly undercut new investments in new cures and treatments” and cause a significant delay in the introduction of approved drugs into the marketplace. “No politician, over the course of 4,000 years of experience, has yet devised a humane system of price controls that spares consumers from the risks of shortages and declines in the quality of the controlled goods or services,” concludes Hunter. “While further shifting costs to consumers in the uncontrolled sector of the pharmaceutical market, price controls would also sacrifice future medical breakthroughs by stifling incentives for private research.”
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Source: The Kaiser Family Foundation/Harvard School of Public Health, 11/10/05

This comprehensive survey examines what seniors know about the Medicare drug benefit and finds varying degrees of knowledge related to key elements of the new benefit, highlighting the importance of ongoing educational efforts. Open enrollment for the benefit begins November 15, but more than half (61%) of seniors don’t understand how the benefit works and 43% are unsure if they will enroll in a drug plan for 2006. Although seniors are “split in their overall views of the drug benefit (37% have an unfavorable view, 31% favorable, and 31% don’t know),” those “who say they understand the benefit well are far more likely to report favorable views (47% favorable), compared with 21% favorable among those who say they do not understand it well.” Additionally, 77% of seniors think the benefit will help those with low incomes, but “[a]mong the group of seniors most likely to be eligible (those who earn less than $15,000 annually), half (50%) do not know they are likely to be eligible for additional financial help.”
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Source: America’s Health Insurance Plans, 11/09/05

This report from America’s Health Insurance Plans examines the growth of information technology (IT) within the health sector and offers summaries of breakthrough IT initiatives, including e-prescribing, digital radiology, and online decision support. But “no IT initiative offers more promise or has acquired more urgency in the wake of recent events than the development and implementation of electronic personal health records (PHRs)”. Many health insurance plans are now creating several types of PHRs and “finding that they have great potential to improve health care quality, reduce costs, and increase consumer satisfaction.” For example, one health plan located in Washington State has created an interactive website for its members that allows them to view their medical records, consult with doctors, schedule appointments, and order and renew prescriptions. “One indication of the system’s success is that more than 10% of members’ contacts with their health care practitioners are now online, and over 23,000 secure e-mails are exchanged between members and practitioners each month,” according to the report.
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Source: PricewaterhouseCoopers, 11/05

“While no one nation has all the answers to the Healthcare dilemma — most have pieces that are working,” writes PricewaterhouseCoopers in its latest edition of Healthcast. PricewaterhouseCoopers interviewed 700 health and business leaders in 27 countries and found that “because they are often viewed as a local industry, healthcare organizations haven’t exchanged ideas globally as much as other industries such as manufacturing and services.” The report identifies several transferable lessons being used by health systems around the world including: collaboration among hospitals, physicians, payers, and other organizations to bring about standardization and encourage the adoption of technology; movement towards consumerism in health care; establishment of new methods to increase transparency; and development of new methods of manpower management.
Executive summary:

Source: eHealthInsurance, 11/09/05

eHealthInsurance has released a new study providing a detailed look at consumer purchasing of health insurance plans from the individual and family health insurance market. Based on a sample of more than 80,000 policies sold through between January 1, 2004 and April 30, 2005, the report provides a wealth of statistics on topics including: average monthly premiums paid by age, gender, marital status and state; costs of health insurance for children insured individually; policy deductible levels; co-payments; and specific benefits purchased.
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Former Louisiana Senator John Breaux is convening a series of events through his “Ceasefire on Health Care” program, which is attempting to find common ground between Democrats and Republicans on the subject of health care reform. This week, Senator Breaux moderated a discussion with scholars Henry Aaron of the Brookings Institution and Stuart Butler of The Heritage Foundation. This event, and several others, can be viewed online at:


Health Savings Accounts and Tax Subsidies: How Effective Can They Be?
AEI Health Policy Discussion
Friday, November 18, 2005, 2:00-4:00 p.m.
Washington, DC

For additional details and registration information, go to:

Healthy Competition
Cato Institute Book Forum
Tuesday, November 29, 2005, 4:00 PM (Reception to follow)
Washington, DC

For additional details and registration information, go to:

Health Policy Matters is a weekly newsletter containing summaries of timely and informative studies and articles on free-market health reform. It features research and writings by participants in the Health Policy Consensus Group, articles of interest from the health policy world, and announcements of coming events. Health Policy Matters is published by the Galen Institute, a not-for-profit public policy organization specializing in information and education on health policy. For more information about the newsletter and our organization, please visit our website at

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