Supercharged Incentives

The debate is engaged. President Bush, as anticipated, has offered a number of new health policy initiatives designed around four goals: affordability, portability, transparency, and efficiency. Health Savings Accounts are the centerpiece of his agenda, with supercharged tax breaks to encourage people to sign up.

Some highlights:

  • Premiums for HSA-compatible insurance would be tax deductible if the policy is purchased outside the workplace.
  • Larger annual deposits to HSAs would be allowed, up to the maximum out-of-pocket exposure on the policy ($5,250 individual and $10,500 family this year).
  • To level the playing field between individually-purchased and job-based health insurance, the president would give a tax credit equal to the amount of payroll taxes paid for both the cost of the premiums and HSA deposits.
  • If you are a family with income under $25,000, you would qualify for a refundable tax credit of up to $3,000 to buy HSA-compatible health insurance.

Fortunately, the White House did not listen to the advice of Glenn Hubbard et al in their new book Healthy, Wealthy, and Wise to make all spending on health care tax deductible. This is a prescription for inflation and would encourage people to spend money on health care over other needs, like education, housing, and food.

This gets lost in all the debate, but HSAs could be seen as a bribe to get people to buy health insurance. You can’t get this tax-preferred savings account unless you buy health insurance. So the real incentive here is to encourage people to get coverage. The new tax breaks for purchasing health insurance will supercharge the incentive. The White House estimates that 21 million people will have HSAs by 2010.

Now the ball is in Congress’ court to make this happen.


It’s too bad that the whole issue is being so politicized. Reps. Pete Stark and Henry Waxman, both of California and both vocal opponents of HSAs, released a study yesterday that says HSA enrollees in the federal workforce are younger and wealthier than those in traditional plans.

“The average age of HSA enrollees was 46 years old compared to an average age of 59 for enrollees in traditional plans,” they report. Since when is 46 young? That is in line with other studies that show HSAs are most popular with families whose breadwinners are age 45-54.

And those in the highest income brackets “were over three times as likely to sign up for HSAs.” These are market leaders who clearly see the investment potential and will bring others along as they see the value as well.

And California Insurance Commissioner John Garamendi issued his own scathing report, calling HSAs “a dangerous prescription” for a struggling health care system.

The Wall Street Journal editorialized that: “Yesterday’s attacks from liberals on health savings accounts — the tax-favored medical accounts that are a key part of the White House proposal — is a sign that this idea is a threat to the government control of health care.”


CMS Administrator Mark McClellan announced yesterday that both premiums and drug costs are lower than expected for the new Medicare drug benefit.

The premiums that beneficiaries pay now are expected to average $25 a month, not $37 as Congress originally projected. This is because seniors are picking plans with lower premiums. And this, in turn, means that the cost of the program will be 20% less this year than expected.

They cite strong competition among the drug plans in negotiating low drug prices as well as lower premiums to entice seniors to enroll – both benefits of market competition.

“Costs are going down as enrollment is going up,” Mark observed. “This is good news for seniors, taxpayers, and the Medicare program.”


Grace-Marie Turner


  • Health savings accounts: A survey of the literature
  • Equal time: Do the math; you’ll like health savings
  • Seizing the HSA opportunity: Developing a winning strategy to grow profits and market share in a time of transition
  • The health disparities myth: Diagnosing the treatment gap
  • The Puget Sound Health Alliance

Author: Grace-Marie Turner
Source: Galen Institute, 01/30/06

The newest studies on Health Savings Accounts, including demographics of who is signing up and the cost of the plans, are summarized in this paper by Grace-Marie Turner of the Galen Institute. Highlights include a survey by America’s Health Insurance Plans that found three million people are now enrolled in HSAs, a Deloitte study that found the cost of consumer-driven plans increased by only 2.8% last year, and data from Blue Cross Blue Shield that shows the health status for purchasers of CDHC plans is similar to those enrolled in traditional plans.
Full text:

Author: Grace-Marie Turner
Source: The Atlanta Journal-Constitution, 01/31/06

Grace-Marie Turner offers examples in a commentary for The Atlanta Journal-Constitution of the savings potential for those who open and maintain HSAs. She used an HSA calculator at to create this example: “[L]et’s take a working family that begins at age 40 depositing the full amount into an HSA each year [$5,450 in 2006]. The family could spend $2,000 out of the account every year for the next 25 years to cover routine health costs, and still have more than $125,000 saved by retirement at age 65.” The calculator shows that “health savings accounts are a valuable potential savings resource for middle-age and middle-class Americans.”
Full text:

Authors: Aamer Baig, Jeff Nuckols, and Amy Dawson
Source: DiamondCluster, 08/22/05

Health Savings Accounts will have “a transformational impact” on the healthcare and financial services industries over the next five years, according to a report published last summer by DiamondCluster, a global management consulting firm. “Financial services companies (including payment processors) are now firmly inside the HSA value chain and have an opportunity to grow assets, build relationships, and increase transaction volumes,” according to the report. By 2010, DiamondCluster estimates that 15-25 million HSA accounts will hold more than $75 billion in assets. “But these billions of assets are just the beginning: we believe that HSAs will reduce healthcare premiums paid by US companies and consumers by over $200 billion over the next five years?[and] will cause tens of billions of dollars to be redistributed across the healthcare and financial services industries,” concludes the report.
Full text (pdf):

DiamondCluster has also published a new report on “Centering on the Consumer: The Health Insurer’s Key to Unlocking the Healthcare Cost Crisis.”
Full text (pdf):

Authors: Jonathan Klick and Sally Satel, MD
Source: American Enterprise Institute, 01/31/06

In their new book, Jonathan Klick and Dr. Sally Satel examine the connection between race and quality of care and find that “differences in treatment do indeed vary by race but not because of it.” The authors write that “socioeconomic status and geographic location–not race–make a much greater difference in a person’s health and the quality of care he receives.” They argue that the amount of attention the media and academic literature have paid to reports on physician bias can be detrimental. “Not only is the charge of bias divisive, it siphons energy and resources from endeavors that are more relevant to improving minority health: expanding access to high-quality care and facilitating changes in individuals’ lifestyles and their capacity to manage chronic disease,” conclude the authors.
Press release and selected text:

Authors: Eitan Hersh and David B. Kendall
Source: Progressive Policy Institute, January 2006

Eitan Hersh and David Kendall of PPI present a case study of the Puget Sound Health Alliance which was created by a local county executive to bring together Seattle area employers, health care providers, and insurers to try to reduce health care costs and improve quality of care. The authors write that the Alliance works to set quality standards, develop methods for sharing health care data through technology, and increase the impact of reform by executing it on a significant scale. “Regional coalitions like the Puget Sound Health Alliance are crucial to the future of health care reform,” conclude the authors. “If every metropolitan area in the country established an alliance as organized, inclusive, and ambitious as the Seattle group, patient care would improve, costs would fall in line with benefits, and the looming threat of corporations cutting employee health care benefits might be averted.”
Full text (pdf):


Getting the Most Innovative Drugs to Market: What Can the FDA Do?
American Enterprise Institute Event
Tuesday, February 7, 2006, 2:00 – 4:00 p.m.
Washington, DC

For additional details and registration information, go to:

Digitizing Medical Records: What are the Choke Points?
Progressive Policy Institute Conference
Thursday, February 9, 2006, 9 a.m. – noon
Hyatt Regency on Capitol Hill
Washington, DC

RSVP to if you wish to attend.

The Health Disparities Myth: Diagnosing the Treatment Gap
American Enterprise Institute Event
Wednesday, February 22, 2006, 10:00 a.m. – 12:00 p.m.
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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