It's time for a health care 401k

Michael Barone
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Posted: Feb 20, 2006 12:05 AM

Sometimes a little-known law can reshape our economy and our personal lives. One such law was Section 401(k) of the 1978 tax law. The headlines that year went to the law's sharp reduction in capital gains taxation, which indeed had important effects -- including sparking the venture capital sector that financed the high-tech revolution. But 401(k) had a similarly important effect.

Employees were allowed to contribute tax-free income to individual retirement accounts, and employers could match their contributions. At the time, most private pensions were defined-benefit plans -- the employer promised to pay certain amounts on retirement. Section 401(k), when implemented by regulations in the early 1980s, led to the proliferation of defined-contribution pensions.

Defined-benefit plans tied employees to their employers for long periods and left the value of their pensions subject to risk if the employer defaulted -- just ask retired steel company and airline workers. Defined-contribution plans allow employees to take their pension money with them when they change jobs and to manage their funds themselves.

The result: a more flexible, agile labor force and a citizenry less dependent on large institutions over which they had little control and more able to fend for themselves.

Bush administration officials and some conservative thinkers hope that health savings accounts can change health care finance in a way similar to the way Section 401(k) changed pensions. Health savings accounts allow holders of health insurance policies to retain monies they do not spend. Typically, such policies have high deductibles. Policyholders pay for routine and predictable medical expenses out of their own pockets, but they are insured against catastrophic expenses.

The Medicare/prescription drug law of 2003 contained provisions allowing health savings accounts -- one reason the Bush administration and most congressional Republicans supported it. Now the administration wants to strengthen HSAs by making premiums on these policies tax-deductible.

This is an attempt to reverse the effect of the World War II decision to make health insurance policies deductible to employers and tax-free to employees. This tended to tie health insurance to employment and has made individuals dependent on large organizations. Since third parties pick up the tab for most health care spending, consumers tend not to be cost-conscious, and the result has been above-inflation cost increases for health care.

The Bush administration, like all before it, shies away from urging that health insurance premiums be taxable -- voters would hate that -- and instead is trying to level the field by making all premiums deductible. There's an argument that this is regressive, because the tax deduction is worth more to high-income taxpayers. But that's true of all tax deductions, and can be compensated for by giving lower-income people deductible tax credits.

Will health savings accounts be an entering wedge to produce a more market-oriented health care sector? Democrats fear that, and Republicans hope so. I confess that I am not sure. What is clear is that health savings account-type policies have been rapidly growing since passage of the 2003 act. There are now 3 million people with health savings accounts, and big employers in increasing numbers are offering high-deductible policies. The employee gets to choose whether to pay more for more coverage or to pay less and be able to keep what he doesn't spend.

Of course, the health care sector will never be entirely market-oriented. Emergency patients on gurneys can't make cost-conscious decisions, and the poor will receive care that will in some way be subsidized by others. But health savings accounts have been spreading more rapidly since the 2003 Medicare act than defined-contribution pensions did after the 1978 tax act.

The New Deal and the World War II years produced policies that left people dependent on large organizations -- organizations that, we now learn when we contemplate the problems of steel pensioners or Social Security recipients, don't always deliver. Public policies like Section 401(k) and, perhaps, health savings accounts give more control to individuals and more flexibility to society.

The Clinton health care plan failed in part because we do not have one health care finance system, but many -- and it is impossible for even very smart people to design a one-size-fits-all model that will be politically acceptable. The Bush administration's push for health savings accounts is an attempt to change things not by government mandate, but by opening the way for private actors -- employers, employees, insurers, individuals -- to make decisions that will increase the power of market forces. Not a headline issue, but an important one.