Froma Harrop on Health Savings Accounts

In a column in Sunday‘s Projo, Froma Harrop expressed opposition to the idea of health savings accounts, at least as proposed by President Bush….

Bush's new HSA is actually a rocket-powered tax shelter dressed up as a sweet little program to help the uninsured. It would also undermine the traditional health coverage now offered by employers. (More on that in a minute.) And in case anyone still cares about deficits, it would cost the Treasury $156 billion in lost tax revenues over 10 years -- more than wiping out any savings Bush hopes to achieve with his cuts in projected Medicare spending.

1. The column’s emphasis illustrates why the country is not moving towards a national consensus on the issue of healthcare delivery. Liberal reformers focus almost exclusively on covering the uninsured. However, many people with health insurance have serious concerns of their own about the existing system, concerns like the fact that they have little control over what is and what is not covered, that changes in coverage are presented to employees in a take-the-whole-plan-or-leave-it fashion, that they may not be able to keep their current doctor if their employer changes insurance companies (which an employer might do without consulting their employees), etc.

To liberals (like Ms. Harrop) these concerns are secondary. Their overriding issue has become locking into law the power of remote collective entities -- either government or big corporations -- to regulate and control healthcare delivery decisions…

Like 401(k)s, the proposed HSAs could save money for employers while transferring the cost and risk of providing what was once an expected benefit onto the workers.

In other words, because some people want to surrender their freedom to distant bureaucracies, everyone’s freedom to make decisions about their own healthcare delivery should be curtailed in order to reduce "risk".

2. Ms. Harrop seems to take the distressingly common liberal position that taxes are good things in-and-of themselves.…

Bush's HSA proposal is a wedding cake of tax credits piled on top of tax deductions. And unprecedented in the annals of tax breaks, this one would tax neither the earnings going into the accounts nor the withdrawals coming out. This is unlike 401(k) plans, in which people contribute pre-tax dollars into accounts but pay taxes on the money they withdraw.

There is no mention of why this “unprecedented” tax cut is bad in terms of its impact on healthcare delivery, just the implication that a new way to cut taxes must be something undesirable.

Say you need medical services that cost $2,000, and you want to pay your healthcare provider directly. How much money do you need to pay for the medical services to be received? Under the "unprecedented" Bush plan, the answer is $2,000, if the money passes through an HSA. Ms. Harrop takes the position that to pay for $2,000 of medical services, you should pay the $2,000 to healthcare provider plus taxes to the government for the right to use your healthcare money where you need it.

3. The analysis of benefits that Ms. Harrop relies on borders on propagandistic. The Bush plan gives people both a tax-credit on the amount deposited into an HSA and tax-deduction from their gross adjusted income. Ms. Harrop, quoting a Center on Budget and Policy Priorities study, says…

The center figures that for a family making $180,000, a $1,000 contribution into an HSA would reap a $433 tax subsidy. If that family makes $15,000, the subsidy would total only $153 -- and that's assuming that a tax credit is made refundable. Otherwise, it would be zero.

The $280 difference comes strictly from the deduction, not the credit. Everybody gets the same $153 tax-credit for $1,000 deposited into an HSA. The person making $15,000, however, gets no reduction in taxes paid on his adjusted gross income becasue he is in the 0% tax-bracket, i.e. he is paying no Federal income tax that can be reduced. The person making $180,000 gets to take $1,000 off of his gross adjusted income, resulting in $280 in savings in the 28% tax-bracket.

This kind of cheap-shot leads one to wonder if the rest of the analysis in the study is of the same dubious quality. It is obfuscating to favor a progressive income tax, then claim that any tax dedution is a “tax-cut for the rich” because it has a bigger impact on the people who are paying more under the progressive structure. Of course, CBPP and/or Froma Harrop could resolve this intellectual difficulty by coming out in favor of a flat-tax, where everyone pays the same percentage regardless of income.