Unbiased Analysis of Today's Healthcare Issues

State of the Union

Written By: Jason Shafrin - Feb• 02•06

In the State of the Union address, President Bush dedicated portions of the speech to the health care problems facing the United States.  A summary of his proposals is located on the White House website.  I will comment on a few noteworthy additions to the Bush plan, of which I was not aware of during my January 26th post. 

A few of his proposals, if approved, will certainly improve health care quality and accessibility:

  1.  Making HSA’s portable.  This will help to reduce ‘job lock’; it will allow workers to choose employment where their marginal product (and thus, their wages) is highest without worrying about losing their health care in the short run.

  2. Creation of Association Health Plans (AHPs) for Small Businesses.  This would allow small businesses to join together to purchase insurance collectively.  Small businesses often pay high load factors since insurance companies must cover their higher administrative costs as well as price the insurance in order to prevent adverse selection.  I am not sure why AHPs are not more common in the US, and do not think that the government needs to establish the AHPs; this is probably best left to the free market.

  3. Improving Health Information Technology.  Standardizing IT formats across the medical field should have create large cost savings and significant improvements in quality.  The medical field is one industry that employs IT the least.  If a patient moves to a new city and is rushed to an emergency room, a physician could check his or her medical history in order to be certain not to prescribe a medication to which the individual is allergic.  Currently, no physician’s practice has an incentive to invest in IT if few firms are currently using it.  The standardization Bush proposes should facilitate IT adoption throughout the nation.  One drawback may be that allowing the federal government to design the IT template, may not be as efficient as if industry insiders were able to design it.

The most contentious point of the Bush proposal is probably his refundable tax credit to low-income families for the purchase of health care.  The White House website states that:

“A family of four making $25,000 or less will be able to get a refundable tax credit of $3,000 from the Federal government to help buy an HSA-compatible policy that covers them for major medical expenses. These families will have the flexibility to put up to $1,000 of the money directly into an HSA to pay for routine medical expenses. What the family does not spend can be saved in the account and carried over to the next year, earning interest tax-free.”

A few items to note:

  1. This policy could replace Medicaid as the major insurer for low income individuals.  It is basically a cash grant to the poor or working poor who can then choose to spend the money on either health care, other goods, or they could save for the future.  Economists always believe that permitting the consumer to choose how to spend his money will allow him/her to maximize their overall welfare.  Since consumers will pay the full price of medical expenses up to the high deductible limit, this should reduce the amount of health care demanded.

  2. In order to finance this, Bush will need to raise the distortionary taxes currently in place.  If not, we will then dig ourselves into debt.

  3. It is imperative that this refundable tax credit is phased out gradually.  If not, poor families could face a marginal tax rate of over 100%.  For instance, let us assume that a family earning $25,000 is eligible for a $3000 tax credit but the same family earning $26,000 would be eligible for only a $1500 tax credit.  This policy would create an enormous tax disincentive to work extra hours for families on the border of getting the tax credit of $3000 or $1500.  Hopefully, Bush’s economic team will realize this.

  4. With all HSAs, there should be exceptions to the deductible made for preventative care.  In the long run, preventative care (such as vaccines and pre-natal care) will reduce costs for insurers.

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