HSAs solve health care better than government
Jeffrey Miron of the Harvard Economics Department and the Cato Institute has it exactly right in his recent column regarding health care:
Government should not subsidize health insurance — for the uninsured, the poor, the elderly or anyone else — or regulate health insurance markets. Here’s why.
Subsidizing health insurance means that patients and doctors are insulated from the costs of health care, so they utilize too much — often in the form of unnecessary tests or medical procedures whose value hasn’t been proven. This excess demand, along with technological progress, means rapidly growing deficits, so governments limit reimbursements to health providers or ration care. This kills innovation and creates its own inequities. The taxes necessary to fund subsidies are a drag on economic growth.
This phenomenon is known in economics as “moral hazard” and is endemic to most insurance markets. The principle is that when insulated against the costs of a particular behavior, individuals are more likely to engage in that behavior – precisely because they do not bear the full cost. This can lead individuals to take unnecessarily risky behavior or to take costly actions even if the individual would not value that action as the best use of limited resources in the absence of insurance.
For instance, comprehensive auto insurance can lead to more risky driving behavior (requiring government to enforce a glut of regulations in order to artificially re-introduce a measure of safety). Expectations of government bailouts can lead large banks to engage in risky lending practices that they would not likely engage in without the anticipation of government “insurance.” So, too, in health insurance markets, individuals who are not directly invested in the cost of treatment are more likely to pursue unnecessary treatments – driving up the cost of health care.
This is precisely why free-market economists such as those at the Cato Institute have advocated for greater use of health savings accounts in combination with high-deductible insurance policies. These policies give the individual an incentive to better self-regulate the amount of health care he requires. A health savings account allows the individual to invest money he would otherwise spend on a higher premium into a tax-free savings account that he can later use to pay the higher deductibles when he decides that care is necessary. This allows the insurance policy to be used for its intended purpose – to insure against the event of a catastrophe – and overcomes the moral-hazard problem that drives up costs and drives down the availability of health care.
The alternative being discussed in Congress right now is to take decisions away from the individual. Under ObamaCare, a handful of bureaucrats would be forced to impose top-down decisions about health care expenditures onto Americans instead of allowing them to self-regulate. Both approaches are designed to overcome the moral-hazard phenomenon. However, one respects individual freedom while the other does not.