Expanding Health Coverage in Increments: Step One

Fixing health care in the U.S. will take time. The hybrid system that we have now, part government-sponsored and part market- based, has too many moving parts to be easily repaired. A Big Fix, furthermore, is probably beyond the fiscal capacity of this, the world's largest debtor nation. We are going to have to do this in pieces.

One place to start is to expand eligibility for Health Savings Accounts (HSA). This will not matter to workers whose employers offer Flexible Spendings Accounts (FSA), allowing employees to bank pre-tax earnings to save up for future medical expenses. Individuals without such a benefit can set up Health Savings Accounts on their own, but there is one major hitch: they must first buy coverage under a qualifying High Deductible Health Plan (HDHP). In other words, you cannot self-insure with pre-tax dollars until you buy insurance first. Who but a lobbyist could have come up with that one?

Now, the reason that nearly 50 million Americans lack insurance is because they cannot afford to pay both the premiums for a high-deductible policy and the out-of-pocket costs required to spend down the deductible. When you think of it, high-deductible insurance is a mirage. By the time you accumulate medical expenses to offset the deductible, you have nothing left to pay the next premium. Your coverage will lapse before you ever access the promised benefits. That is why they call it "coverage without care."

Out of simple fairness, the prior-coverage requirement for HSAs should be eliminated so that people who do not have "cafeteria" benefits can enjoy the same tax advantages as people who do. Alone among the 2008 presidential candidates, Ron Paul proposes exactly that. A truly level playing field would also call for a rebate of any payroll withholdings on earnings directed into HSAs. John McCain would level the field the other way, by taxing cafeteria plans out of existence and instead offering personal tax credits to help cover medical expenses.

Lacking an HSA, the best a tax filer can do to recover a portion of out-of-pocket medical expenses is to claim a Schedule A deduction. But that deduction only kicks in after you have already spent 7.5% of your Adjusted Gross Income (AGI) on health care in any one year, which makes the deduction pretty useless for most people (Paul would grant deductibility to the first 7.5% as well). Let's face it, the tax code really wants you to buy insurance from the industry that helped write the code in the first place.