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February 11, 2006

A Case Against Medical Savings Accounts

Courtesy of Gerald Prante at Tax Policy Blog,  we are informed that former Congressional Budget Office director Douglas Holtz-Eakin is not a fan of the President's proposal for tax-preferred medical savings accounts:

In response to the idea of adding a tax exclusion for individually purchased health care expenses -- in addition to the current one for employer-provided care -- Holtz-Eakin had this to say:

I think it's bad tax policy. We ought to have in this country a tax system that means something. I am less in favor of tax systems that are designed to do things other than raise revenue. We are likely to spend a lot of money in the future. The government is likely to be bigger than it is now -- I don't know how much -- and we need a tax system that raises those revenues efficiently and doesn't muck up our economy too much. Things like this are a recipe for mucky up the tax system and the economy and so I really am nervous about that as -- from a tax-policy perspective, and implementation perspective.

In general, I am the picture of sympathy for this sentiment.  The best tax code is one that has low marginal tax rates and a broad base.  That latter requirement means that there should be minimal use of the tax code as a tool for social engineering (or, worse, political gain).

But I make an exception for health care.  The fact is that we are not talking about simply adding a distortion that was previously nonexistent.  Distortions are already present in the form of tax preference for employer-provided health insurance expenditures.   As Andrew Samwick emphasizes in his related Wall Street Journal debate with Mark Thoma, the idea of the tax-preferred accounts to finance out-of-pocket expenditures is designed to eliminate the perverse incentives created by subsidizing insurance with low deductibles, and to improve the portability of health care provisions. 

I gather that Dr. Holtz-Eakin would prefer that we address the problem by eliminating all tax preferences of this sort, and there I am somewhat sympathetic.  A preferable course might well be to address some of the regulatory issues that Andrew discusses (such as making health care coverage mandatory) and dealing with the availability of coverage to the poor through a straight system of transfers (although it would be mistaken to claim that this isn't mucking up the tax system to some degree).  But absent the social consensus to move in that direction, something like medical saving accounts seems like a reasonable second-best strategy.

February 11, 2006 in Health Care , Taxes | Permalink


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Tracked on Feb 27, 2006 1:05:29 AM


Logically one could combine accounts with removal of tax exemptions for employer paid healthcare moving to a system of individual coverage that could be had regardless of employer. That would be an improvement over the current system, but would people be happy with individual versus group policies? The healthy likely would and the unhealthy likely would not.

Posted by: Lord | February 12, 2006 at 02:54 PM

The system can only really make sense, I think, with some regulatory change that prohibits nonexclusion (on the part of both buyers and sellers).

Posted by: Dave Altig | February 13, 2006 at 06:27 AM

Discriminatory pricing is the main reason they won't work. Account users end up paying retail, while insurers routinely pay only 20%.

One would need to identify the pricing criteria and limit discrimination to those criteria.

Posted by: Lord | February 13, 2006 at 02:21 PM

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