Few have ever heard of “Health Reimbursement Accounts,” but they could fundamentally change the nation’s health care system — for the better — and destroy the Democrats’ case for socialized health care.
Late last week, the Trump administration finalized rules that will let companies put money into tax-exempt HRAs that their employees could then used to buy an individual insurance plan on their own. Seems like no big deal, right? Except it will start to unravel a 77-year-old policy mistake that is largely responsible for many of the problems the health care system suffers today.
Back in 1942, the Roosevelt administration imposed wage and price controls on the economy. But it exempted employer-provided benefits like health insurance, and the IRS later decreed that these benefits wouldn’t be taxed as income.
The result was to massively tilt the health insurance playing field toward employer-provided insurance. Today 88% of those with private insurance get it at work.
The massive tax subsidy — now valued at more than $300 billion — also encouraged overly generous health plans, because any health care paid by insurers was tax exempt, while out of pocket spending had to come from after-tax dollars.
So not only did this Roosevelt-era mistake create an employer-dominated health insurance market, it made consumers largely indifferent to the cost of care, since the vast bulk of it was picked up by a third party.
But while health care experts across the political spectrum recognize this mistake, Democrats’ response has been to get the government even more involved in health care, with the latest proposal a total government takeover under the guise of “Medicare for All.”
Republicans, to their credit, have been pushing in the opposite direction. The introduction of Health Savings Accounts — a GOP reform idea Democrats fiercely opposed — 14 years ago helped to remedy one of the tax distortions, by allowing some people to pay out of pocket costs with pre-tax money.
Even with all the restrictions Congress put on HSAs, the market for high-deductible HSA plans exploded — climbing from nothing in 2005 to nearly 30% of the employer market today. By the end of last years, consumers had saved up $10 billion in these accounts.
The rise in these “consumer directed” plans was at least partially responsible for the slow-down in health spending in recent years, according to official government reports, as consumers increasingly started shopping around.
Trump’s HRA rules will have a far more profound impact.
Under the plan, employers will be able to fund tax-free Health Reimbursement Accounts for their workers, who can then use the money to buy an individual insurance plan — thereby taking another step toward fixing the 77-year-old tax distortion. The rule also lets employers fund a different account to buy cheaper “short-term” plans.
“This subtle, technical tweak has the potential to revolutionize the private health insurance market,” wrote Avik Roy, one of the smartest health care experts around, in the Washington Post.
The administration figures that 800,000 employers will eventually move to HRA plans, and 11 million workers will get their benefits this way.
At the same time, Trump also loosened the federal rules that had needlessly impeded “association health plans.” These are plans that let members of various groups band together to buy insurance. The result will be more competition, and more affordable choices for millions of people.
The Democrats’ response? Attack these changes as another attempt by Trump to “sabotage” Obamacare. What they really fear, however, is that the two new rules will destroy their case for socialized medicine.
As Roy put: “Together, over time, these changes would give workers more transparency into — and more control over — the health-care dollars that are now spent by other people on their behalf. That transparency and control, in turn, would create a powerful market incentive for health-care payers and providers to lower prices and increase quality.”
Once that happens, the last thing these millions of newly empowered health care shoppers will want is to be shuffled into a one-size-fits-all government plan designed for the masses by socialists like Bernie Sanders.
Issues & Insights is a new site formed by the seasoned journalists behind the legendary IBD Editorials page. We’re just getting started, and we’ll be adding new features as time permits. We’re doing this on a voluntary basis because we believe the nation needs the kind of cogent, rational, data-driven, fact-based commentary that we can provide.