Academic journal article American Journal of Law & Medicine

The Role of State Regulation in Consumer-Driven Health Care

Academic journal article American Journal of Law & Medicine

The Role of State Regulation in Consumer-Driven Health Care

Article excerpt


In December of 2003 the Medicare Modernization Act (MMA) added section 223 to the Internal Revenue Code, creating a federal tax subsidy for money contributed to (and earnings accumulated on) health savings accounts, or HSAs.1 Though public attention was largely focused at that time on the provisions of the MMA creating the new Medicare prescription drug benefit, the MMA was also a major victory for advocates of "consumer-driven health care" who believe that HSAs have the potential to control the cost and improve the quality of health care in the United States, and perhaps even to increase health care access.2

Consumer-driven health care advocates believe that the key reason health care costs are out of control in the United States is that most Americans are too generously insured.3 They believe the solution is to increase consumer sensitivity to cost and effectiveness by making people spend their own money for health care.4 People should make health care purchasing decisions just as they make purchasing decisions for everything else: by evaluating the costs and benefits of health care and balancing their preferences for it with their preferences for other goods and services. If consumers are forced to do so, providers and professionals will lower their prices to compete seriously for the consumer dollar. On the other hand, consumers will buy only the services they really need (or want, or can afford) and thereby reduce utilization to the correct level.5 Consumers will also be more sensitive to the effectiveness of health care, since they are now spending their hard-earned dollars to buy it. Finally, as costs come down health care will become more affordable to those who currently consume too little of it.6

Consumer-driven health care advocates believe that imposing higher deductibles is the most effective way to turn patients into consumers.7 They argue that individuals should be encouraged to buy high-deductible health plans (HDHPs) to cover medical catastrophes, and spend their own money to cover routine medical care.8 They encourage the establishment of HSAs to help assure that money is available to cover routine costs and to equalize the tax treatment of insured and out-of-pocket medical spending.9 The MMA does this by offering three tax benefits: tax deductions for funds that HSA holders contribute to their HSAs (regardless of whether the account holder files an itemized return), exclusion from income and payroll taxation for funds employers contribute to HSAs for their employees, and freedom from taxation for accumulated earnings of HSAs.10 The HSA must, however, be coupled with a HDHP, which must have a deductible of $1,000-$5,000 a year for a single individual, or $2,000-$ 10,000 a year for family coverage.11 The tax subsidies for contributions to the HSA, moreover, only apply to amounts limited to the lesser of the deductible of the insurance plan or $2250 for individual coverage and $4500 for family coverage (indexed for inflation), though people over 55 are allowed to make additional "catch-up" contributions.12

Money contributed to a HSA is not subject to income tax if it is spent on "qualified medical expenses"13 but is subject to both income tax and to a 10% excise tax if it is used for other purposes.14 "Qualified medical expenses" are broadly defined, however, to include many things traditional health insurance does not cover such as nonprescription drugs, transportation or lodging while away from home to receive medical care, or long term care insurance premiums.15 If HSA funds are not spent for health care, they can be withdrawn for any purpose once the account holder dies, becomes disabled, or reaches the age of 65.16

The consumer-driven health care vision and strategy is very controversial. Many health care policy experts believe that HSAs will do little to control health care costs or improve quality, and are likely to diminish access to health care by further fragmenting the insurance market. …

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