This is consistent with the finding that many people get little value out of an additional dollar spent on health care–a painful paradox in a country where tens of millions of uninsured do not have access to the additional medical services they need. Jack Wennberg and his colleagues at Dartmouth Medical School, for example, have done a series of groundbreaking studies finding that the tremendous variations in the level and intensity of medical services across counties is largely uncorrelated with health outcomes. This phenomenon is sometimes described by saying that much of America’s health care is practiced on the "flat of the curve," with little additional benefit for large amounts of additional spending.

To be sure, while the tax system certainly contributes to higher health spending, one should not exaggerate its role. Even in the absence of any tax incentives, Americans–like people around the world–generally prefer not to pay many health costs out-of-pocket and instead prepay much of the cost through an insurance company. To the degree that this leads insurance companies to do a better job bargaining for lower prices, this preference makes perfect sense. And, even if tax changes did lead to greater cost-sharing, this would still have only a limited effect on total health spending, for the simple reason that 10 percent of Americans are responsible for 70 percent of health costs. Any insurance plan, with or without greater cost sharing, would pick up most of the tab for expensive procedures like chemotherapy or coronary bypass surgery.

Everything else being equal, encouraging greater cost-sharing is worthwhile, although the cost-sharing should be limited for low-income families. The health cost and efficiency challenge is simply too large to address with a single step, but that is all the more reason to have as many steps as possible in our overall reform. But cost reductions should be part of a plan to improve the health system, not a pretext for a proposal that would reduce coverage and impede the functioning of the health insurance system. Yet this is precisely what President Bush’s HSA proposal would do.

Health Savings Accounts Won’t Save Health Care
In the face of a tax code that creates incentives to spend more and subsidizes those who least need help, President Bush has put forward a health plan, based on so-called "consumer-driven health care," that would actually make this situation worse. This health plan, predictably, is based on his two favorite panaceas: private accounts, in this case HSAs, and tax breaks tilted toward the most fortunate. The 2003 prescription drug bill established HSAs as a way for individuals with qualified, high-deductible plans (in 2006, a deductible of at least $1,050 for an individual and $2,100 for a family) to save in a tax-favored savings account. Contributions to HSAs are tax-deductible, the funds accumulate tax-free, and all withdrawals for qualified medical expenses can be made without incurring any tax liability (in contrast, IRAs and 401(k)s have either tax-deductible contributions or tax-deductible withdrawals, but never both). Unlike IRAs, HSAs have no income limits, and thus they offer a particularly lucrative tax-sheltering opportunity for high-income families. In addition, President Bush has proposed adding $15 billion in annual tax breaks to support HSAs. Claiming that "one of the greatest obstacles to expansion of HSAs is the tax code," he proposes to expand the tax benefits for HSAs and high-deductible insurance plans purchased directly in the individual market by making even more health costs tax-deductible.

President Bush’s HSA package would make our current system even more regressive by subsidizing savings for wealthy families. For example, he is asking Congress to raise the annual amount a family can save in an HSA from a maximum of $5,450 under current law to a maximum of $10,500. Only a tiny minority of American families are saving so much that they would benefit from this higher contribution limit. These families could accumulate hundreds of thousands of dollars tax free, far more than needed to pay their health costs, and in doing so achieve the President’s stated goal of "reforming" the health system. This is less a reform than an expensive tax giveaway for the most fortunate: high-income families could easily get tax breaks that are 20 times as large as middle-class families. As Congressman Rahm Emanuel puts it, HSAs are "more wealth care than health care."

Not only would President Bush’s proposals have limited upside in controlling health spending; they, as designed, could even end up increasing health spending, thanks to all the new tax incentives that encourage greater health spending by people already enrolled in HSAs. Perhaps more alarming, healthier individuals would opt into high-deductible plans and the individual market, driving up costs for everyone left in the old system. The Bush plan also would undermine the one pooling mechanism that works tolerably well, the employer-sponsored system, without providing any replacement pooling mechanism. As a result, despite spending $15 billion annually, the plan would do little to reduce the number of uninsured and could even end up swelling their ranks. By creating a new tax deduction for individuals purchasing insurance on their own, the President’s proposal would eliminate the added tax incentive to purchase insurance through an employer. MIT economist Jonathan Gruber estimates that nine million people will be dropped from, or choose to leave, their employer-sponsored coverage as a result of this change. This more than offsets the number of people who would get insurance under the plan, raising the total number of uninsured by approximately 600,000. In addition, many of the people who would lose their health insurance are sicker than average, while the people who gain health insurance are healthier.

And, ironically, President Bush’s proposal–one lauded by free-market conservatives–actually restricts consumer choice. All of the tax breaks are reserved for purchasers of one type of government-approved health insurance, with specific limits on deductibles, out-of-pocket payments, and other aspects of the plan. Even Bush’s own Council of Economic Advisers acknowledges in the 2006 Economic Report of the President that this one-size-fits-all design may be inappropriate in some cases, like lower-income families who will forgo needed care.

A Progressive Way Forward
Over the past several months, progressive politicians and allied groups have united in their opposition to the President’s HSA plan. But few have followed their criticism to its logical conclusion: addressing our unhealthy tax system. The bottom line is that we should spend less subsidizing more expensive insurance and more health care for higher-income people and spend more to help moderate-income families obtain the health insurance they lack.

How can this be done? For one, Congress could cap the amount of health insurance that is tax-deductible and use the savings to expand coverage, say by limiting the deductibility of employer-premium contributions to a certain amount, such as $7,500 for a family policy. Alternatively, it might be more politically feasible to phase the policy in over time by initially setting a higher threshold but not fully indexing it for the growth of premiums for a period of time. In addition, the value of deductibility could be limited for higher-income individuals, either by capping the deduction at 25 percent of the health premium or phasing it down for high earners. Any combination of these approaches could save a sizeable chunk of the current $200 billion subsidy.

Those savings, in turn, could be used to expand coverage in a variety of ways, such as by guaranteeing Medicaid to all Americans below the poverty level (or an even higher threshold), by providing progressive tax credits to strengthen the weakest link in the employer-sponsored system (coverage by small businesses) or by funding subsidies for new mechanisms to make insurance affordable for all Americans, such as allowing them to buy into a plan like the Federal Employees Health Benefit Plan (FEHBP), the same health plan available to members of Congress.

In such a scenario, there is little risk of undermining the employer-sponsored health system, because the proposal would retain the current structure of tax subsidies for employer-sponsored insurance. Moreover, employers who are currently considering dropping their coverage are probably paying lower shares of their employee premiums and thus would not be affected by lower caps. It is also unlikely that a generous employer who contributes $10,000 toward annual premiums would drop coverage altogether just because the employee’s tax benefit is trimmed. Finally, capping tax benefits could lead some companies to pay workers more in wages and less in insurance coverage, which would reduce overuse of the health system and make the system cheaper for everyone. Unlike HSAs, however, the progressive alternative is not contingent upon a specific government-approved form of cost-sharing; instead, individuals and firms are free to shape cost-sharing as they deem best, adapting them to individual tastes and the best evidence of medical effectiveness.

This approach would buy the health care system some time, but would not cure it. To do that, policymakers should consider scrapping the deductibility of health insurance entirely and replacing it with a progressive tax credit. Individuals could count the value of their health insurance as part of their income when calculating their taxes, but they would get a new progressive tax credit instead of a deduction. The tax credit would be the reverse of the current system, more like $4,000 going to the cleaner and $1,000 to the investment banker. The tax credits would go to anyone with health insurance, but would not provide additional subsidies for more generous insurance. This could create the basis for a simpler, fairer system of universal health insurance. Although health benefits might be slightly less generous, higher out-of-pocket costs would be offset by higher wages.

Ultimately, the best plan might include many elements from the recent health reform in Massachusetts while also addressing that scheme’s biggest shortcoming, its lack of sufficient funding. Under a plan of this type, people would have the responsibility to ensure that their families are insured–with a penalty for anyone without insurance. At the same time, the federal government would have the responsibility to make insurance affordable for all through a combination of progressive tax credits, employer mandates (or penalties for firms not offering insurance), a new pooling mechanism for small businesses and higher risk individuals, and expansions in Medicaid. The money saved by ending the tax deductibility of health insurance, plus the existing funding for Medicare and Medicaid, might be enough to pay for a well-designed, universal health-insurance plan. If not, additional funds could be provided through relatively modest tax increases or spending reductions.

Making these changes will not be easy. In the 1980s, Congress rebuffed President Ronald Reagan’s bid to cap the amount of health insurance that could be deducted, and just last year, President Bush’s tax reform commission was criticized for proposing the same idea. However, what was missing from both proposals was any commitment to use the bulk of the money saved by eliminating the deduction actually would be used to expand and improve access to health insurance.

And let us remember, no plan for universal insurance will be easy. The principal goal of universal insurance is to provide more health care for the uninsured and to reimburse them for more of the costs they are currently paying themselves. Even with some savings from better preventative care, reduced visits to emergency rooms to deliver routine care, and reductions in uncompensated care, the total bill for universal insurance is likely to be anywhere from $50 billion to $200 billion, depending on the details of the plan and who is doing the cost estimates.

Nevertheless, there are many areas in which our tax code’s perverse incentives take us in the wrong direction, wasting money and exacerbating inequality across society. Although conservatives talk a lot about efficiency, ultimately their tax policies reflect their values: a desire for an even less progressive distribution of resources and a smaller government. Progressives should focus more on efficiency, not just in the traditional economic sense but also in terms of ensuring that our limited resources are put to the best use in achieving those social goals–-like helping families pay for college or health care–that are increasingly being funded through the tax system. There is no better place to start than with our number-one national problem: health care. And if we cure what ails our tax code, making it more progressive and fair, we can put health care within reach for all Americans.