How Bush would tame healthcare costs

President Bush is moving to put healthcare at the top of America's political agenda. In his State of the Union speech next Tuesday, he is expected to propose a series of initiatives that are designed to rein in the spiraling cost of healthcare and increase the number of Americans with insurance. To do this, he is hoping to encourage a market-oriented, consumer-driven system. Key components of his plan include the expansion of health savings accounts, additional tax breaks for individuals who buy insurance on their own, and provisions that would improve public access to information on healthcare pricing.

Supporters contend the proposals are crucial to making American more of an "ownership" society, allowing individuals to have more control over their healthcare choices. Critics warn they'll shift more risk onto individuals and undermine the nation's already strained health-insurance system.

These initiatives are outlined below, followed by arguments for and against:

Health savings accounts are tax-free accounts that individuals or businesses can set up at banks or credit unions, in conjunction with the purchase of high-deductible, so-called catastrophic health insurance. Individuals can now contribute as much as $2,600, and families as much as $5,150 each year. Bush is expected to propose increasing these limits. The accounts are to be used for routine medical expenses, such as checkups and pharmaceutical costs. The insurance is there as a backup in case of a health emergency.

In the past year, the number of individuals with such policies tripled to 3 million, according to America's Health Insurance Plans (AHIP), a medical lobbying group in Washington. That accounts for about 1 percent of the insured population.

Pros

• Is designed to give consumers more choice of providers and services.

• May encourage medical-services shoppers to be more cost-conscious because they will be spending their own money.

• Makes insurance more affordable to some of the working uninsured, since the premiums for catastrophic insurance are lower than traditional premiums.

"About one-third of the individuals who were purchasing [the catastrophic insurance in conjunction with setting up an HSA] didn't have health insurance prior to the offering of these policies," says Karen Ignani, president and CEO of AHIP. "Clearly these policies are reaching out to a segment of the population that heretofore found coverage too expensive."

Cons

• Because of very high deductibles, could discourage the purchase of preventive or other care that is deemed necessary, which could lead to higher overall medical costs.

• Does not address the real drivers of healthcare inflation: advances in expensive medical technology and the growing cases of chronic illness. (Eighty percent of healthcare spending in the US is for individuals diagnosed with chronic problems, like diabetes.)

• Will be attractive to healthier, wealthier people, draining them from the insurance risk pool and leaving only higher-risk people with traditional insurance, which would drive up the cost.

"It takes us back to the equity question of whether we want to be spreading the costs out through society so that people who get sick don't bear the full cost of their own illness," says Mark Schlesinger, a health policy expert at Yale University. "This is basically saying once you're sick, you can plan to spend more for the rest of your life as opposed to saying we'll help share that burden with you."

When businesses buy employees' health insurance, they receive a tax break, which is essentially a taxpayer subsidy worth about $120 billion annually. Individuals who buy health insurance on their own currently receive no tax break. They must spend more than 7.5 percent of their income on medical expenses before qualifying for an income-tax deduction. Of the 45 million uninsured, 80 percent are estimated to be working at low-wage jobs, many of which don't include health insurance.

Bush is expected to call for individuals to be able to take deductions similar to those taken by businesses.

Pros

• Could create incentives for more uninsured individuals to buy insurance.

• Levels the playing field between businesses and individuals.

"We're throwing a tremendous amount of dollars at people like me. I have a nice job and a nice salary," says Joseph Antos, a healthcare expert with the American Enterprise Institute. "I'm appreciative, but in truth I don't need it nearly as much as someone who is working at the minimum wage who isn't getting that tax break."

Cons

• Might encourage some businesses to cut back on the health insurance they provide.

• Is estimated to cost in the tens of millions of dollars, and with increasing deficits, Congress may balk.

• May not help the working poor, unless the tax advantage is given as a credit.

"Only a refundable tax credit will help people [with little income] who have little or no tax liability," says Mr. Antos.

Currently, no national standard exists by which consumers can judge the quality and cost of varying healthcare services. By creating such a set of standards - which an alliance of healthcare providers is currently attempting to do - and encouraging hospitals and doctors to comply, consumers would have the tools to shop for the best care at the best bargain. Even the staunchest advocates of HSAs agree that without such data, consumer-driven healthcare won't work as advertised.

PROS

• Helps consumers make more informed choices.

• Helps improve quality of care.

"You will get a lot more pressure to understand the comparative effectiveness of technologies and medical procedures," says Gail Wilensky, a health policy expert at Project Hope in Washington. "That can help payers, providers, and even the patient community to understand if there is either not much known or a lot of dispute about how effective a new technology or procedure may be. For some people in some circumstances it can make all of the difference in the world."

CONS

• Is expensive to implement because of the database technology required.

• Could take years to accomplish because medical culture is slow to change.

• Is based on cost, when some consumers don't make medical decisions on that basis.

• Could be difficult for consumers to understand.

"It's right now such a complex pricing mechanism that even experts on the inside have trouble deciphering it. How in the world is an individual consumer going to?" says Dr. Henry Simmons, president of the National Coalition on Health Care in Washington.