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REVIEW & OUTLOOK (Editorial)

Three Cheers for the IRS
 
07/02/2002
The Wall Street Journal
Page A18
(Copyright (c) 2002, Dow Jones & Company, Inc.)

We can already feel Ted Kennedy's blood pressure rising. He and New York Senator Hillary Clinton are slowly but steadily trying to build support to nationalize American health care. So when Congress passed Medical Savings Accounts back in 1996, he succeeded in restricting their terms and limiting the total number of policies allowed to 750,000. Suffer your HMOs, he said.

But last Wednesday the Internal Revenue Service opened the door to MSA -type accounts for tens of millions of American workers. The little-noticed ruling is a great leap forward for patient-directed health care. Over time it could signal the end of double-digit increases in employer health-care costs, and thus the end of the era of stuffing employees into unpopular health-maintenance organizations.

The IRS ruled that money provided by employers for employees' out-of-pocket medical expenses will not be subject to tax. Further, that any unspent funds can be rolled over from year to year and retained when an employee switches jobs or retires. This clears the way for treating what the IRS calls Health Reimbursement Arrangements (HRAs) the same as other employer-sponsored health-insurance plans. Aetna says it has already sold eight or nine such policies to major U.S. corporations in anticipation of the IRS decision.

This has the potential to be a very big deal, not just for health insurance but for health-care politics. Since 1960 the average share of medical expenses paid by employees with health insurance has fallen to 20% from 50%. With somebody else footing the bill, health-care consumers have had little monetary incentive to shop around for cheaper drugs and services, or to avoid seeing the doctor for a sniffle.

The result has been an explosion in costs, and attempts to ration care through HMOs. It's unfair to blame HMOs for meeting a market demand to control costs, but the truth is that they're less popular with patients than traditional, pick-any-doctor insurance.

HRAs are pick-any-doctor insurance, but they give consumers an incentive to ration their own health care. Instead of purchasing expensive first-dollar coverage for employees, employers would purchase high-deductible policies and use the cost difference to fund medical spending accounts. An employee might get, say, an insurance policy with comprehensive coverage after the first $1,300 in annual medical expenses, and a $1,000 annual account to apply toward that deductible if need be.

Participants in such plans will have plenty of reason to consume health care wisely, since they get to keep any unspent funds. Over time, individuals could build up sizable accounts with which to meet future health-care expenses. Healthy and younger employees, especially, will want to move into these plans rather than seeing money that could be theirs spent on insurance they don't need at the time. The health insurer Humana, which offered the product to its own employees this year, saw an expected 19% increase in health costs drop to less than 4%.

In announcing the ruling, Treasury Secretary Paul O'Neill said that "With this new guidance, we clear the way for employers to adopt health plans with patient-directed features so that employees have more choice and greater control over their health-care coverage." That's an understatement. The IRS , of all things, may have started a revolution.