Health Care Solution

The following is a letter that was sent to the Senate Finance Committee as well as the President and Vice President on September 14, 2009.

I have a solution to your Health Care debate: Make Health Saving Account (HSA) distributions eligible to pay for insurance premiums. An easy, elegant fix, is usually the correct one. My arguments for this fix include fairness between employer insurance plans and private insurance plans, overall cost savings, and insurance for life.

Current law makes insurance plan premiums tax free for those individuals and families who get insured through their employer. How is it that the government is allowed to discriminate against a person who chooses to get insurance directly from an insurance company? His or her insurance premium should also be tax free to be fair and non-discriminatory.

Now, you may make the argument that the government can’t afford to not tax insurance premiums. But, as I’ve already stated, the government doesn’t tax the premium of a plan provided by employers. In effect, the government creates an incentive to get insurance through an employer. This insurance, however, will be cancelled when an employee retires. To whom will the retiree go but the government for help?

By not taxing insurance premiums, the government will encourage the young and healthy to seek out health insurance independent of their employer. In my own example, I pay $600 in insurance premiums annually through my employer. It’s taken off of my check before federal and state taxes are applied. I looked up a similar plan offered through Blue Cross Blue Shield. For similar coverage, I would have to pay $1200 a year. Now, at first glance, this may seem unfair. But, understand that my employer pays $4600 a year on my behalf for my insurance coverage. If I go with private insurance, I would remove $4000 from the overall equation.

But that’s not the whole truth because my insurance premium through my employer is federal and state tax free. Thus, for me to purchase private insurance, I need to gross $1600, not $1200. This 33% increase accounts for both federal and state taxes. Thus, the net money saved is $3600, or about 2x my premium before taxes.

For more evidence of the elegance of this plan, consider this: By getting private insurance early in life when a person is healthy, they will likely have insurance before they have a pre-existing condition. The majority of ‘dropped coverage’ claims are due to rescission, where the insurance company claims to be misled on preexisting health conditions. If people get covered early in life and keep the coverage after they retire, that will dramatically reduce the number of dropped-coverage cases.

And here’s more of the plan’s beauty. Should I stay with my employer’s coverage until I retire at 65, how will I get insurance if I already have had a heart attack or other health conditions? My insurance costs would skyrocket because I would likely have higher medical bills. I might even be denied coverage because I wouldn’t be profitable to the insurance company.

That’s a key point that I’d like to take a few sentences to talk about. Insurance companies are driven by profit. They need to make a profit. Some say that desire for profit drives up insurance costs. But those people are not looking at the entire equation. We live in a free-market society. Inefficient companies do not prosper and should be allowed to fail. But those companies, who streamline costs and hire only the right number of right people, thrive. Supply and demand drive a free market to establish a fair price for goods and services.

Thus, it is perfectly reasonable that I should be denied coverage if the insurance company can’t make a profit off of me. They are trying to provide a service that I’d like to purchase.

To avoid the scenario where I am denied coverage in my retirement, I should get my own private insurance now when I am young and healthy. Yes, the premiums will be greater since I will not receive help from my employer (I would forfeit the $4600 employer benefit that was paid on my behalf). But my plan will not be cancelled when I retire. Also, the government can create an incentive by not taxing distributions from HSAs for insurance premiums.

Now, you’re probably asking yourself, what does the government get for not taxing this money? Here’s your answer: When all of America is on their own private insurance, which will stay with them until they die, Medicare and Medicaid can be removed. Those programs are the two of the biggest entitlement items on the federal budget. And they’re quickly going bankrupt.

The solution that I’m proposing will not immediately solve the bankruptcy problem of Medicare and Medicaid. Those who are currently receiving assistance should not lose that assistance. Also, those who are close to retirement and have been counting on assistance should not be denied. But, you can probably get the majority of America’s young adults (less than 40 in age) to go along with this program because, in the end it will save them money. Sure, you say that we could continue with Medicare and Medicaid by reducing the benefits. In 30 years time, however, that benefit will be negligible.

The solution is simple. Allow HSA distributions to pay for insurance premiums. It’s a one-line fix on page 8 of IRS publication 969 (2008). Current language states, “You cannot treat insurance premiums as qualified medical expenses unless the premiums are for…” Change that language to say, “You can treat insurance premiums as qualified medical expenses.”

This will be a short bill that will pass Congress. The youth of America will go for this change because it empowers them. The elderly will also back it because it doesn’t affect them. Continue to tax for Medicare and Medicaid until those programs are no longer needed. Let the people take responsibility for their own lives.