Improving Incentives in Health Care Spending

Abstract

Although U.S. economic growth is likely to continue to be robust, the growth of private and public spending on health care presents long-run public policy challenges. To meet these challenges health care resources must be used more efficiently. Currently, there are few incentives to put health care dollars to the highest value use. This is true in both public and private spending. An important element of the problem lies in the tax-preferred treatment given to employer-provided insurance but not to out-of-pocket spending. The resulting bias towards first-dollar insurance coverage means that consumers are insulated from the real costs of the health care that they consume and have little reason to evaluate whether the benefits are greater than those costs. Moreover, they seldom have sufficient price and quality information to make informed decisions. Health Savings Accounts (HSAs) are a promising way to remove the tax-penalty for enrolling in catastrophic insurance and paying for routine care out of pocket. Given the information that they need, consumers would then have more choices and more control, strengthening their role in reducing waste, improving efficiency, and promoting competition. Coupled with other policies, HSAs can be a critical component in moving toward an efficient and equitable health care system.