Medical Savings Accounts: The Authors Respond

Abstract

the pernicious problem of very high implicit tax rates that result when credits, welfare, or Medicaid is withdrawn quickly as earnings increase. Tax, health, and welfare reform can and must be made to work together. Mark Pauly and John Goodman also sug gest a fixed-dollar tax credit. As an incremental step, their proposal does not focus on a select group such as children, but they recommend that it be made available on an optional basis. Options, unfortunately, can create difficult problems for tax planning and administration; for instance, taxpayers would make alternative calculations, based on guesses of annual income, to see how to minimize taxes. Also, the addition of options without other reforms increases total subsidies for health, thus raising further the share of government spending devoted to health care and reducing the share devoted to everything else. These costs may be worth bearing only if the options are steps in transition to some new, better system. Pauly and Goodman also try to avoid the distortions contained in many MSA proposals. They do not want to favor MSAs over other cost-effective financing or delivery mechanisms. This is an important advance. But there is a Catch-22: If Strategy A (subsidized first-dollar coverage) is favored over Strategy B (unsubsidized health care purchases), and we try to solve the problem by creating Strategy C, which is more neutral with respect to Strategy A, then we will favor Strategy Cover Strategy B, while making the combined system even more complex. The Pauly/ Goodman proposal does get rid of almost all proposed preferences for Strategy C–MSAs– except that it would not allow the purchase of a credit-subsidized catastrophic plan with a higher deductible unless the purchaser put money into an MSA, and it might give a preference to interest earned in an MSA. In so doing, MSAs would still require regulation, for example, optimal size of deductible, mandated use of an intermediary for self-insurance below a catastrophic amount, and limits on abuse of saving incentives. Minimizing but not eliminating preferences for MSAs, therefore, maintains a fair amount of complexity with little gain in incentive over the basic tax credit proposal. In sum, incremental health care reform options deserve serious consideration, and Pauly and Goodman have advanced us several steps. Ironing out the details, however, remains a difficult task.