Chairman STARK. Mr. Matthews. STATEMENT OF MERRILL MATTHEWS, JR., PH.D., HEALTH POLICY DIRECTOR, NATIONAL CENTER FOR POLICY ANALYSIS Mr. MATTHEWs. Mr. Chairman, I appreciate the opportunity to come and testify before the hearing today. Two of the ideals and goals of the Clinton plan are to address the problem of the uninsured and at the same time to try to hold down health care spending, but I think the fear is that under the Clinton plan, health care spending will explode rather than decrease. And that is going to cause a great problem. Let me explain to you by an analogy why it will explode. Suppose you are the parent of a teenager and you go up to your teenager who needs a new pair of blue jeans. I will give you two scenarios. In the first scenario, you go to your teenager and you say "You need a new pair of blue jeans. Take this credit card of mine and get yourself a new pair of blue jeans. Let's call this a "blue jean security card." Take the card and go buy yourself a new pair of blue jeans, and whatever you get is fine. I don't care. Just please yourself." In the other scenario, the parent goes up to the teenager and takes a $50 bill and gives it to the teenager and says, "You need a new pair of blue jeans. Take this $50, go out and buy yourself a new pair of blue jeans, but here is the catch: Anything you spend more than $50, you have to take out of your pocket. Anything you spend less than $50, you get to keep, and you can take that money and spend it however you like; I don't care. Given those two scenarios, under which scenario is your teenager more likely to be a prudent shopper in the blue jean market place, and under which scenario is your teenager more likely to spend more money on blue jeans than you ever imagined a teenager could spend? When I was growing up, I had the first scenario. My mother had a card and she used to give me the card to go out shopping, but she soon found she couldn't trust me to be a prudent shopper so she ended up going shopping with me. It seemed like whenever we went shopping, I always thought I needed "this" and she thought I needed "that." Since she was carrying the card, we always ended up with that. Our concern is that under the Clinton administration proposal, the Federal Government is going to go shopping with us for health care, and in many cases we and our physicians may think we need "this," whereas the administration will think we need "that." Since the administration is doing the shopping and paying, ultimately we will decide on “that.” Under the blue jean scenario, the only thing at stake was my pride and sense of fashion. Under the Clinton administration proposal, what is at stake is my health and perhaps even my life. Now, we know what the problem is. Virtually all health policy analysts agree that part of the major problem in spending is that somebody else is paying the bill. We are insulated from the bill. We know what the problem is and we know the direction the solution ought to take. Now, we can approach that solution with a medical savings account proposal. A medical savings account is a tax-free account, one that would permit people to put money that they are now giving to the insurance companies, to put a portion of that money into the tax-free account to use for small health care expenditures and to purchase a catastrophic health insurance policy to pay for the major expenses. Under the Clinton administration proposal, spending is going to increase. Under the medical savings account proposal, spending actually would begin to decrease. Under the Clinton plan with the card, the government is going to have to come in and take control of the system. Under the medical savings account proposal, we take control of the system. Given the card, the insurance companies are going to get to keep all the money. With a medical savings account, we have the option to keep some of the money. Under the Clinton proposal, the government is going to end up making choices for us. With a medical savings account, we can make our own choices. Chairman STARK. Thank you very much. [The prepared statement follows:] Your Money or Mine Merrill Matthews, Jr., Ph. D. President Bill Clinton has identified two major problems in the American health care system: (1) that there are millions of Americans who are uninsured and (2) that total health care spending and medical inflation have been growing far faster than the economy as a whole. The President believes that his reform legislation will solve these problems. But the truth is that under the President's proposal health care spending will explode, not decrease. Let me use an analogy to show you why. Let's suppose that you are the parent of a teenager who needs a new pair of blue jeans. So you tell your teenager that you will provide the money for a new pair of blue jeans. Two approaches: In the first approach you bring out a card and you say to your teenager: "You need some new blue jeans. Take this card - let's call it a Blue Jean Security Card — and go out and buy whatever blue jeans you want. Money is not a problem. Just be sure that you are happy." In the second approach you take out a $50 bill and you hand it to your teenager and you say: "Here's $50. You go out and buy yourself a pair of blue jeans you need a new pair. But here's the deal: Anything you spend over $50, you have to pay for out of your own pocket. However, if you spend less than $50 on your blue jeans, you get to keep the difference, and you can take that money and spend it however you want. It doesn't make any difference to me." Now, under which scenario is your teenager more likely to be a prudent, value conscious consumer? And under which scenario are you more likely to have to spend a whole lot more than you ever anticipated. Now I know that you know the answer to that. But what does the Clinton administration say? Give the kid a card! My mother used to do this to me - - she had a card, and she realized very quickly that she couldn't let me go out with that card by myself. Since she wanted to use the card instead of cash, she always went shopping with me. And whenever we went shopping, invariably I thought I needed "this," and she thought I needed "that." Since she was in charge of the money, we always ended up with "that," and I was never satisfied. Under the Clinton proposal, you will have a security card. But the administration is going to find out very quickly that it can't permit you to go out and spend whatever you want. The government is going to go shopping with you for your health care. And I can assure you that in many cases you will think, and your physician will think, you need "this" while the government thinks you need "that." And since the government is providing the card, in most cases you will end up with “that." Now, under the scenario with my mother, the only thing at stake was my fashion and my pride. Under the Clinton administration, what is at stake is your health and maybe even your life. Mr. Chairman, we know what the problem is, and we know what the solution should look like. The solution is to remove the insulation most of us now experience in the health care marketplace and, as much as possible, return the money to the consumer of health care, the patient. There is no mystery as to why health care spending is out of control. A primary reason is that most of the time when patients enter the medical marketplace they are spending someone else's money rather than their own. Economic studies as well as common sense- confirm that we are less likely to be prudent shoppers if we believe someone else is paying the bill. All economists and most health policy analysts recognize this crucial fact. Nevertheless, most health care reform proposals - including the President's attempt to increase the role of third-party payers rather than diminish it. Because reformers know that increasing third-party payment will only increase spending, they want to hire a manager or government employee to look over the shoulders of the physicians and the patients to ensure no one is consuming too much medical care. Such proposals go in precisely the wrong direction, and they will never reduce health care spending without significant rationing which the American people will never stand for. As an alternative, why not give patients, rather than insurers and bureaucrats, more control over their health care dollars? Last year, 180 members of Congress thought it would be better to empower patients rather than bureaucrats and cosponsored one of 12 different bills designed to create Medical Savings Accounts (MSAs). Also called Medisave Accounts and Medical IRAS, Medical Savings Accounts are attracting growing support again this year, as new MSA bills are being fashioned in the current legislative session. The advocates of MSAS span party lines and ideological divisions. They include Democrats and Republicans, liberals and conservatives. Medical Savings Accounts also have widespread support outside the Washington Beltway. The concept has been endorsed by such diverse groups as the American Medical Association, the American Farm Bureau, the National Association of Health Underwriters and the National Association for the Self-Employed. Why have so many people, representing such diverse points of view, decided that Medical Savings Accounts are an essential element of health care reform? Because MSAs are better than any alternative in attempting to reach five important goals: (1) controlling health care costs, (2) maintaining the quality of health care, (3) getting more Americans covered by private health insurance, (4) making the market for medical care more competitive and (5) reforming Medicare, Medicaid and other government health care programs. Under the current system, 250 million Americans find it in their self-interest to take actions that contribute to our nation's health care crisis. With Medical Savings Accounts, individual patients would become part of the solution instead of remaining part of the problem. Establishing Medical Savings Accounts In one sense, the establishment of Medical Savings Accounts for employees would represent only a small change in the tax law governing employer-provided health insurance. Yet this small change would give individuals an opportunity to take control of a substantial portion of their own health care dollars. If individuals took full advantage of this opportunity, there would be a major transfer of money and power from third-partypayer bureaucracies (employers, insurance companies and government) to individual patients. The result would be a radical transformation of the medical marketplace. How Medical Savings Accounts Work. Medical Savings Accounts would be tax-free personal accounts used to pay medical bills not covered by insurance. Regular deposits could be made by individuals or their employers, but they would be the property of individuals. Money could be withdrawn without penalty only to pay medical expenses and health insurance. Money not spent would grow tax free and could be used for medical expenses after retirement, rolled over into an IRA or private pension plan, or would become part of the owner's estate at death.2 MSAs would ensure that people would have money to pay small medical expenses, including expenses for preventive care, and to pay insurance premiums if they change jobs or become unemployed. The Relationship Between Medical Savings Accounts and Health Insurance. Medical Savings Accounts represent a new way of paying for health care. Under 1 The general case for Medical Savings Accounts is presented in John C. Goodman and Gerald L. Musgrave, Patient Power: Solving America's Health Care Crisis (Washington, DC: Cato Institute, 1992), p. 76. A shorter version of the argument may be found in John C. Goodman and Gerald L. Musgrave, "Controlling Health Care Costs With Medical Savings Accounts," National Center for Policy Analysis, NCPA Policy Report No. 168, January 1992. 2 Some have suggested more liberal options for using the funds, including those that now apply to 401 (k) pension plans, which permit use when certain disabilities arise or for education expenses under conditions of financial hardship. Others have suggested that once the balance exceeds a certain level, account holders should be able to withdraw funds tax free- or at least without a penalty. Other proposals would restrict the use of MSA funds, for example, by limiting the amount that could accumulate in an MSA or by taxing the interest income. 83-037 0-94-14 traditional health insurance, people make monthly premium payments to an insurer (such as Blue Cross) and the insurer pays medical bills as they are incurred. Under the new system, people could confine health insurance to catastrophic coverage with deductibles of, say, $2,500 to $3,000, reduce their monthly insurance premium payments and make deposits to a Medical Savings Account instead. Under this arrangement, insurance would be used to pay for expensive treatments that occur infrequently, while MSA funds would be used to pay small bills covering routine services. MSA funds not spent would build up over time. Thus after a few years, most families would have MSA balances equal to, or greater than, the deductible on their catastrophic policy. Why Government Action Is Needed. Under current law, every dollar of health insurance premium paid by an employer escapes, say, a 28 percent income tax, a 15.3 percent Social Security (FICA) tax and a 4, 5 or 6 percent state and local income tax, depending on where the employee lives. Thus government is effectively paying up to half the premium a generous subsidy that encourages employees to overinsure.3 At the same time, the federal government discourages individual self-insurance by taxing income that individuals try to save in order to pay their own future medical expenses. By subsidizing third-party insurance and penalizing self-insurance, federal tax law prevents employees and their employers from taking advantage of the opportunities that a Medical Savings Account option would create. How Medical Savings Accounts Can Help One of the most serious health policy problems we face is rising health care spending.4 Over the past decade, health care expenditures grew about twice as fast as our gross national product. If that trend were to continue which it cannot - we would be spending 100 percent of our income on health care by the middle of the next century.5 Why Third-Party Payment of Medical Bills is the Cause of the Problem. As mentioned earlier, a primary reason why health care spending is out of control is that most of the time when we enter the medical marketplace as patients we are spending someone else's money rather than our own. Although polls show that most people fear they will not be able to pay their medical bills from their own resources, the reality is that most of us pay for only a small portion of the medical care we receive. On the average:6 Every time we spend $1 in a hospital, we pay only 5 cents out-of-pocket, and 95 cents is paid by a third party (employer, insurance company or government). Every time we spend $1 on physicians' fees, we pay less than 17 cents out-ofpocket. For the health care system as a whole, every time we consume $1 in services, we pay only 21 cents out-of-pocket. Moreover, the explosion in health care spending over the past three decades parallels the rapid expansion of third-party payment of medical bills. The patient's share of the bill has declined from 48 percent in 1960 to 21 percent today. Given a fixed amount of total compensation, employers will tend to be indifferent about its makeup, i.e., how much is paid in wages vs. fringe benefits. The tax law, however, encourages employees to choose too much non-taxed health insurance and too little taxable wages. See Goodman and Musgrave, Patient Power, chapter 9. 4 This problem is often described as the problem of rising costs. However, it is not clear that costs in the sense of average cost per treatment are rising. More importantly, the term "costs" encourages people to focus solely on the supply side of the market, when the fundamental source of the problem is on the demand side. See the discussion in Gary Robbins, Aldona Robbins and John C. Goodman, "How Our Health Care System Works," National Center for Policy Analysis, NCPA Policy Report No. 177, February 1993. 5 See Goodman and Musgrave, Patient Power, p. 76. 6 These estimates are based on National Health Accounts data for personal health expenditures adjusted for tax subsidies and include the administrative costs for private health insurance. See Robbins, Robbins and Goodman, "How Our Health Care System Works." |