Improving Incentives in Health Care Spending

Properly Designed Health Spending Accounts Can Be A Major Step

Baicker By Katherine Baicker

Katherine Baicker was nominated by President Bush on September 22, 2005 and confirmed by the Senate on November 4, 2005 to serve as a Member of the Council of Economic Advisers. She received her B.A. in economics from Yale in 1993, and her Ph.D. in economics from Harvard in 1998. She is an associate professor in the department of public policy at the School of Public Affairs at UCLA and a research associate at the National Bureau of Economic Research in the public economics program. From 2001-2002, she served as a senior economist at the Council of Economic Advisers. Her research areas include health economics, welfare, and public finance, with a particular focus on the financing of health insurance, spending on public programs, and fiscal federalism.

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.

This paper is based on a speech given at NABE’s 22nd annual Washington Economic Policy Conference on March 14, 2006.

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