Sunday, January 31, 2010

The Socialized Medicine Scheme and Health Savings Accounts

The current socialized medicine bill proposed in the house and senate discourages a cost containment method known as the Health Savings Account (HSA).

What is a health savings account (HSA)? Is the HSA a cost containment tool? Is the proposed socialized medicine scheme discouraging the use of the HSA?

What is a Health Savings Account (HSA)?

The health savings account (HSA) is a market based, consumer driven, health-care cost containment mechanism. Through the use of tax qualified deposits to the medical expense savings account and through withdrawals from the account of tax free money (tax free when used for qualifying medical expenses) the consumer is put in the a position of spending their own funds in the wisest manner. (1) (2)

The health savings account is the concept of moving insurance back to the realm of catastrophic coverage. That is, you are allowing insurance to perform its intended use and moving routine items to the sole direction of the consumer. In this way you remove the use of the "insurance mechanism" for everyday expense and/or basic health maintenance issues. (3) (4)

Is the Health Savings Account a cost containment tool?

Health insurance dates back to the artisans of imperial Rome. (5) Health insurance progressed over the years and between 1910 and 1945 the basic medical care expense program was introduced. However, basic medical care expense policies were inadequate against catastrophic accidents and illnesses that required long hospital stays and/or extensive treatment. (6) In extended stay and extensive care cases, the medical expense plan left the insured with large unmanageable bills that were not covered by the basic medical expense plan.

To address the short comings of the basic medical expense plan, Liberty Mutual Insurance Company in 1949 introduced major medical insurance to provide insurance coverage for catastrophic medical events. (7) Today major medical is the most common medical-care coverage available. (8)

However, as with any insurance plan, public or private, there is an inherent problem of the "third party payer system". That is, when a third party pays a bill on the consumer's behalf, the consumer is disenfranchised from the health-care cost and health-care provider. That the third party payer effect leads to the any cost from any provider phenomena. (9) (10) (11)

Major medical health insurance was designed to pay for catastrophes. However, in the recent past major medical has been combined with elements of the old basic medical expense plan with offerings (known as "extras") such as doctor office co-pays, specialist co-pays, prescription cards co-pays and co-pays for emergency room visits. The relatively small out of pocket co-pay with the remainder of the bill subject to the third party payment effect mentioned above, leads to over utilization at a high cost. That is, the cost of the routine expense and the provider of the routine expense are not items that the consumer directly measures in regards to expense or quality due to the third party payment effect.

If you price a typical major medical plan with a $1,000 deductible and include the menu of "extras" as mentioned above, then reprice the plan removing the "extras", you find, as a rule of thumb, a 30% reduction in cost. Further, by increasing the deductible from $1,000 to $5,000, you generally see another 15 to 20% reduction in cost. Hence the proponents of high deductible health plans (HDHP) point to the immediate savings to the consumer of the traditional major medical plan with a high deductible. In other words, taking the major medical plan back to its intended initial use as a "catastrophe plan".

With the removal of the "extras" and the increase in the deductible a major cost savings is achieved. This cost savings is then redirected into the health savings account. The health savings account then gives the consumer the ability to make cost effective decisions about more minor, mundane, everyday expenses such as routine doctor visits, prescription drugs, physicals, etc.. The consumer can shop these routine medical needs and find the best provider at the lowest cost. In other words, the third party payer effect is removed.

Is the current socialized medicine scheme discouraging the use of HSA's?

In both the house and senate versions of socialized medicine the health savings account is discouraged rather than encouraged. (12) Coverage never intended to be included in high deductible health plans are required to be included driving up cost for the major medical portion. Further, limitations on contributions and withdrawals are proposed in both house and senate plans.

The arguments to discourage the health savings account are class warfare based. The typical argument avoids the cost containment feature of the health savings account and concentrates on the class warfare argument associated with the tax qualified status of health savings account as well as the health savings account not being a popular program. (14) (15) However, the critical arguments to discourage HSA's are quickly dispatched as highlighted in a paper by Michael F. Cannon of the Cato Institute as well as other evidence . (16) (17) (18) (19)

Basically the arguments against health savings accounts are that the wealthy and/or high income earner takes advantage of the tax aspect of health savings accounts more often than low wage earners. The argument is the classic class warfare argument and has nothing to do with the main idea of cost containment. The arguments against HSA's point out that HSA's are not popular and have little impact on market share of health insurance. The popularity argument is based on notions and not empirical evidence. That in fact between 2004 and 2010, a mere six years, the HSA has captured 12% of the health insurance market place. (20) (21)(22)

One must take into account that the proposed socialized medicine scheme is nothing more that an elaborate and very complicated price fixing scheme. (23) Fixing prices has nothing to do with cost containment. In point of fact, price fixing schemes have always produced reduced supply. The proponents of price fixing schemes think fixing a price somehow affects basic underlying cost. The results of price fixing is well known within the discipline of economics. Its known to fail each and every time ever attempted. There is not one recorded incident in all of economic history where price fixing ever succeeded. Hence the discouragement of the HSA under the proposed socialized medicine scheme fits the proponents wishes as they are removing a cost containment measure in favor of price fixing.


The health savings account is a cost containment measure. The health savings account is an attempt to put health insurance back in the realm of catastrophe coverage and make routine medical needs a consumer driven point of sale decision hence creating a cost containment environment. The currently proposed socialized medicine scheme is in fact discouraging health savings accounts as a cost containment measure.


(a) the phrase health savings account gets blurred. Many times the phrase health savings accounts (HSA) is used when referring to high deductible health plans (HDHP). Also, the phrase health savings account is sometimes used to refer to the combination of the health savings account and the high deductible health plan.

(b) an excellent source for health savings account information can be found as

(c) a very comprehensive discussion of the tax aspects of the health savings account can be found at





















Saturday, January 9, 2010

The Socialized Medicine Scheme: Cadillac Health-Care Plans

Proponents of the socialized medicine scheme
want to pay for the $1 trillion price tag of
socialized medicine by levying a tax on so called
Cadillac health-care plans (1). What is a Cadillac
health care plan? Will everyone end up with a
Cadillac health-care plan? Who will pay the tax?
What is the amount of the tax?

Cadillac health-care plans defined

The term "Cadillac" was first used to define a category of health-care plans in the 1970's. The term was used again in the 1980's. Then it was used extensively in the 1990's when Hillary Care was proposed. Basically the term was meant to distinguish the perception of luxury health-care plans.(2)

However, the proponents of the current socialized medicine scheme have arbitrarily defined a Cadillac health-care plan in terms of the level of annualized premium. Individuals have a Cadillac plan if the annual premium exceeds $8,000. A family is deemed to have a Cadillac plan if their annual premium exceeds $21,000. (3)

Will everyone end up with a Cadillac plan?

In order to find the answer to the the question posed above you first need to understand a predominant phenomena of taxation. The phenomena is: when you introduce or increase a tax on an item you will get less of that item. For example, if government levied a $1 tax on a loaf of sliced bread, consumers will demand less sliced bread and hence sliced bread supply will fall as demand for sliced bread falls.

Therefore, if government levies a tax on Cadillac plans, then demand for Cadillac health-care plans will fall hence we will have less Cadillac plans. Employers will buy more modest plans for their employees. (4) In other words, employers will exercise tax avoidance.

However, a problem then occurs for the revenue stream needed by proponents of the socialized medicine scheme. As the Cadillac tax reduces the number of Cadillac health-care plans , then tax revenue will fall as less taxable items exist to in fact tax. Its the Laffer Curve and associated arguments by Dr. Art Laffer. (5) What then?

This problem has been solved by socialists by merely not indexing for inflation the $8,000 individual and $21,000 family thresholds mentioned above. (6)

Looking back in time, an income earner once suffered tax bracket creep. That is, inflation pushed up wages of the income earner and the income earner being also a tax payer, moved from one tax bracket into another tax bracket due to inflating wages. However, prices were inflating simultaneously. Hence the income earner's purchasing power remained unchanged with wages following prices. Yet the income earner's tax bracket changed and the income earner paid more tax thus suffering diminished purchasing power due to tax bracket creep. That is, constant purchasing power as wages follow prices yet higher taxes ended in dimished purchasing power.

Tax bracket creep was deemed unfair and hence the introduction of tax brackets indexed for inflation.

Ah the evil of it all! What is good for the goose is not good for the gander when it comes to tax revenue needed to fuel the $1 trillion dollar socialized medicine scheme. Socialists have merely gone back to the taxation concept of tax bracket creep. In this case one might call it health plan creep.

The Kaiser Family Foundation states that the average family plan premium is $13,375. (7) Kaiser goes onto to mention the average price increase for family health care plans from 1999-2009 was 8.7%. Hence the average family plan will become a Cadillac plan by 2015. (8)

Its rather simple mathematics to see that everyone will eventually have a Cadillac health-care plan.

Stepping back for a moment, and looking at the term "Cadillac" from the perspective of Political-Economy, socialists are simply using the specific term "Cadillac" as a sham. Its merely a term used for a class warfare and misdirect strategy. Socialists are using the term Cadillac to make John and Jane Q. Public think only people with very rich benefits aka Cadillac plans are going to carry the water for the funding of the socialized medicine scheme. Hence John and Jane Q. Public are class warfare baited and their attention is directed away from the fact that John and Jane Q. Public will soon, themselves, have a Cadillac plan. Oops! Oh yes! The dollar threshold of a Cadillac plan is unadjusted for inflation hence through the compounding of inflation everyone ends up with a Cadillac plan.

Hence John and Jane Q. Public's modest benefit plan soon morphs into a Cadillac plan due to inflation. Like tax bracket creep, socialists have now introduced health benefit plan creep. Its merely a matter of time when everyone has a Cadillac plan. Which means its merely a matter of time when everyone pays the tax. John and Jane Q. Public are being duped.

Who pays the tax and at what tax rate?

Another phenomena of tax is that the ultimate payer of any tax is always the consumer. (9) (10)All taxes are passed onto consumers. Hence the concept that the Cadillac tax will be levied against insurance companies is yet another class warfare and misdirect argument to throw John and Jane Q Public off the real subject at hand.

What is the tax rate? Try 40%. (11)

Within a very short period of time, all consumers of health care insurance, through health benefit plan creep, via non-indexed thresholds and inflation, will have a Cadillac plan and the consumer of health benefits will be taxed at a 40% rate.


(a) the picture above is the Titanic beginning sea trials 04/02/1912. Seemed appropriate.

(b) the Cadillac tax has been proposed by politicians through expert analysis and confirmation by MIT economist Jonathan Gruber. However, it has been uncovered that Gruber has a major conflict of interest. Please see the following post by Donald Luskin of Trendmacro entitled Where's the Outrage:












Saturday, January 2, 2010

The Socialized Medicine Scheme: Medicare is a popular government-run program?

An argument put forth by proponents of Socialized Medicine is that Medicare is a popular government run medical program. (1) That the Medicare program is popular among participants.

Is Medicare popular or is it popular as no alternative medical plan is available to participants? Is Medicare popular with suppliers of medical services? Is Medicare popular with participants as the price paid by participants (tax levied) is too low in regards to benefits derived? What part does Medicare's monopolistic price controls forced upon suppliers of medical services and the consequential subsidization of price through private insurance have to do with popularity or satisfaction of Medicare?

Medicare is a popular government-run medical program?

The argument supporting the popularity of Medicare among participants and hence a popular government run health-care program points to a 2007 CAHPS survey (2). In the survey 51% were satisfied or very satisfied when asked how they rated their health plan (Medicare).

The survey question that yielded the above results is as follows: "Using 0 to 10, where 0 is the worst possible and 10 is the best possible, how would you rate your health plan?" A glaring problem exists in regards to the survey question mentioned above: how can a survey respondent rationally judge satisfaction regarding Medicare when the survey respondent has no other alternative regarding their health-care? How can any survey respondent, in any survey, regarding any product or service, rationally rate satisfaction when no other choice(s) are presented to the survey respondent?

The survey question was posed to another group that in fact have alternate choices and can rationally judge satisfaction. Reviewing the results of the above mentioned survey regarding private insurance yields a result of 40% satisfied or very satisfied. However, in this case the survey respondent has many alternative private health plans available to base their response upon. Health plans in the private sector cover the entire spectrum from basic scheduled medical indemnity plans, to traditional major medical plans, to health savings accounts, to plans with expansive coverage with low out of pocket costs. Hence if the survey respondent has a health plan but perceives an alternate health plan as more desirable, would the survey respondent score his/her current plan with less satisfaction merely because they desire another alternative plan?

Therefore, since Medicare represents a monopoly on health-care for survey respondents, would the existence of alternate plans for the survey respondent to choose from have caused the survey results to vary? If the survey respondent was not faced with a monopolistic provider (Medicare), would alternatives, if available to the survey respondent, seem more or less satisfactory to the survey respondent than the zero choice alternative provided by the monopoly known as Medicare?

What about Medicare's popularity among suppliers of health-care?

The survey question and survey results mentioned above are purely a demand side examination. That is, the survey is only examining those that receive health-care or in other words, the demanders of health-care supply.

What about the popularity of Medicare on the supply side of the equation. How satisfied are suppliers of health-care regarding the health insurance plan known as Medicare?

Suppliers are completely dissatisfied by Medicare. More and more doctors are no longer accepting Medicare recipients. (3) Medicare services providers as well as medical care device makers are forced into accepting an artificial below market price from Medicare. This artificial price is being rejected by some while other consequences of the artificial below market price are doctors not investing in the latest technology as well as medical device supplier not investing as quickly in advancements in devices.(4)

Hence in this particular demand and supply segment of health-care you have the demanders 51% satisfied and the suppliers so dissatisfied they are more and more opting out of providing health-care through the Medicare mechanism of monopolistic price controls.

A scenario of satisfied demand and completely dissatisfied suppliers can not last long as the suppliers will find a better use for their resources. In other words, resources will be employed in a more productive manner, likely in other indusrties with no price controls, by those making up the current health-care supply.

Medicare's artificial price affects satisfaction for both Demand and Supply

Medicare is going bankrupt. Imminent bankruptcy is around the corner. On the demand side of the equation Medicare recipients are being charged an artificially low premium. The artificially low premium (tax levied) for Medicare is unsustainable as medical-care expenditures are greater than receipts. When expenditures are greater than receipts over an extended period of time, such as the Medicare case, then insolvency is the eventual result.

Receipts or premiums in this case is the tax revenue for Medicare. The imminent bankruptcy of Medicare is in large part due to underfunding (tax receipts). Had current Medicare recipients been charged a higher tax rate and/or been taxed on larger amounts of income, would the Medicare survey mentioned above yielded a different satisfaction percentage? Did an artificially low tax rate during the working years of current Medicare recipients affect the satisfaction level of the survey mentioned above?

On the Supply side of the equation, artificially low payment rates forced upon Medicare suppliers creates dissatisfaction. Any supplier forced to take a payment below market rates will always be dissatisfied. Price controls always create supplier dissatisfaction.

Artificial Medicare prices and the Private Insurance Subsidy

Given the Medicare program is facing bankruptcy, and with Medicare artificial pricing affecting satisfaction in regards to Demand and Supply, what is holding the plan together on a current basis? Medicare is on life support through subsidies from private insurance.

One way to get around Medicare price controls forced upon suppliers is for suppliers to make up the below market payments by over charging another group. Medical-care suppliers have raised prices they charge for goods and services to Private Insurers hence subsidizing Medicare. (5) (6)

The current Socialized Medicine proponents want to eliminate or strongly reduce private health care. If you eliminate private health insurance where will suppliers of medical-care find the revenue lost from over charging the segment known as private health care?


Proponents of Socialized Medicine, pointing to Medicare as a popular Government run plan, are using a highly flawed argument.How can any survey respondent, in any survey, regarding any product or service, rationally rate satisfaction when no other choice(s) are presented to the survey respondent?

Basing an argument on the the demand side of health-care without regard to the dissatisfaction of the supply side is an incomplete argument. That price controls by the monopoly known as Medicare is creating artificial satisfaction on the demand side of health-care and price controls are directly creating dissatisfaction on the supply side of health-care.

That the looming bankruptcy of Medicare due to underfunding is a direct result of insufficient tax revenue. With Medicare recipients paying an insufficient tax for benefits provided, would a sufficient tax in the past (higher tax and/or higher tax applied to more income) have impacted the current Medicare recipients satisfaction regarding the survey result?

Finally, the survey results are an attempt to argue for Socialized Medicine and the abatement of private health-care. The argument does not account for Medicare's monopolistic price controls causing suppliers to make up the deficient price mandated by Medicare through higher prices charged to private health-care. The elimination of private health-care would then cause suppliers to seek alternative uses for their resources as the price controls of the monopolistic provider Medicare could no longer be subsidized by private health-care.