There are many ways to reduce eligible health care costs while improving the quality of services.
While Elon Musk and Vivek Ramaswamy pursue a goal of reducing government waste, critics have been quick to argue that it is not achievable. The reason? If we don’t touch rights (Social Security and Medicare, for example), they say, there isn’t enough waste to be found.
Yet there is a lot of waste in our welfare programs. And there are many opportunities to reduce spending while improving the quality of social benefits. Here are some examples.
Health Savings Accounts (HSA). These are devices used by employers and employees to pay for medical expenses not covered by liability insurance. They achieve two important social goals. First, if a person needs medical treatment, the money deposited into the account guarantees that they will be able to pay for it. In other words, people will not forego care due to lack of financial means. Second, because money not spent on medical care can then be withdrawn and spent on non-health care goods and services, people have an incentive to avoid waste.
The second objective is perhaps more important than the first. Some estimates suggest that, to the extent that 25 percent of health care spending in the United States is wasteful. Our current use of HSAs acts as a fix, but it is very imperfect.
If the money is withdrawn for purposes other than health care (before age 65), it is subject to income tax plus a 20 percent penalty.
So an individual in the 15 percent tax bracket who withdraws a dollar from their HSA and spends it on non-health-related expenses will have to pay 35 cents to the government. This means that a dollar of health care is exchanged for 65 cents of other goods and services.
If health care is only worth 66 cents on the dollar, it will still be the best option. In this way, the individual is encouraged to spend on health care even if up to a third of the money spent is of no use.
The bottom half of the income scale pays virtually no income tax. But they still face a 20 percent penalty for non-medical withdrawals.
Roth HSA. A Roth HSA would be characterized by after-tax deposits and tax-free withdrawals. If there were no penalties for non-medical withdrawals, health care and non-medical care would trade on an equal footing under tax law. People wouldn’t spend a dollar on health care if it didn’t have value.
Now suppose we offer Medicaid enrollees the opportunity to have a Roth HSA in exchange for personal responsibility for a portion of their care – say, all primary care.
Medicaid itself (or one of the companies that manages Medicaid for 75% of enrollees) could make the deposits. Enrollees would be limited to using the money for health care during the insurance period. But once the year is over, they could withdraw the funds for any purpose.
How much would be saved? It is estimated that current use of HSAs will reduce total health care costs for account holders. from 5% to 7%. But, before the government doubled the penalty for non-medical withdrawals, the RAND Corporation estimated that reducing spending was 21%. A much earlier RAND study found that high-deductible insurance reduces expenses by 30%, Since all expenses were after-tax in this study, these results are most applicable to Roth accounts.
Ignoring spending on people with disabilities and nursing home care, if the rest of Medicaid spending could be reduced by 30 percent, that would amount to nearly $1 trillion in savings over ten years. This savings would be split between beneficiaries and the taxpayers who fund Medicaid.
We could probably double this figure through creative programs of self-management and self-care for the rest of the Medicaid population.
Roth HSAs should also be available to elderly and disabled people on Medicare. If half of beneficiaries had one, the savings would be $1.8 trillion – again, shared by beneficiaries and taxpayers.
Pay market prices. When people are newly enrolled in Medicaid, their emergency room visits increase by 40 percent! A probable reason is that many doctors will not see Medicaid patients and even if they do, they are the last patients the doctors want to see. Additionally, many of our best medical centers will not cover Medicaid managed care.
Medicaid prices are often half the prices at walk-in clinics and urgent care centers. Although some accept Medicaid fees, they rarely locate in areas where Medicaid enrollees live.
One solution is to allow Medicaid patients to purchase medical care the same way they purchase food. At supermarkets, low-income shoppers are free to combine food stamp funds with money out of their own pocket and pay market prices. In health care, we have made this option illegal.
Under a reformed system, people enrolled in Medicaid could still receive free emergency room care and possibly lose a day’s pay. (The entry and exit time at Parkland, a safety-net hospital in Dallas, is almost 6 hours!) Or, they could save time and taxpayer money by getting care where middle-class patients go.
If this reform (coupled with 24/7 primary care described below) could cut Medicaid emergency department spending in half, it would save the federal and state governments up to $135 billion. dollars over 10 years.
Reduce fraud. According to the General Accounting Office, fraud in Medicare and Medicaid amounts to 100 billion dollars per yearand they admit that this is a low estimate.
In principle, credit card fraud should be much easier to commit than health care fraud. (Think about how often your card disappears into the possession of a server or other seller.) Yet losses from credit card fraud represent only a fraction of 1% of spending. If the federal government could manage Medicare and Medicaid as efficiently as the credit card industry (or perhaps outsource them), the savings would approach $1 trillion over ten years.
An optional Medicaid block grant. State governments should have the option to receive 90 percent of their federal Medicaid dollars in the form of a block grant, saving federal taxpayers the remaining 10 percent. With their part, States could achieve some of the things already mentioned. They could create Roth HSAs outside of the federal tax system. They could make deposits into these accounts and let enrollees pay market prices for their care.
They could also allow HSA money to be used to pay for “direct primary care physicians WHO provide all primary care 24/7 (including telemedicine) for as little as $50 per month for an adult and $10 for a child.
If all states agreed to the deal, the savings to taxpayers would be $630 billion.
Other reforms. THE Paragon Health Institute identified 12 reforms that could reduce Medicare and Medicaid spending by $2.1 trillion. They include paying hospitals the same fees that Medicare pays doctors when the services are identical.
Additionally, President Biden’s recent changes to Medicaid rules are expected to add $137 to $270 billion to federal spending. Taxpayers could avoid this expense if President Trump revokes these new rules.
Since the reforms I have outlined here interact with each other, the numbers cannot be added up in a simple way. Still, they strongly suggest that we could save about $7 trillion in total, mostly in the form of taxpayer savings.
And it’s without much effort.