Health Saving Accounts
People do not require a steady amount of healthcare each year. They will need to make provision in good years for costs incurred in bad years.
There are two typical ways of spreading costs: insurance and saving. Insurance is appropriate for spreading the cost of low-probability/high-cost items over many people. Saving is appropriate for spreading the cost of medium-probability/low-cost items over many years.
Both types of costs occur in the field of healthcare. Insurance (whether private or socialized) is required for catastrophic items such as serious injury and illness. Saving is more appropriate for frequent, low-cost health requirements such as primary care (GP visits).
Saving has the added virtue that the individual is spending their own money, so has incentives to avoid expenditure, and to minimize the costs of treatment. There is also no need for bureaucratic procedures when a patient is spending their own money, whereas an insurance firm covering health costs will need tight bureaucratic controls to determine which claims ought to be covered.
Prudence suggests that everyone should be putting money away for a rainy day under a system where they must pay directly for some healthcare costs. But many people are not prudent, particularly when facing pressures on their household budget. It would be desirable, therefore, to provide incentives to encourage people to make prudent provision for their healthcare costs.
Basic framework
We propose the introduction of Health Saving Accounts (HSAs). Any bank would be free to offer this type of account. The account would offer tax benefits to the customer, which should encourage people to open them and banks to offer them.
Tax benefits
The first £1,000 paid into the account each year would be exempt from income tax. At the initial rate we are proposing for the Flat Tax under our Basic Income + Flat Tax proposal, this exemption would be worth £430/year of avoided tax.
Any interest earned on the account would also be exempt from income tax. The combination of these two incentives and compound interest (particularly within our proposed sound-money/saver-friendly framework, where savings rates should be more generous) should see a modest contribution of a few hundred to a thousand pounds per year during people's relatively healthy youth grow into a substantial pot to contribute to increased care requirements as people age.
People would also benefit from paying in to an HSA the £100/year of their Basic Income that is earmarked for healthcare. Even those without earnings (e.g. the unemployed, the retired and parents on behalf of their children) would in this way get a benefit from their HSA, and would be encouraged to make modest provision for their healthcare costs.
Flexibility
Some people might pay into an HSA all their life, and then drop dead without utilising the pot. Others may find themselves in dire need of the money for other purposes. If the account is so inflexible that the money could not be withdrawn for other purposes if needed, people are likely to avoid it however attractive the tax benefits. If the account is so flexible that the money could be withdrawn for any purpose without penalties, people are likely to use the account as a tax-avoidance mechanism.
We therefore propose that people should be entitled to withdraw sums from their HSA for any purpose, but if it is withdrawn for any purpose other than healthcare, the avoided Income Tax should be payable. The same would apply to any residual amount in an HSA bequeathed to a beneficiary, unless the money went directly into that beneficiary's HSA. This would make the HSA directly equivalent to any other saving account for expenditure on anything other than healthcare, whilst maintaining the strong financial benefit of investing in an HSA for healthcare purposes.
Expanding the scope
After HSAs had been in operation for several (say, 10) years, most people of working age should have begun to accrue a sufficient pot of money that it would be practical to start to expand the range of healthcare costs to which individuals would make a direct contribution.
