Protecting Ourselves from Our Masters

I have previously blogged about healthcare “reform.” (One example is here.) Both the House and Senate bill attacked the tax-advantaged flexible spending account for healthcare expenses. Now there seems to be a move to reinstate it with a maximum of only $2,500.

I understand why the first instinct of economists is to oppose to such accounts. They enable people to put aside money from their salaries before taxes and use it to pay for deductibles, copayments and uncovered medical or dental expenses (for which most people’s insurance is terrible).

Flex Spending Accounts tend to lead to overutilization of healthcare because it changes the terms of the tradeoff between medical and other expenditures. A dollar spend on healthcare costs a person, say, $0.60 (Federal, NY State and City income taxes). A dollar spent on clothing costs him or her a dollar.

However, look at the world in which we live. We have a Congress and a president who wish to impose a complex healthcare reform which will be altered up to the very moment of passage, and then unleashed on a largely ignorant public —  as well as those of us who struggle to stay informed.

No doubt there will be many unintended negative consequences as well as intended negative consequences for many people. I look at the Flex Spending Accounts as a kind of exit option. If they screw with my healthcare financing I can use this money to get perhaps better care than the new system would normally allow.

In other words, Flex Spending is imperfect insurance against the consequences of bad policies.

I implore my fellow economists not to be myopic but to see policies in their second and third best context.

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About Mario Rizzo 75 Articles

Affiliation: New York University

Dr. Mario J. Rizzo is associate professor of economics and co-director of the Austrian Economics Program at New York University. He was also a fellow in law and economics at the University of Chicago and at Yale University.

Professor Rizzo's major fields of research has been law-and economics and ethics-and economics, as well as Austrian economics. He has been the director of at least fifteen major research conferences, the proceedings of which have often been published.

Professor Rizzo received his BA from Fordham University, and his MA and PhD from the University of Chicago.

Visit: Mario Rizzo's Page

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