Saving For Health Care: The Policy Pros And Cons Of Different Vehicles

by John Goodman

Source: Health Affairs Blog

There are two ways people can insure for medical expenses: third party insurance and individual self-insurance. Under the former, a third party (insurance company, employer or government) pays the expenses. Under the latter, people must save and pay the expenses directly, from their own resources.

This division of insurance responsibility is a normal aspect of every insurance market. In health care, however, the tax law complicates our choices. In general, employers are able to pay third party insurance premiums with pre-tax dollars (untaxed to the employee), whereas out-of-pocket payments by patients must normally be made with after-tax dollars. A second problem is that most families are not in the habit of saving while they are healthy for expenses that will arise with an unexpected illness.

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