Health savings accounts on the rise

The HSA idea gives you a tax-free account for medical expenses but requires purchase of a high-deductible health care plan (above $1000 for individuals and $2000 for families, in most cases). And when age 65 comes, you can use the money for Medicare premiums or simply pull it out and pay standard rates of taxation. Bush packaged this innovation with the Medicare drug prescription bill. The accounts are now rising in popularity:

1. About twenty major financial institutions are now marketing HSAs. About fifty insurers have introduced corresponding high-deductible health care policies.

2. 81 percent of large (>20,000) employers expect to offer the accounts by 2006.

3. The Treasury has recently clarified what kind of expenses the plans can be used for.

4. One Congressional spokesman expects one million HSA accounts by 2004 and three million by 2013.

My take: The number of accounts will not be large enough to affect health care costs in the foreseeable future. So we can forget about macro changes and evaluate the micro incentives on their own merits.

In general I favor incentives to save, although I would remove current disincentives before adding on a new tax benefit.

Should the government subsidize high-deductible insurance policies? Probably not in the abstract. Of course this subsidy may offset the tax advantages of low-deductible plans, but again a simpler solution is available, namely to eliminate the original distortion.

Finally let us say that HSAs were soon to be much more common. What would the macro effects be on health care costs? I predict the “encourage health care expenditures” effect would swamp the “encourage high deductibles” effect. A $1000 or $2000 deductible is still not very high, especially since most people using the plan will be middle class or above. So aggregate medical costs would rise rather than fall.

More politically and more cynically, the plan has the plus of (possibly) deflecting pressures for national health insurance.

The best case for HSAs involves strategy. The plan might, in the longer run, wean us away from more governmental mechanisms. And people will identify with their health savings accounts, which will cause voters to internalize some of the effects of their decisions in the voting booth.

That being said, the strategic issues cut two ways. The core idea, whether admitted or not, is that we cannot muster the political coalitions to eliminate the original distortions on savings and health care decisions. Rather than keeping up this good fight, we should cave and add in some new distortions, hoping the net effects are to some extent a wash. In other words, the Bush people must believe it is easier to sell people on a new “benefit” than to undo previous mistakes. But the more distortions we add on, the harder it becomes to get rid of any of them. I wonder how wise this will prove in the longer run.

I am all for the idea of the ownership society. But let’s start with letting people own things. This means cutting government spending and the real tax burden over time. It is less useful to direct individual behavior by using a crazy quilt set of conflicting incentives to induce them to lock up their funds for purposes specified by the government.

Some of the facts above are from The Wall Street Journal, September 9, 2004, p.D2.


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