Health savings accounts

A few readers have written me or asked in the comments why I am not so crazy about HSAs.  From the past, read here and here, and here, or here is an index of previous MR posts on the topic; in any case my take is relatively straightforward:

1. I favor tax-free savings (albeit with some fiscal qualifications), so you can make a case for HSAs on this ground, noting that we do already have other tax-free savings vehicles.

2. HSAs take one market segment — usually a relatively wealthy and health care-satisfied segment — and introduce one marginal improvement of incentives.  This doesn’t seem to help much in terms of lowering aggregate costs.

3. HSAs introduce greater care into any single medical expenditure by creating a direct private opportunity cost for the spender.  I am less sure it will limit medical expenditures in general; that depends on how people frame withdrawals, once funds are committed to an HSA account, and to what extent they use HSAs for what would have been cash payments anyway.

4. As Paul Krugman says, "too much health insurance" is not the fundamental problem in the health care market.  (Unlike Krugman, I don’t see single-payer plans as the solution; I see the incentives of producers, combined with the fear and unreasonableness of buyers, as the key problem on the cost side.)

5. Re Bryan Caplan on Singapore, HSAs might work much better in another setting, noting that the other features of Singapore also might account the difference in performance in health care systems. 

6. Given #1 and #2, it is easy for me to believe that HSAs bring net social benefit.  It is much harder for me to see HSAs as "the one health care idea we would promote if we had one shot at health care reform."  The main beneficiaries are the healthy and the wealthy, and, while I am all for helping those people, surely that is odd, no?

7. I will profess my agnosticism on many health care policy issues, but one of the better plans is Jason Furman’s and/or spending more on medical R&D and some public health programs and lots of cost-lowering deregulation while in the meantime getting expenditures and costs under control.  I also recommend Arnold Kling’s work.

Comments

Perhaps we could split the difference by scrapping HSAs but also scrapping the "use it or lose rule" for flexible spending accounts?

Thanks.

So in summary the fraud is that HSAs are not a silver bullet?

My primary concern from the fraud statement was that there were well-known (but not to me!) hidden costs, so I view this as neutral news as a small social benefit is irrelevant to my company.

I would posit that most people don't look at health care bills because they are multiple, and incomprehensible. HSAs will not make medical billing clearer for the average user. Broadly, I think moral hazard is over-estimated in health care.

Tyler:

I believe you are missing the big picture. It is perhaps unfortunate that the word "savings" even appears in the term "health savings accounts."

The issue is: the tax law heaviliy subsidiizes third-party insurance and penalizes individual self insurance. As a result, we have way too much of the former and way too little of the latter. This is especially true of the chronically ill, who spend more than half of all health care dollars and who are often capable of managing their own care and their own expenses if given the opportunity to do so.

The current structure of HSAs is way too restricitive and it limits the use of these accounts. That is one reason why about half of all people in consumer directed health plans are in Health Reimbursement Arrangements (HRAs), rather than HSAs.

No single health reform would do more to revolutionize the health care marketplace than a universal, completely flexible HSA.

Oh I forgot to say thus HSA do not accumulate enough money to be effective they much be much bigger.

Krugman is wrong. Overinsurance is the root of the problem.

The best objection to HSAs is that they will only be a small help, not a big one, but I think that creating a class of people, perhaps 3% of the market, that cares personally about the price-to-value tradeoff will have a bigger effect than some people think. A lot of markets allow uneducated consumers to free-load off of educated consumers; you can go into a lot of situations with the sense that markets are broadly efficient because a small portion of the market participants keep them that way. I think that going from 0% to 3% of the market that hasn't dropped out of the regular health-care market altogether but no longer has its quality incentives decoupled from its quantity incentives could make a bigger difference than is often portrayed.

The fact that HSAs appeal to wealthy people is not a negative. It is simply a fact and a good idea at the same time. That said, HSAs remain an even more attractive feature for middle- and lower- income employees who, for the first time, can shepherd their own money, and use it as they deem important.

HSAs are one very important component of a market approach to resolving what ails U.S. health care. No one, to my knowledge, assumes they are the single magic bullet. For instance, a fully-funded HSA for an obese person will do little to reduce their health risk. Yet, an HSA, combined with price transparency, for the person with a chronic illness can go far in their evaluation of the cost and type of treatment, simply because it is their "skin in the game."

HSAs are progress. They are today. HMOs, Managed Care, low-deductible co-pay plans are yesterday, and a malignant sore on our health care system.

HSA's are a correction of the main problem, which is the tax preference of employer-provided health insurance. The tax code doesn't treat it as income, but your out of pocket purchase of health insurance or of health care is from post-tax money. So we have more employer provided health insurance than we otherwise would. HSA's are a second-best solution to the problem. The first-best solution is to start taxing employer-provided health insurance as compensation. That's a political impossibility, so exempting more income from the tax code to even out incentives is done instead.

That said, HSAs would work better if the contribution caps were higher, if HDHPs weren't required in order to have one, and if the money inside one could be used to buy insurance. I wish my employer put the full employer contribution toward my insurance in an HSA instead of buying my insurance. I'd buy a plan that costs and covers less than theirs, on the open market, and keep the difference in my HSA. The tax code disparity doesn't allow me to do that now.

Once I accumulate enough money in my HSA, say, 10 years down the line, I might choose a plan with an even higher deductible (depending on whether the difference in premiums makes it worth doing) than the plan I chose in year 1. That's a long term effect that we can't yet measure.

BTW, in response to Dave's and other comments about the rich and HSAs ... I'm not that rich but I'm rich enough not to care about HSAs ... not big enough to matter.

Without prejudice to how big a factor it is compared to others, I think "the fear and unreasonableness of buyers" is important in health care, and can show up in unexpected ways. For anyone who might be interested, I have a paper on one of these at http://works.bepress.com/david_balan/3/.

I love my HSA. I work in the technology industry and have had seven different employers in the past ten years. About four years ago, I got a HDHP with a $5000 deductible. I buy it on my own and haven't had employer-sponsored health insurance since then. I have filled it up so that the account now has over $3000 in it, and will probably go over $5000 within a year. Since I have 100% coverage on anything beyond my $5000 deductible, starting next year, even a major health problem could theoretically not require an additional dollar out of my pocket.

The best part of it is the security. In return for the $87.37 monthly premium, losing or changing my job is much less of a concern than it might be for other people. If I quit or lose my job, I don't need to worry about COBRA, benefit waiting periods, or anything like that.

Finally, the tax benefit of maxing out my HSA contribution just about covers my premiums - up until my premiums went up again this year, I could have actually turned a profit on the whole thing.

(12*87.37 = $1048; $2850 tax deduction is worth about $935)

You can have an HSA with whoever you want as long as you have a HDHP. My wife and I have one with Chase by default that sucks, so we got another one with Alliant CU paying 5% and put our money there.

Tyler’s comments prompted me to write the following post:

Summary: The best defense of Health Savings Accounts is not that they promote wise spending and bring costs down. It’s that they are a step toward a more ethical tax policy. So either scrap the tax exemption for employer-sponsored insurance & lower tax rates or (second-best) tax insurance and out-of-pocket expenses the same with "Large HSAs."

The rest of the post is here:
http://www.patientpowernow.org/2008/07/21/moral-health-savings-accounts/

maybe you are a good men

Is it realistic?

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