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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.
Posted by Tyler Cowen on July 22, 2008 at 07:39 AM in Medicine | Permalink
Comments
Perhaps we could split the difference by scrapping HSAs but also scrapping the "use it or lose rule" for flexible spending accounts?
Posted by: KipEsquire at Jul 22, 2008 8:00:15 AM
One of the first things that should be done is outlawing the previous condition penalties. It is fundamentally anti-free market. One virtually cannot change health care companies for fear of not being covered on exactly the conditions they need coverage for. So dollar voting for the best product at the lowest price cannot is effectively blocked. Interesting monopolistic tactic.
Posted by: Ed D. at Jul 22, 2008 8:00:29 AM
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.
Posted by: Jody at Jul 22, 2008 8:07:50 AM
An HSA combined with a High Deductible Health Plan (HDHP) is a powerful instrument. First, it lowers premiums for an individual to about how much a cell phone and data plan costs ($80/month for a young person). The first $1000 of non-routine examinations is on you. Having used this plan, I examined every charge on my bill and found procedures that I didn't even have (scheduled, but not performed and I didn't want to go back for them)! This is very important to reducing the cost of healthcare. When it's your money, you look at the bill. The HSA becomes somewhat of a 401k, in that it's your life long health savings fund that you can use until retirement. It's a great place to park some extra cash for a rainy day, like your bonus.
I do believe in decoupling insurance from your employer. It will make our work force more mobile and our health care more continuous (don't have to switch doctors when you switch jobs).
Further, I would support state legislation that requires anyone who registers a motor vehicle to have BOTH car insurance AND health insurance. In your hierarchy of needs, if you can afford the Jeep lease you can afford health insurance. I don't mind the gov't forcing someone who can pay to make the right choice (in conjunction with the vehicle purchase).
Posted by: westwest888 at Jul 22, 2008 8:14:05 AM
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.
Posted by: Alanna at Jul 22, 2008 9:20:38 AM
Dr. Cowen, how is it that we can be reasonably certain of #4? (Isn't that what Kling & Hanson have been more or less shouting from the rooftops for some years now?)
Posted by: ryan at Jul 22, 2008 9:38:31 AM
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.
Posted by: John Goodman at Jul 22, 2008 10:25:01 AM
I think that we should focus on the fact that the insurer, whoever that is, will need help from the insured if it will control costs. The insured needs to gain significantly by controlling costs but since much of the cost comes in very big lumps deductibles below 30k are not effective. I have a few ideas, they have problems but here they are:
1. Provide insurance with a deductable that is equal a families’ income minus the poverty rate. If the poverty rate for a family of four is 15k per year then if a families income was 150k in the prior year there deductable would be 135K.
2. Term health insurance with and annuity and growing deductable. After all it seems like healthcare in old age is not an insurable even but almost assured.
Posted by: floccina at Jul 22, 2008 10:29:37 AM
Oh I forgot to say thus HSA do not accumulate enough money to be effective they much be much bigger.
Posted by: floccina at Jul 22, 2008 10:31:36 AM
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.
Posted by: John Goodman at Jul 22, 2008 10:35:20 AM
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.
Posted by: dWj at Jul 22, 2008 11:03:40 AM
First, it lowers premiums for an individual to about how much a cell phone and data plan costs ($80/month for a young person).
I was going to sign up for this at work, instead of the HMO they provided. The deal was that the difference in cost between the two would be put into the HSA for me. Unfortunately, this amounted to about $500 a year and the max year deductible was actually $2500. I'm not sure HSA plans are really that much cheaper than a HMO. Health insurance for young, healthy and single individuals is likely always cheap.
Posted by: JordanT at Jul 22, 2008 11:32:05 AM
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.
Posted by: Dave Racer at Jul 22, 2008 11:35:44 AM
Mr. Cowen,
I have never visited your blog before, but with all due respect I have rarely read a less well-informed opinion on health care. Small wonder if you are relying on Paul Krugman and Jason Furman for your understanding. I read the earlier items you posted on HSAs and it is interesting how you have been wrong at every step of the way.
In every measure that matters, HSAs have been a phenomenal success. Patient behavior is changing so that people are more discriminating in their use of services. Information and patient support services have grown in response to demand. Providers are learning how to provide transparent prices. Cost increases are about one-third of other financing products like PPOs and HMOs. Market penetration is exceeding expectations. And consumer satisfaction is high -- at least once people learn how to use the program.
HSAs are not, and were never intended to be, a panacea. There is plenty remaining to be done. We need to bring market forces to bear on the high-cost side of things. We need more competition between insurers and between hospitals. We need more choice for consumers.
But we are well on our way to restructuring health care from the bottom up so it will become more efficient, accountable, affordable, and convenient. HSAs are an critical firs step in that process.
Posted by: Greg Scandlen at Jul 22, 2008 11:55:07 AM
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.
Posted by: Ari Indik at Jul 22, 2008 12:30:05 PM
I think we should make interest and dividend income tax free, up to an amount equal to the median income. And then roll back all the crazy tax-protected investment plans.
We CAN save tax-free now, we just need to seek out IRA variants or municipal bonds. Not very efficient, nor very free-market.
I dislike HSAs for Tylor's reason #2, and just because the are part of an explosion of complexity in our tax system.
Of course, my tax-free savings plan probably wouldn't fly. We are too populist a nation, and too willing to see savers as "the rich" ... never mind that an average worker should really have reached near that level of savings and interest/dividend income by retirement.
Posted by: odograph at Jul 22, 2008 12:50:23 PM
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.
Posted by: odograph at Jul 22, 2008 12:52:32 PM
"I see the incentives of producers, combined with the fear and unreasonableness of buyers, as the key problem on the cost side."
I am unsure what Tyler means by this.
Anyone care to elaborate? Who are the producers and who are the buyers? What exactly is the disconnect/problem/etc
Posted by: Robert Olson at Jul 22, 2008 1:54:57 PM
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/.
Posted by: David J. Balan at Jul 22, 2008 2:02:16 PM
If by "aggregate costs" you mean the total cost of healthcare in US, I'd agree with Point #2. The aggregate cost of healthcare would probably stay the same. But cost is just one side of equation. I would expect the benefit we receive from those costs to increase substantially.
If by "aggregate costs" you mean a measure of some cost per service or per procedure, I disagree. LASIK and breast enhancement seem to be remarkably within reach.
What are the goals anyway? To reduce total amount spent on healthcare? That can be done easily by lowering quality (as defined by outcomes, wait times, freedom to choose). Many countries have proven that.
Posted by: Seth at Jul 22, 2008 2:34:22 PM
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)
Posted by: Aric at Jul 22, 2008 6:04:46 PM
I have an HSA and one thing I don't like about it are the uncompetitive savings and investment options. My account has an in interest rate of 2% and my investment options carry high fees.
It is uncompetitive with regular investment options because the employee doesn't chose what company to use and employers simply care that the base plan is free. The employer is less concerned that the investment options carry higher fees.
The way I look at it, I would be better off investing individually than as part of my employer's plan, except for the tax break. This makes the HSA tax break an effective subsidy for the financial institutions that offer HSA plans.
Posted by: Tim at Jul 22, 2008 7:18:33 PM
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.
Posted by: Cliff at Jul 23, 2008 7:56:42 AM
I am the CFO for a mid sized company and we went with HSA's 4 years ago. I'd have to say you're wrong on all accounts. I don't want to say that HSA's are the ultimate panacea but from a social benefits and ecomonic model they work very well. A few of points:
1) You CANNOT make a case against HSA's based on a company that switches, saves a boatload of money thru HDHP and pockets the money. That is purely a reduction of benefits. You have to look at those organizations switch, save money, and give it back to employees in the form of wages or HSA/FSA account contributions. In virtually all of the complaints I have heard against HSA's its due to the switch and save not the fundamental zero-sum model.
2) I survey our participants annually and they overwhelmingly favor the HSA model. A committe of employees chooses the coverage annually and has a certain amount to spend on healthcare so they could go back to the traditional model at any time. IT WON'T HAPPEN.
3) Both my organization and the participants have saved tremendous amounts of money.
4) Employees have become more aware consumers and they have altered there lifestyle to become more health conscious because of the individual benefit involved.
5) Our HSA model is EXTREMELY progressive. We have a majority of minority participants. They have a $2500 deductible and a $2500 employor paid HSA contribution. The contribution is a MUCH higher percentage of their income than the highly paid mgmt and they are much less likely to use healthcare than the older higher paid executives. This is important - THE BENEFITS ACCRUE TO YOUNGER HEALTHIER PARTICIPANTS. Older high use participants are still covered they just don't have any balance in their HSA accounts. Virtually all of our older white participants have zero balances in their accounts and virtually all of our younger minority participants have balances some of which are $10,000 or more.
6) Healthcare usage has dropped but anecdotaly overall health has not. If a participant needs a service they will get it. However, if they sprain an ankle and they have normal soreness and get referred for a $1000 MRI they will think twice or wait a week or two.
7) Eduaction is extremely important for a well run HSA model.
Posted by: wtlf555 at Jul 23, 2008 12:41:55 PM
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/
Posted by: Brian T. Schwartz at Jul 24, 2008 1:21:57 AM
