Arnold Kling  

Health Savings Accounts

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Sebastian Mallaby writes,


Even if the administration were determined to shelter out-of-pocket payments using health savings accounts, why make them so generous? It proposes both a tax deduction and a tax credit when money goes into the accounts; savings would accumulate tax-free and could be withdrawn tax-free also. As Jason Furman points out in a paper for the Center on Budget and Policy Priorities, no other savings vehicle enjoys so many privileges. And then there's the size of these accounts. If the aim is to discipline health spending below the deductible, why subsidize savings up to $5,250 a year -- five times more than the deductible?

In sum, health savings accounts are not just about ending the tax bias in favor of traditional company health plans. The administration is proposing a new kind of 401(k), and using it as an inducement to quit low-deductible insurance. Rich people, who gain most from the tax breaks on saving, will be first to sign on; healthy people, who subsidize sicker people in company health plans, will be right behind them. Their exit may force traditional health plans into a death spiral. The loss of the subsidy from healthy workers will drive premiums up, which will drive more healthy people into health savings accounts, which will drive premiums up further.


I am skeptical about health savings accounts, but not for the reasons given by Mallaby. In fact, I would tend to dispute most of the thrust of the article.

First of all, when he says that $5,250 is too much money to shelter, I totally disagree. To start with, I think that deductibles ought to be at least $5000. Moreover, I think people need to accumulate a lot of money in health savings accounts if they're going to be able to afford health care when they get old. Unless you want to count on Medicare, which if it were a private firm would be declared bankrupt, with its CEO under investigation for financial fraud.

And if traditional health plans--which are not real health insurance--go into a death spiral, why is that not a good thing? Let people buy catastrophic insurance instead. Let the government focus on paying for health care for the poor and the really expensively sick, instead of doling out tax subsidies for employer-sponsored prepaid health plans.

Another point that I would make is that the more you make a fetish out of taxing the rich, the more likely you wind up being opposed to anything that might increase private saving. You can preach about progressivity and you can preach about the need for increased saving, but not in the same sermon.

My problems with HSA's are more that I have a general aversion to programs that are beloved by wonks and operate through the tax system. Maybe that makes them politically clever, but I think you lose a lot in terms of consumer clarity and economic efficiency.

Finally, I worry that special savings buckets might create more substitution than net saving. People who would have saved the money anyway in other accounts put the money into HSA's because they get a better after-tax return. Not whole lot of net benefit there.

For more on HSA's, see last week's Becker-Posner blog.


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COMMENTS (8 to date)
David Thomson writes:

“employer-sponsored prepaid health plans”

We must eradicate the myth of free health care. One of the worst things that has ever occurred in American history was General Motors introduction of the so-called employer subsidized health care plan. It is something of a well intentioned con game. The employee always picks up the total costs. One receives a smaller salary or hourly pay to pay for the health insurance.

Jonathan Brown writes:

Perhaps your objection could be cleared by making the tax system into three buckets that are generall consumption based. The first would be consumption and taxed at a rate similar to today's income base. The second would be money not consumed and would be exempt. The third would be used when that money is used for specific purposes - perhaps health and perhaps education - which would not be counted as consumption. In the long term we would be building a pot of capital with a bit less complication than today's myriad of vebas, iras, hsas, Roths, esas and other categories.

aaron writes:

The problem I see with FSA is that they essentially increase demand for health care services. Healthcare is notorious for not being able to chase demand. What needs to happen is supply needs to be increased in ways other than providing money for HC to chase after.

There should be policies to encourage good doctors to educate and train more new doctors. Incentives should be created to get more students into health care. Some key specialized programs should be strealined so that all doctors are not taught information that they may never need.

wonk writes:

Health savings plans are the only way to do away with comprehensive insurance that I can think of. If you don't make them mandatory, only the healthy will give up on comprehensive insurance; adverse selection will get worse. Worse still, the healthy who are motivated to buy catastrophic insurance (or none at all) will now find that their health spending is tax deductible and will increase it. Medical expenditures will go up, not down.

If you make health savings plans mandatory, you will have to make them tax deductible as well. So why not make them mandatory in the first place?

quadrupole writes:

Johnathan Brown,

There is already such a tax proposal. It's call the FairTax. See HR 25.

PJens writes:

The best source for HSA data I have found is in "Health Savings Accounts: The First Year In Review." by eHealthInsurance. It shows 1) that over 30% of HSA owners previously were uninsured 2) the number of HSA's keeps growing. People are choosing HSAs and isn't that what free markets are about; choice?

I agree with Mr. Kling that money in an HSA would have been most likely saved/invested in another manner. However, the HSA directs how it can be spent. At least until retirement age. While the money invested in HSA's may have neglible impact on saving rates, the impact I believe comes in where it is spent, and who makes the spending decisions. Dollars pumped into the health care system will make it bigger - for better or worse. HSA owners will choose where to get their medical treatment. Theorictally, they will choose the best doctors and care, not the one an insurance company picks.

I also agree that health plans via the tax code are a poor way of doing business. Until a better way comes along, my family has decided that HSA is our best option.

Aaron writes:

I've emailed the author to let him know he made a glaring factual error in the article. He suggests that one can save 5 times the annual deductible in an HSA, when in fact your deductible is the limit of what you can contribute. The minimum deductible allowed with an HSA is $1050, and the maximum annual contribution is $5450, but you can only contribute that much if your deductible is that high. A simple google search for "hsa contribution limits" would have shown him as much, but who wants little things like facts getting in the way of an agenda? I would hope that a correction is forthcoming.

Ivan Kirigin writes:

Arnold,

How would you recommend the government end the bias towards employer provided 3rd party payment?

Isn't the whole point not necessarily to reduce direct spending, but to move closer to a 2-party system, which should reduce costs and increase quality?

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