HSA Gumbo

A Lousiana blogger named Dr. Hébert offers a skeptical but open-minded critique of health savings accounts. Hébert is board certified in internal medicine and pediatrics. I addressed many of his criticisms in a recent study on HSAs, but I’ll see if I can tackle his concerns head-on – and perhaps more succinctly.

Here are Hébert’s main concerns, saving the biggest for last.

1. HSAs favor the wealthy. Yeah, that’s pretty much true. But the fault here lies more with the problem that HSAs attempt to correct. The federal tax code has exempted employer-sponsored insurance premiums from payroll and income taxes for over 60 years. The wealthy get the biggest tax breaks from that exemption. (See neat graphics to that effect on pp. 14-15 of my paper.) But money saved or used to purchase health care directly is subject to both types of taxation. That causes people to rely on health “insurance” more than they should. HSAs are an attempt to level the playing field between health savings and out-of-pocket expenditures on the one hand and third-party payment on the other. So extending to HSAs a tax break that already benefits the wealthy naturally will benefit the wealthy more than the poor. Since eliminating those tax breaks entirely doesn’t seem politically feasible, HSAs are the best shot we’ve got for fixing what the tax code has done to the health care sector.

2. Employers won’t pass the savings on to workers. HSAs make it easier for employers to provide less health coverage, because they and/or their workers can contribute money to the worker’s HSA tax-free. But if employers cut back on coverage, how can we be sure that employers will “pass on this savings to their employees by paying higher wages”? In the short term, we can’t be sure; employers could just pocket the savings. (If there are any savings – the rising cost of health insurance could eat up any potential wage increase even if employers cut back on coverage.) It’s in the long run that economists agree that non-cash compensation reduces cash wages. And it’s in the long-run that premium savings will be passed on to workers.

3. HSA rules discriminate against those who want traditional insurance. Okay, I have to agree with Hébert again. And with Jason Furman of NYU. It is inconsistent for HSA supporters to say that people are smart enough to shop around for medical care, but not smart enough to choose their own health insurance. That’s one reason I’ve proposed turning HSAs into “large” HSAs, where you would get a tax break on up to $8,000 in HSA deposits ($16,000 for families) and you could use that money to buy whatever kind of health insurance you prefer.

4. HSAs are not a good deal for those with high expected medical expenses. As I discuss in my paper, HSAs may be unpopular with people whose health insurance currently pays for what are essentially uninsurable expenses. In order for insurance to work, coverage has to be confined to expenses that are unknown. If you try to force insurance to cover known expenses, you drive people out of the market – because they know you’re just trying to extract wealth from them. This is not an argument against subsidies, only an argument against trying to cram subsidies into “insurance.” As I wrote in an exchange with Matthew Holt from TheHealthCareBlog.com:

My preference is to let insurance markets do all they can do to improve efficiency, particularly by encouraging patients to pay directly more often. Some people will still require assistance, though with a more efficient health care sector their numbers should be smaller. We should subsidize those who remain directly, with cash.

But that hardly means that chronically ill patients won't like HSA coverage. As the Congressional Research Service notes, HSAs could be popular with many such patients because they offer much more control over one's medical decisions.

5. HSAs won’t result in higher quality care. Hébert gives two reasons. First, patients not always in a position to shop around, because you can’t comparison shop when you’re on a gurney. Yet as I wrote in my paper:

Most health care spending occurs in circumstances under which the patients can comparison shop. For example, emergency room care accounts for only 3.3 percent of health expenditures. Hospital and nursing home care combined account for 45 percent of personal health care expenditures, yet many hospital expenditures are discretionary. Spending on physicians, prescription drugs, home health care, and other services accounts for 55 percent of personal health care expenditures. Those data suggest that a large share of health care spending does allow time for considering one’s options.

Hébert’s second reason is that medical billing is too complicated for patients to comparison shop. Yet the scenarios he offers are no more complicated than comparing prices for cars or houses or mobile phones with calling plans – and consumers comparison shop for all of those things, sometimes all at once. When they need help finding value, they find an agent (e.g., realtors) to guide them. Which brings me to Hébert’s main critique.

6. HSAs equal less health care, and that’s bad. Hébert’s biggest concern seems to be that HSAs will cause people to cut back on their medical consumption, particularly visits to primary care physicians. The way HSAs are set up right now, many primary care visits are not be covered by insurance, although preventive care may be covered below the deductible. That means that patients may face actual tradeoffs if they want to go to the doctor, and will therefore demand more value. If primary care physicians provide as much value as Hébert believes, he should have nothing to fear from cost-conscious patients. But if it turns out we are wasting money even on primary care – and there’s evidence to suggest that is the case – then maybe primary care physicians will have to focus more on providing value.

Hébert predicts that HSAs will meet the same end as HMOs. I disagree, because HSAs give people more control over their health care decisions, and people are not going to want to give that up. HMOs did exactly the opposite. But Hébert offers a testable hypothesis to which I hope we both shall return in the coming years.

(Hat tip to Trapier Michael, the hardest working man in health policy.)