May 3, 2007 10:13AM

HSAs: Goodman vs. Reinhardt

Over at The John Goodman Health Blog, there is an important exchange between Goodman (“the father of health savings accounts”) and Princeton economist Uwe Reinhardt, who writes in the comments section. 

Reinhardt rightly chides supporters of health savings accounts (HSAs) for their obsession with high‐​deductible health insurance. Why call HSAs consumer-directed health care if the government tells HSA holders what type of insurance they must purchase? Reinhardt appears to have missed the fact that Goodman shares this criticism. In a 2005 paper, Goodman proposes removing all restrictions on what type of insurance HSA holders may purchase. 

Goodman’s proposal remains vulnerable to another of Reinhardt’s criticisms, however. Goodman would allow people to contribute unlimited amounts of money to an HSA tax‐​free. As Reinhardt argues, retaining the tax preference for HSAs would still require Congress “to specify what can and can not be financed out of the tax‐​favored HSA…If Congress did not specify it, would ‘recuperative’ trips to Hawaii or Monaco qualify?” The only way to end such silliness is to eliminate all tax preferences for health care.

Unfortunately, Goodman’s proposal does not seem headed in that direction. Allowing unlimited tax‐​free HSA contributions would complicate the elimination of such tax preferences in the future (in addition to expanding the economic distortions created by existing tax preferences for health care). 

I have proposed expanding HSAs in a way that would (1) allow individuals to purchase whatever type of insurance they wish, (2) limit the currently unlimited tax preference for health care, and (3) facilitate the elimination of such tax preferences. Read more about that proposal here, here, and here. Or register for the May 24 Cato policy forum where Katherine Baicker, Jason Furman, and I will debate that proposal.