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Health Savings Accounts: A Bad Idea Whose Time Has Come?

If you thought privatizing Social Security made sense, here's a health care innovation for you!

| Thu Jan. 26, 2006 4:00 AM EST

Article created by The Century Foundation.

Last Saturday, in his weekly radio broadcast, President Bush proposed making health savings accounts (HSAs) “more available, more affordable, and more portable.” He is widely expected to call for expanding access to these accounts, which resemble individual retirement accounts for health care, in next week’s State of the Union address.

The predecessors of these accounts, such as medical savings accounts, made very little impact on the health insurance marketplace. The Medicare Modernization Act of 2003, which established the Medicare drug benefit, created HSAs and offered substantial tax incentives for electing to use them. Individuals who join a health insurance plan with a high deductible ($1,000 for a single person and $2,000 for families) may establish an HSA in which contributions (up to a limit) may be deducted from federal taxes and withdrawn tax-free to pay for qualified medical services.

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Proponents of HSAs claim that they will lower the numbers of uninsured, persuade employers to retain insurance coverage, empower individuals by giving them a choice in how to spend their health care dollar, and encourage providers to compete on price and quality as a true market for medical services evolves.

Many health care analysts fear that widespread acceptance of HSAs will separate the wealthy and healthy from the sick in insurance pools and drive up premiums and out-of-pocket health costs for the latter. They worry that individuals who face higher out-of-pocket spending, within their HSA or outside it, will be unable to distinguish accurately between care they need and care that they don’t, with bad consequences for health. They also doubt that HSAs will have a major impact on overall health costs or on the number of uninsured.

For instance, because a relatively small percentage of the population incurs most of the national health care costs (about one quarter of Americans account for roughly 80 percent of total spending each year), most of the spending presumably will be above the deductible. Under the current framework, there is also an incentive for the holder of an HSA to time any elective services in a year when the deductible has already been reached, or to spend more on health care of marginal value if he anticipates that the deductible will be reached.

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