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!

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$2,000 for families) may establish an HSA in which contributions (up to a limit) may be deducted from federal taxes and withdrawn tax-free to pay for qualified medical services.

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.

Real evidence on the impact of HSAs is skimpy at best. Only about 8 percent of Americans are enrolled in an existing health plan with a high deductible and only about 2.5 million have health savings accounts or their equivalent. The number of insurers and employers offering such plans is expected to rise substantially in 2006 because Treasury guidelines for their use have been clarified. As Beth Fuchs and Julia James point out in their exceptionally clear and comprehensive survey, “Health Savings Accounts: The Fundamentals” (National Health Policy Forum, April 2005), while insurers and employers are eager to offer HSAs, the demand for them is much less clear. According to a recent survey of working-age adults, two-thirds of respondents preferred employer-chosen plans to health savings accounts.

Whatever their theoretical pros and cons, current interest in HSAs is being driven by employers who are searching for ways to reduce their health care spending. (If current trends persist the cost of health benefits for Fortune 500 companies will be greater than their profits by 2008.) HSAs are the centerpiece of so-called “consumer-directed” or “consumer-driven” care. This is premised on the questionable idea that cost-conscious individual buyers of health care are the key to reining in health care costs. While many of the features of consumer-directed care are unobjectionable, such as encouraging people to adopt healthier lifestyles and improving information on the quality and price of medical care, the potential risks of HSAs to low-income and sicker Americans shouldn’t be overlooked. Their widespread adoption would represent a potentially radical shift away from the basic insurance principle of healthier individuals subsidizing the sick through a common pool of premiums.

The current health care crisis—rapidly increasing U.S. spending on health care that doesn’t result in equal value, unsustainable costs for employers and public payers, and eroding coverage—is real. There are better ways to address it than by relying principally on individual Americans and market dogma to right the ship. These include new strategies for universal coverage and rewarding better performance from health care providers through incentives offered by public purchasers and health care plans.

We will say more about Health Savings Accounts when the specifics of the president’s plan are released. In the meantime, many of the most important recent books, reports, and articles on the subject are set out here, in the hope and expectation that they will be a useful resource for those who are joining the debate.