by hilzoy
Kevin Drum just wrote a post on the Bush administration’s idea for health care reform: Health Savings Accounts. I wanted to expand on what he said, since HSAs are a Very Bad Idea, and it’s worth knowing why.
The basic idea behind health savings accounts is simple. You get a health insurance policy that is, ideally, cheaper, but has a much higher deductible. In Kevin’s example, the deductible is $2,000; he suggests that such a policy would be $2,000 cheaper, but that’s wrong. CNN reports:
“According to the Kaiser Family Foundation, premiums for an employer-sponsored family plan averaged $9,068 in 2003, with workers kicking in $2,412. The premiums on a high-deductible plan will run you 20 to 40 percent less, estimates Herschman.”
If you have such a policy, you or your employer can deposit money in a tax-sheltered account. The idea is that this account will cover some or all of the health care costs you run up before you hit the deductible. Since you will have to pay for the first few thousand dollars of your health care costs, the proponents of HSAs argue, you will be motivated to be a good consumer, and use no more health care than you need. In this way, health care spending will be driven down.
Sounds good, right? A nice, market-oriented solution to a serious problem. (And the idea that liberals are hostile to market-oriented solutions, in general, hasn’t been true for at least fifteen years.) However, this is just one more illustration of Hilzoy’s First Rule of Policy Wonkery: Never, ever rely on slogans instead of looking at the details*.
First, under the Bush administration proposals, employer contributions to HSAs are optional. That means that the account you supposedly get to use to pay your medical bills below the deductible might not exist. You could put the money you save into it, but as noted above, those savings will not cover the whole difference in the deductible. If they don’t, you’ll just pay more.
Second, HSAs will not, in fact, lower health care spending overall. The best study on the issue concludes that “health spending would change by +1% to -2%.” One reason, as Kevin notes, is this:
“the vast bulk of healthcare dollars are spent on people who are extremely sick and quickly blow past even a large deductible anyway. Since HSAs don’t affect that spending at all, it means that, at best, their effect on the total cost of healthcare is probably pretty negligible.”
It’s worth being clear about this. To that end, I have created my first ever chart using Excel (I am so proud), from data found here (see Exhibit 1.11):
[UPDATE: OK, I blew my chart. Darn. Along the y axis, it should say: percent of health care spending. The idea being that the 1% of the population who spend most on health care account for 22.3% of all health care spending, and so on.]
The top 50% of health care spenders will probably breeze right by their deductible, and will thus be completely impervious to HSAs’ incentives to save money. Any health care savings will have to be gained from the bottom 50% (or from people who will be in the top 50% but don’t yet realize it.) But the bottom 50% accounts for only 3.4% of health care spending. This means that this proposal leaves the overwhelming majority of health care spending absolutely untouched.
More problems below the fold.