United States House of Representatives

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Health savings accounts (HSAs) and HSA-qualified high-deductible health plans (HDHPs) are being promoted as a method of reducing health care spending by placing patients in charge of their own personal health care funds, while protecting against catastrophic losses through HDHPs. Unfortunately, this simplistic framing of the concept ignores important and well established health policy principles.

Cost sharing as an economic tool to control spending

The classic RAND Health Insurance Experiment (RAND HIE) is frequently cited as providing the rationale for reducing spending by making patients sensitive to health care costs through cost sharing.

Since the RAND HIE was an experiment involving a relatively healthy sector of employed individuals over a limited period of time, the internal validity of the study would apply only to a similar healthy subset with a similar limited time interval. Since the population at large includes a very large number of individuals with significant medical problems, and the interval for potentially requiring access to health care is life-long, the RAND HIE has almost no external validity for our general population.

The traditional insurance model is partially based on the principle that the care that a patient receives which would have been declined if the patient directly shared in the cost is a moral hazard of insurance that results in a welfare loss. Preventing this welfare loss through cost sharing is a blunt approach since, even in the RAND HIE, projected death rates increased in patients with hypertension who were subjected to cost sharing. John Nyman has reframed the moral hazard theory to apply to the population at large, demonstrating that ensuring access to medical care for those with needs, by removing financial barriers, constitutes a welfare gain not only for the infirm but also for society as a whole.

As John Nyman states, “Because people value the additional income they receive from insurance when they become ill more than they value the income they lose when they pay a premium and remain healthy, and because everyone has in theory an equal chance of becoming ill, this national redistribution of income from the healthy to the ill is efficient and increases the welfare of society.”

The HSA component

Although HSAs are being promoted primarily as a simple vehicle for paying for health care, it is really a more complex concept combining tax policy, health policy, and pension policy. Rather than being thought of as a health account, it would be more appropriately categorized as a retirement account, similar to an IRA, except with a special provision allowing tax-free withdrawal of funds to pay medical bills.

Since contributions to HSAs are deductible from taxable income, individuals with higher incomes, who are better able to fund these accounts, receive a greater implicit tax subsidy than lower-income individuals, since their tax rates are higher. Using regressive tax structures to fund health care is flawed tax policy.

Individuals with significant health care needs rapidly deplete their HSAs, if they were even able to fund them in the first place. They then face financial barriers in their efforts to access further beneficial health care services. Impairing access to necessary care by erecting financial barriers is flawed health policy.

Individuals who are relatively healthy but wish to reduce their tax burden find HSAs to be a very attractive vehicle to expand their pension programs. If they remain healthy and have little need to access their HSAs for health care, they then receive benefits comparable to IRAs. Individuals with significant health care needs deplete their HSAs and suffer the double insult of not only illness but also the loss of this component of their retirement program. Decreasing the pensions of individuals who are unfortunate enough to have developed significant medical problems is flawed pension policy.

It is inappropriate to use public funds through tax subsidies to support a program that fails on tax policy, health policy, and pension policy.

The HDHP component

HSA-qualified HDHPs are being promoted as the perfect complement to HSAs since they provide 100 percent coverage of all medical expenses after the deductible is met, and they are very inexpensive to purchase. This simplistic statement is very deceptive.

Most HSA-qualified HDHPs are PPO plans. They limit benefits, and they limit network providers that are covered under the program. Services that are not covered under the plans do not apply to the deductible and would increase out-of-pocket spending beyond the deductible. For instance, plans excluding maternity benefits could saddle a young couple raising a family with expenses in excess of their already-high deductible. Excesses charged by out-of-network providers also are excluded from the deductible. Because of emergencies or because of lack of availability of in-network services, patients are frequently forced to accept care that results in significant financial penalties in excess of the deductible. HDHPs are one reason that health insurance has failed to protect so many against overwhelming medical debt. The claim of 100 percent coverage after the deductible is almost a fiction.

Another claim now being made is that HSAs with HDHPs are not only for the healthy and wealthy because the evidence is that many lower-income individuals are purchasing them. To be clear, they are purchasing HSA-qualified HDHPs but only because the low premiums are all that they can afford. Many are not even opening an HSA account, and, even if they do, they are not funding them adequately simply because of a lack of funds. HDHP premiums can be kept low only by requiring medical underwriting and by significantly limiting plan benefits. This then may make the health plan premium affordable to lower-income individuals, but access to health care when needed becomes unaffordable due to excessive out-of-pocket expenses. Selling cheap, inadequate plans to lower-income individuals does not address the issue of affordability of health care.

Failure to address the real costs of health care

Perhaps the greatest deficiency in the HSA/HDHP concept is that it fails to address the funding of most of our health care. About 80 percent of health care services are used by 20 percent of the population. This care is predominantly for severe acute problems and significant chronic disorders. Patients who are sick and their professionals who care for them are deeply involved in ensuring access to the best care attainable, and they are not significantly influenced by deductibles that may have already been exceeded.

The 80 percent of people who use 20 percent of health care might be influenced by the blunt instrument of cost sharing, but at the cost of a reduction in the use of beneficial services. Fortunately, most beneficial care would not be declined because of cost sharing, although the burden would fall heavier on lower-income individuals. Even if cost-sharing were very effective and reduced spending by one-fifth for this 80 percent of our population, that is only 4 percent of our global health care spending. Since it is likely much less than that, the benefit of cost sharing is so small that the trade-off is not worth the loss of access to beneficial services that would occur.

Perhaps the most serious deficiency of the HSA/HDHP model is that the 80 percent who are healthy would migrate toward the low-premium HDHPs. The prospect of taking a portion of the premium currently being paid for insurance, and placing that in a personal retirement account, is a very powerful incentive for individuals to move a major portion of their funds out of the common risk pools. This would leave the 20 percent with high costs in more concentrated pools. HDHPs designed for those with significant health care needs would be exorbitantly expensive since medical underwriting could not be used to exclude them, or they would have no coverage at all. Although it is certainly unlikely that all of the healthy would shift to HSA/HDHPs, simply a trend would compound the problems that we are already having with funding the care for those with needs.

Our very high health care spending is not due to patients who are demanding too much unnecessary care. Establishing financial barriers to reduce access to beneficial services is not rational public policy. Even more irrational are policies that encourage the healthy to remove their funds from common pools, concentrating high-cost patients into insurance products that will exit the market because of the death spiral of premiums.

If not HSAs and HDHPs, how do we control health spending?

It is important to understand why our health care costs are so high. A strong primary care infrastructure ensures higher quality care at a lower cost, but we have failed to establish public policies that would strengthen that base and have stood by as it progressively deteriorates. We have also stood by as excessive high-tech capacity has been developed on a regional basis, and have continued to pay the bills for the resulting excesses of non-beneficial care than does not improve and sometimes even impairs outcomes. We have continued to tolerate high prices that would be moderated if we demanded more value. Above all, we have continued to tolerate a fragmented system of funding health care that wastes a tremendous amount of resources on superfluous administrative excesses, while perpetuating and expanding the inequities and injustices of our very expensive, but highly inefficient health care system.

A single payer system would slow the rate of health care inflation and dramatically improve the allocation of our health care resources, ensuring that everyone would have affordable access to high-quality, comprehensive health care. It is time to abandon irrational ideology and begin to apply sound health policy science.