Monday, August 13, 2012

On Health Savings Accounts

Libertarian views on health care reform in the United States still focus on combining Catastrophic Health Insurance with Health Savings Accounts or HSAs. The idea of HSAs can be traced to John Goodman's, Patient Power (1992) and was later popularized by Michael F. Cannon and Michael D. Tanner's Healthy Competition (2007). Goodman's more recent book Priceless (2012) continues that argument. Although I agree in principle with moving public policy away from Comprehensive Health Insurance, I'm less enthusiastic with HSAs here's why.

Here is how HSAs are supposed to work. Basically they are a form of "self insurance" where U.S. citizens are expected to pay for more of their non-catastrophic health care needs via a tax exempt savings account. That tax exemption, in effect, reduces the cost of paying for health care out of pocket by about 1/3. Why pay for some health care out of pocket? Well, both Goodman and Cannon persuasively argue that the ever-spiraling cost of health care is fueled by third party payment. Health insurance insulates consumers from both price and quality, and therefore they over-consume. Comprehensive health insurance, they argue, incentivizes providers to provide more health care than those price and quality insensitive patients need, and incentivizes patients to demand more health care. Thus, over time, health insurance has gotten more "comprehensive" over time, and ultimately more incomprehensible and more costly. As long as employers could absorb the ever-spiraling costs, everyone was satisfied with comprehensive health insurance. However, as state governments required insurance companies to cover more-and more more products and services, the cost began to far outstrip the federal tax advantage offered employers.

Goodman's HSA idea was to limit insurance coverage to catastrophic insurance that covers only expensive, unanticipated, catastrophic illness and force patients to pay for most other everyday expenses (preventative care, doctor visits, pharmaceuticals etc.) out-of- pocket. The argument here is that if patients were forced to pay for these non-catastrophic products and services out-of-pocket, they would be more sensitive to cost and quality, and force providers to compete in a free market. I think that's all right-headed. Here are my concerns.

How do we get to a system based on catastrophic health insurance and HSAs from where we are today politically and culturally? Let's look at political reality first. How do we get politicians to NOT tinker with the basic legal requirements of HSAs? Right now government limits the amount of money that can be sheltered in HSAs, it also limits how long the money can be left in the account before it is confiscated by the bank that provides it. They even limit what counts as "health care." You can't use HSAs to pay for over-the-counter-drugs any more! But that's not the most serious problem.

The fact is that HSAs are incompatible American culture. We live in a society that "borrows" much more money than it "saves." Thus, most Amercans are already in debt via credit cards, home mortgages, automobile loans, and educational loans. How can we reasonably expect Americans to suddenly start saving for future health care needs?  Most of us are already trying to pay off our existing debt and make ends meet day-by-day. Many American are unemployed. So where will all the HSA money come from? The basic problem with trying to incentivize Americans to save for future health care needs is that healthy Americans will choose NOT to purchase health insurance and will choose not to put money in that HSA. After all, why would young healthy adults save for future health care needs over other more immediate needs? Recent college grads inevitably find themselves saddled with onerous college loans, yet they're culturally expected to own their own home, drive a new car, and a save money for retirement, and even save for their children's college education! Now that just ain't going to work!

But most importantly, HSAs are based on a tradition that most of us libertarians really abhor. That is, the tradition of government using the tax code as an instrument for social engineering. Our tax code is already enormously complex, convoluted, and steeped in cronyism? How many tax advantages can be doled out before there's no one left paying taxes? The Feds have already doled out tax advantages to homeowners, college students, investors, the rich, the poor, churches, farmers and a slew of corporations. Meanwhile, local governments continue to generously dole out tax advantages to their cronies while finaning a growing number of "public goods," such as: sports stadiums, hospitals, orchestras, zoos, and airports. They also lavish public union members with Cadillac health insurance and generous pensions. So on the one hand we have a growing list of beneficiaries of tax money, and an ever-diminishing number of tax payers. Now that's the ultimate source of our current economic malaise. The only way to fix these deficits is to end tax-based cronyism once and for all and not allow Congress to reward its political friends and punish it's enemies. So that's why I'm not much of a supporter of HSAs. To me they are really just another highly-disguised form of cronyism.