Tuesday, March 16, 2010

Do HSAs Hurt the Poor and Sick?

Liberals have finally had to admit that conservatives do more than say "no" to health care reform. There are actual ideas — even bills — on the table. I'm pleased to say some of them are even interacting with those ideas.

Jonathan Chait of The New Republic says, "Democrats propose to shift resources from the rich and the healthy to the poor and the sick. Republicans want to do just the opposite."

One idea he hates is health savings accounts (HSA) which, in his words, "give individuals who buy insurance a tax deduction for money they set aside for a high-deductible plan. Since tax deductions are worth more to people in higher tax brackets, and since high-deductible plans appeal more to those with lower medical expenses, the plans attract the rich and healthy, leaving the poor and sick behind."

Health care costs
He's partly right; in the short-term, going to an HSA-based system would not help the poor or the sick, especially those with chronic illnesses/pre-existing conditions. Could we do something to mitigate that? Of course.

Long-term, though, HSAs — no, let's call it what it is, cash. Long-term, only going to a cash-based system will reduce overall health care costs.

Insurance-based systems of one stripe or another have been tried in every corner of the world, and they have failed to control costs. The simple fact is insurance-based health care makes costs invisible to the user. Make costs visible and felt and patients will force health care costs down — or at the very least to flatten out — quite naturally.

We've seen this in eye care and veterinary medicine. It will work here too.

And reigning in health care costs helps everyone.

How HSAs work
But in his indictment against HSAs, I don't think Chait really understands how they work. First, it's not a "tax deduction" but pre-tax money. A minor difference? Yes and no.

The people he's concerned about largely don't pay income taxes, but this will still increase the amount of money they take in on April 15. And pre-tax money, unlike a deduction, decreases your adjusted gross income no matter what — you can still take the standard deduction and there wouldn't be any cutoffs.

The other key feature of HSAs, at least as envisioned by conservatives, is their permanence. Many people have a "flex" account that has to be used or forfeited every year. Money in an HSA would be yours until you die, and then it is inheritable. So you start saving now for health needs in fifteen years. This gives the young and healthy poor the chance to save up for when they get old and sick.

What about the poor?
I think Chait underestimates how many this can help. Employers who can't afford conventional health insurance could still afford to put a little into your HSA. The same goes for those who don't make enough to buy their own insurance — at least they can put a little in an HSA.

But maybe there would be people who can't put enough back to pay for their medical expenses. Don't we already have a system to deal with that? Most people accept that there is and must be some kind of social safety net. Can we fund HSAs for the poor much like the food stamp debit cards? Could we subsidize care for sudden expenses or chronic diseases?

Of course. That some people might need help under this system doesn't mean it isn't the best option for controlling health care costs long-term.

It is the best option. So far, it's the only option.

If you've got a better idea, we'd love to hear it.


Kacie said...

For me... my HSA helps in small ways, but not big ones. I have a $3,000 deductible. I'm supporting my husband as he gets through seminary. We make enough, but just enough. We live with another couple to save money, I drive a clunker, shop at thrift stores, etc..etc. Compared to where I grew up overseas, I have enough. Compared to the US, we're pretty poor.

But I'm okay at living at my income level. What is frustrating to me, however, is how inaccessible some healthcare is to me. The HSA does help in some ways. I can confidently book dentist appointments and doctor's visits that I used to avoid because I know I can slam the $50 or so dollars on the HSA card instead of on our monthly budget. However, it only works for the small things. It doesn't help with big things.

We really want to start a family. We're paralyzed by the fact that if the process ends in an expensive delivery, we could easily pay $3,000 out of pocket. We don't have $3,000 in our pockets! That would mean my husband would have to drop out of school, etc. Same thing if either of us had an accident.

ChrisB said...


I appreciate what you're saying. What wasn't clear enough in the post above is the desire to make this part of a larger shift in how we handle health insurance -- away from the current buffet approach and toward a catastrophic-only approach (like car insurance). The savings in lower premiums could then be put by employers into an HSA.

It's not a panacea, and I don't delude myself that we'll never have to help people with medical costs, but a comprehensive change (as opposed the current use of HSAs) would free up a lot more money for you to use.

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Anonymous said...

It seems to me that once/if you are able to save up that $3,000 max out of pocket, than an HSA is a very good deal regardless.

It's taken me awhile to get on board, but if you have chronic illness you can easily pay $10,000 a year out of pocket on a conventional, low-deductible major medical plan. With an HSA and $3,000 max out of pocket, you are about $7,000 ahead of the game, not to mention the money you saved on taxes.

I can see that being really hard for lower income brackets in the first years.

It seems the the HSA is slanted a bit against the lower income AND chronically sick, but not each one on it's own. If you are in a lower income you must be healthy and start saving up, so you have that full deductible if needed. If you are chronically sick, you better be in a higher income bracket and be able to have that $3,000 on hand more readily.

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