Why you should totally get an HSA, but Uncle Sam shouldn’t
First of all, a promise to everyone rolling their eyes that this will be my last post on health care for a while. I had intended to give it a rest after my last post, but all this talk of HSAs as a way out of our healthcare crisis – both in the threads and in the media – is making me go against my better judgment. I swear I will post on something more interesting next time.
So that being said, let’s talk for a moment about HSAs.
For those of you not familiar with the acronym, HSA stands for Health Savings Account. A bit of legislation tacked onto Bush’s Medicare expansion, it allows you to put aside pre-tax dollars into a savings account in lieu of paying a health insurance premium. These dollars do not have to be spent on medical expenses, but if they are they are not taxed. (Also, if you withdraw them for non-medical reasons there is an additional tax penalty.) If you have still have money in the account when you die, that money goes to your estate, tax free, and your heirs can spend it on whatever they choose. When you have an HSA, you are also required to have what is called a high-deductible health insurance policy for your larger expenses. The premium for this policy is considerably cheaper than standard health insurance premiums.
If you have a fair amount of disposable income, and if you and your family do not have expensive chronic illnesses, I cannot recommend an HSA strongly enough. It provides you with the ability to save tax-free money over long periods of time, and to use it to make choices about your healthcare expenses. God willing, you will have enough left over that your children might benefit from your good luck in perishing before you were able to spend it all. There are even good statistics that indicate you might become healthier by using an HSA: Studies do show that people who are in HSAs are more likely exercise, not smoke, and generally make better decisions about their care. (These statistics should be taken with a grain of salt, however. As HSAs financially reward people who are healthy, they are therefore more likely to be purchased by people that are already making healthy lifestyle choices. So there may not be any causal link.)
Now you might be saying to yourself, “If Tod is recommending I look into an HSA for myself, surely he agrees with the current (largely) conservative political meme that having everyone in an HSA would be the answer to our healthcare woes, right?”
Well, wrong. The truth is, HSAs can only work effectively if a relatively small percentage of the population takes advantage of them. There are a few reasons for this.
Splice Up A Pie Any Way You Want, It’s Still A Pie. I’ll beg forgiveness from hardcore policy wonks in advance here, as I won’t be going too far into the weeds; I will instead be using purposefully round numbers to illustrate my point.
For the sake of argument, lets say we have exactly 300 million Americans, and in order to insure them all under a standard health insurance model we’d need to charge a little over $500 a month for premium; the premiums therefore come out to $2 trillion dollars over the next year. Some of this will be spent on the insurance carriers admin costs and taxes, but the vast majority will be spent on health care over the next year.
Now, let’s suppose we are going to shift to a universal HSA model, and we’ll all be paying half of that $500 a month to into our personal health savings account, and half into our high-deductible insurance policy. We now have $1 trillion going into health savings plans. Lets say that 25% of the country is relatively healthy this year, and does not spend any money on doctor’s care – that’s $250 million that will stay in our savings accounts. Now lets say that an additional 50% of the country only has to spend 10% of what it put away this year, say for check ups and such – that’s another $450 million we as a country get to put away in savings. Put those two piles of money together, and we’ve just socked away $700 million. That’s great, except for one thing:
We’ve still just spent $2 trillion on healthcare, but we’ve only collected $1.3 trillion to pay off that debt. Were we to do this, our large-deductible insurance premiums would increase over 70% the subsequent year, to offset that amount we “saved.” And we haven’t even started talking about the fact that instead of needing to pay the admin costs of 300 million insurance policies, we now have the admin costs of 300 million policies plus the admin costs of 300 million insurer-run health savings accounts.
Health insurance is largely a pass-through system. If you have been relatively healthy over the past decade, your premiums don’t sit around doing nothing. They subsidize other people’s healthcare. The reason that we pay as a country $2.6 trillion in health care a year isn’t because we’re using a particular kind of insurance; it’s because we spend $2.6 trillion in health care.
If you want to devise a system where we carve out that theoretical $700 million, then we certainly can – but know that we have to do it by making a decision to withhold $700 million in healthcare from someone.
Healthy populations increase health expenditures. One of the arguments used for a universal HSA system is that given the chance to save money, we would make better lifestyle and healthcare decisions, we would therefore be far healthier, and subsequently our national healthcare costs would be reduced. For there record, I have zero confidence that we would in fact make better choices, but let’s assume for the sake of argument that we would. In fact, let’s “Blue Sky” it and say HSAs work beyond anyone’s wildest dreams, and everyone in America starts eating healthy and stops smoking. That means we as a nation spend a lot less in health care, yes?
Well, no actually. In fact, we spend more.
Take, as an example, smokers. We have a tendency to think that smokers cost more to our healthcare system than non-smokers. And you can certainly see why we think this. First of all, if you’re applying for health insurance today you’ll be asked if you are a smoker, and if you say yes the carrier will charge you more. And it is true that if you are 40 years old and you smoke, statistically you will be a greater financial burden on your insurance pool than a 40 year old who doesn’t. But the world is made up of more than 40 year olds. Your insurer only has to consider the costs you generate until you’re eligible for Medicare, and therein lies the rub. A universal system has to take the costs of everyone’s healthcare into account.
If you are a non-smoker, you will statistically get chronic and expensive diseases at a later age than a smoker, but you will still get them. What’s more, you’ll be able to battle those diseases better than a smoker, which means that you’ll be able to last a lot longer without giving up the goat while undergoing, say, chemotherapy. In fact, your chances of getting better, and living long enough to battle another expensive-to-treat ailment will be significantly greater. And that’s a very good thing – but it’s not cheaper. Statistically speaking, if you don’t smoke, your life-long healthcare costs will greatly exceed those of someone that smokes, because smokers die much more efficiently than non-smokers. The same thing holds true to one degree or another with people that are chronically overweight, are overly sedentary, drink to excess, or are in any other non-healthy due to lifestyle choice.
Simply put, if all we have to worry about insuring is the population from 63 and under, healthier is cheaper. But for the entire population, healthier is more expensive.
As we go through these next few years trying to figure out how to control costs, I would strongly advise this rule of thumb:
Is someone on either side of the political fence tells you there is an easy way to fix the system that does not involve you making any sacrifices (or in this case, making a little money on the side!), they are either willfully misleading you or they do not know of what they speak. It should be noted that when a think tank releases a study encouraging moving to an HSA model as a sole remedy, it is almost never from a think tank that represents providers or insurers. Rather, it is almost always from a think tank that represents the investment industry, who would love to have an extra and mandatory $1 trillion or so at their disposal.
This is not to say that something like an HSA could not or should not be a part of our overall HC reform. In fact, whatever our reformed system looks like, I would love to see something akin to an HSA be at least one of the moving parts incorporated. But I recognize that it will not be the panacea it is being sold as.
As far as I’m aware, there are only two kinds of financially sustainable healthcare models to choose from. One is the model we came from prior to our employer-based healthcare system, which is simply having hardly any quality care to speak of. The second is to have a system where it is decided, either by the government or private insurers (think: HMO), that not everything can be covered for everyone – and choices are made about what will and won’t be covered. Call them death panels if you will, but the belief that you can continue having everything paid for without dealing with exponentially rising costs is a fantasy. The belief that you can do it and have millions in a savings account by the time you’re retired is a fantasy on steroids.