Health Savings Accounts (HSAs), which were enacted into federal law in 2003, are a key reform for the future of health care policy, as explained in a recent 1889 Institute paper. HSAs are personal savings accounts with significant income tax advantages. Deposits to an HSA from current income are not taxed, whether an employer makes the deposit or the HSA’s owner does. Investment or interest earnings deposited in HSAs are not taxed. If an HSA holder spends HSA funds on certain health care expenses (most qualify), the withdrawal is not taxed. Once retired, an HSA holder can withdraw funds to spend on something other than health care and pay income tax on that withdrawal without any other penalty. HSAs can only be established for those with federally-defined high deductible health insurance plans (deductible minimums of $1,400 per individual or $2,800 per family).
There are a number of reforms the federal government could and should make to the HSA law that would make it much more meaningful. There are at least a couple, though, that states can and should pass in order to make HSAs work better, along the lines of how they were intended.
HSAs are meant to counter the third-party payer problem, where 75 percent of health care expenditures are split roughly evenly between Medicare and Medicaid on the one hand, and private health insurance on the other. Another 15 percent is covered by the Veterans Administration, charity, and other government programs at various levels. Patients – consumers of health care – in the system as a whole, personally pay only 10 percent of health care expenditures. Since the bulk of the cost is borne by third parties, health care consumers in the U.S. do not shop around. They don’t push back when providers charge ridiculous sums for what are apparently simple tests and procedures. They don’t push back on whether tests and procedures are truly necessary. In short, consumers of health care don’t act like consumers in other markets. There is no true market in health care.
HSAs are intended to get people to act more like consumers. With their own wealth at stake, and having to pay for everyday procedures and prescriptions from their own pockets, HSA holders are likely to push back in all the ways consumers do in other markets. The problem, though, is that HSA holders have thus far only saved an amount equal to about two percent of the yearly total expenditures on health care in the United States. What’s more, HSA holders aren’t shopping in a real market. That’s where states can help, at least a little.
The truth that there is no real market in health care is made obvious by the fact that getting pricing information about health care services is a little like pulling teeth. The most common reply to questions about how much a service might cost is, “I don’t know. We’ll have to check with your insurance. Don’t worry, we’ll bill you.” Markets can only operate with ready pricing information. Competition in quality, timeliness, fairness, and openness is all wrapped up in price competition. But price competition practically doesn’t exist in health care due to third-party payers.
HSA holders are often victims of the lack of price transparency in health care. The are shocked by ridiculous bills for simple procedures the same as anyone else trying to manage their way through the health care system on their own. Add to that the fact that HSA holders do have insurance, so when they present their insurance cards, the best pricing they can expect is pricing the insurance company has negotiated. This is often significantly higher than the deep discounts offered to cash payers, which is what an HSA holder actually is for most services that are needed.
So why don’t HSA holders just pay without presenting an insurance card? Insurance companies won’t take cash-pay receipts to count toward the deductible, presenting a risk for HSA holders that they might spend beyond the deductible but get no credit for the spending. HSA holders’ true out-of-pocket could end up much higher in a year than necessary. To protect themselves they present the card and lose out on cash discounts.
States can do three things to help solve this problem and at least make a minor contribution to fighting excessively high pricing in health care. First, require insurance companies to count cash-pay receipts for qualifying health services toward the deductible. Second, insurance companies should be required to make their negotiated prices readily available so that anyone can compare cash-pay prices to negotiated rates. And third, in order to encourage transparent cash pricing, providers should be prohibited from accessing civil litigation or sending bills to collections or credit-rating agencies when the pricing was not revealed to patients beforehand.
Each of these recommendations require working out more detail and technicalities, but they are still pretty simple, and morally just. These are proposals that states can implement without any federal involvement. Ultimately, though, the federal government’s tax and social policies are the root cause of health care being so expensive in the United States. By liberalizing HSAs in the following ways, the federal government would create a sea change in how we pay for health care and, consequently, make health care much more affordable:
Allow HSA holders to pay for health insurance premiums from their HSAs.
Raise HSA contributions limits substantially (combined with above, allows for health insurance portability regardless of employment).
Allow HSA holders to contribute part of their HSA balances to others’ HSA balances without tax penalty, subject to minimum balance restrictions.
Allow HSA balances to be inherited without tax implications as long as heirs maintain balances as HSAs.
Some will protest that not everyone can easily save into an HSA, but Singapore tells a different story. There, all but the indigent are required to save for their health care. And even a lowly taxi driver complains about going to the gym three times a week, not because the government requires it, but because he knows it will save him money.
Want to start solving the problem of high health care prices? Reform and expand HSAs.