Hoorays for HSAs?

Tyler is less optimistic about Health Savings Accounts (HSAs) than I am. Tyler predicts that too few people will make use of them to have any substantial macro effect. I hope he’s wrong, but his predictive powers may exceed mine.

I suspect Tyler’s incorrect to say that “the ‘encourage health care expenditures’ effect would swamp the ‘encourage high deductibles’ effect.” Any increased spending effect would have to result from a greater willingness of patients to incur health expenditures under this type of plan relative to low-deductive plans without HSAs. But in a low-deductible plan, most health services are (nearly) free to the patient at the point of service. The patient has little monetary incentive to refuse them. With an HSA, on the other hand, the patient faces the full cost of care at the point of service (for most services). Spending money from the account means reducing the amount rolled over into an IRA at the end of the year. So unless the law of demand fails to hold for health expenditures, there is good reason to believe that spending would decrease under HSAs. Moreover, even if people plan to spend the entire amount in their HSAs, which seems to be Tyler’s concern, they will still have good reason to make those dollars stretch as far as possible. That means they’ll start shopping around and asking doctors for prices to compare. As consumers become more price sensitive, the pressure will tend to push prices down.

(I admit that this effect will only occur if a significant number of people switch over to plans with HSAs; but Tyler says the “encourage health expenditures” effect would outweigh the “encourage high deductibles” effect even if HSAs became common.)

Tyler also says it would be better to remove the initial tax distortion than correct it with a new one:

Should the government subsidize high-deductible insurance policies? Probably not in the abstract. Of course this subsidy may offset the tax advantages of low-deductible plans, but again a simpler solution is available, namely to eliminate the original distortion.

In principle, I agree. But in political reality, the tax-exempt treatment of health insurance will never go away. Any proposal to start taxing health insurance benefits would go over like a lead balloon. Given that constraint, the best way to fix the incentives is to give all health expenditures – whether in the form of insurance or direct payments to providers – the same tax treatment. That’s essentially what HSAs do. It would be nice if leftover money in HSAs rolled over into your bank account instead of your IRA (thus giving people a more immediate incentive to economize on health expenditures), but the HSA policy is still a major improvement over the status quo.