And now that I’ve thanked Trent, I’d like to disagree with him about something. He apparently shares Tyler’s concern that HSAs will tend to inflate healthcare spending:
But Matthew [Holt] is right to point out that, in a world with HSA's, people will purchase more health care than they "need." Tax breaks for certain behaviors or purchases does falsely increase the demand for those things.Trent’s agreeing with part of Matthew Holt’s negative assessment of HSAs, in which he says:
There is no reason that health care premiums should be bought with pre-tax dollars (and for that matter there's no reason that housing loans should be too). … It also means that we spend marginal dollars on health care when we should be spending on something else. But I guess they [the WSJ] missed that day in micro-economics class when MR=MC was brought up.The basic complaint is correct: when you give a tax break to health services without giving the same tax break to other goods and services (like food, clothing, and entertainment), you encourage people to consume too much healthcare and too little of those other things. Matt and Trent’s point, if I reconstruct it properly, is that tax-free HSAs expand the tax break on healthcare even further, and that will exacerbate the problem.
Why doesn’t this bother me? Because the status quo ante (that is, the tax code prior to the new HSA provisions) allowed people to get as much healthcare as they wanted tax-free anyway, so long as they got it in the form of health insurance. There is no additional health service that is made tax-free under HSAs that couldn’t have been gotten tax-free in a comprehensive (low deductible) health insurance plan. And that was (and still is) precisely the problem: people can and do purchase health insurance plans covering all varieties of health service, including routine care, prescriptions, therapy, ad infinitum. Allowing people to buy the very same health services with HSA funds does not constitute an expansion of the tax distortion. It just means they can get the same tax-free services by a different route – one that, as I’ve argued before, has more efficient incentives.
I would feel differently if HSAs increased the size of the tax advantage or gave tax-free status to some variety of health service that didn’t have it before. But that’s not the case. The health services in question are the same; only the manner of purchase is at issue.