The Case for Health Savings Accounts


At Forbes, Dean Zarras makes a strong case for moving away from comprehensive health insurance and toward health savings accounts:

Only Health Savings Accounts distinguish the "care" from the "insurance". They are different issues, and they require different solutions.

To demonstrate the difference, say you currently have a traditional "family plan" through your employer that costs the employer $12,000 a year. Your employer is very generous, and pays for all of it. You see whatever doctors you want, and make "co-payments" of $25 per doctor visit. Beyond that, it's basically all you can eat — the buffet line starts to your left.

With a Health Savings Account, your employer still spends $12,000 a year (in actuality, probably less).   But they take $5,000 of the $12,000 and put it into an account with your name on it. The money is now legally yours.  It's a form of compensation.  With the remaining $7,000, they buy a "High Deductible Health Plan", whose deductible just happens to be $5,000. The HDHP covers you in full for any unlikely tragedy that should it occur, would be financially devastating.

When you go for your physical, since it's a non-risk, near-certain probability event, you pay for the physical with a plastic card linked to your HSA. Here's the kicker:  since that $5,000 is your money, whatever balance you have at the end of the year is yours to keep. Note that this is distinctly different from "Flexible Spending Accounts" that many people have, which have a "use it or lose it" aspect to them (thus making them the local eyeglass store's best friend in December).

Next year, your employer deposits another $5,000 into the account and the process repeats. Over time, the balance in the HSA account can grow, and it's yours to keep if you change employers.  

In broad terms, Zarras is talking about moving toward consumer-driven health plans which couple HSAs with high-deductible health insurance. Experts are still studying the effects of those plans, but the evidence we have strongly suggests that they provide what traditional health insurance does not: lower overall cost, increased use of preventive care, and equal health outcomes. As I've noted before, a metastudy of high-quality research into consumer-drive plans conducted by the American Academy of Actuaries indicates that such plans result in big cost savings the first year after switching to a CDHP, and (though the evidence is less conclusive) smaller savings in years after that. That's a real achievement. The vast majority of the time you hear talk about "reducing health costs," what you're really hearing about are proposals designed to reduce the projected growth in health spending. Consumer-driven plans seem to result in real savings—and without sacrificing quality of care.

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  1. Nice idea.

    Too bad it wasn’t brought to the table during the ObamaCare debate. I guess folks were too busy photoshopping the president’s head into vintage Maoist propaganda posters.

    Also, it doesn’t seem to break the insidious link between coverage and job. If you don’t have an employer buying that high-deductible plan and dumping that $5k into your account every year, you’re screwed. (But around here, I guess that’s more of a feature than a drawback.)

    1. congrats on your recent birth

    2. Pretty sure it was brought up here and at the Cato Institute during the ObamaCare debate. Nice try though.

      1. Yeah. I think seasteading and legalizing heroin were also “brought up” in various magazines and think tanks around the same time. That doesn’t mean the opposition party presented the idea in legislative debate while the legislation was under consideration — in other words “bringing up” a proposal where it could have functional meaning.

    3. Danny|3.28.11 @ 5:32PM|#
      “Nice idea.
      Too bad it wasn’t brought to the table during the ObamaCare debate. I guess folks were too busy photoshopping the president’s head into vintage Maoist propaganda posters….”

      Too bad you never learned to read.

    4. I seem to recall Obama declaring in an interview that major medical/high-deductible coverage “wasn’t really insurance”, and that’s the assumption that most of the subsequent “negotiation” seems to have proceeded on. Of course, it’s HMO coverage that really “isn’t insurance” — it’s a prepayment plan, which is why it’s so beloved by the health care conglomerates who essentially wrote the Obamacare law.

      If the real objective of health care reform was making sure that life-saving procedures are available to those who need them, and keeping people from being bankrupted by medical emergencies, it would be constructed around major medical/high-deductible insurance, rather than prepayment plans to cover every “well visit” and wart removal. That’s “use-it-or-lose-it” on a grand scale, helping costs to skyrocket.

    5. It was brought to the debate but it was not considered by the idiots who created Obamacare. Of course, numerous other real reform ideas which would maintain quality while lowering costs were also not considered.

      It is a step in the right direction but as you point out should be combined with other reforms including tax code reform which help remove government interference in the health care market.

  2. Love my HSA.

    One more advantage of these plans viz, traditional insurance: consumers have choices.

  3. We actually had that where I work. You had a plastic card with $900 on it, for use on copays etc., along with the insurance plan, and you could continue to build up what you didn’t spend. The company phased it out this year and said they were losing money on it, and now we have the same health insurance plans only we pay about $20 less a month in premiums since we don’t get the cash anymore.

    1. They were losing money on it? Did they fire all the employees too since they were losing money on their salaries as well?

  4. Note that this is distinctly different from “Flexible Spending Accounts” that many people have, which have a “use it or lose it” aspect to them (thus making them the local eyeglass store’s best friend in December).

    I was just bitching to my wife about this yesterday (after we drove past an eyeglass store that had “use it or lose it” on its marquee). I suspect the only reason people don’t bitch about flex accounts is that they see the pair of glasses they buy in December as some sort of freebee, much in the same way that idiots see their tax refunds as money from the government. The insurance industry (acting in concert with the government, of course) never misses an opportunity to distort market forces in its favor.

  5. I got me one of these HSA/HDHP deals. If you’re relatively healthy and can always use more tax-deferred savings, its the way to go.

  6. Are the premiums for these plans, plus the contribution to the HSA, less than the premiums for a traditional plan for all similarly situated groups (i.e. for healthy people v. not healthy, young v. old)? If so, why would that be?

    1. Because of the high deductible on the insurance benefit. The premiums don’t need to be high if they don’t expect to have to pay lots of claims, which is the case if the benefit only kicks in for the small number of plan members with catastrophic health problems.

      1. Yeah, but the employer has to pay the full deductible, via its contribution to the HSA, regardless of whether the employee uses any health services. That’s why I asked whether the premium plus the HSA contribution is less than traditional premiums. If not, then there’s no advantage to the employer.

        1. Should be cheaper for two reasons:

          1) A decent portion of insurers admin costs are variable and related to claims volumes. Another component of admin for full-insured plans is a profit/contingencies load on expected claims. That load is a factor of expected claims.

          A lower volume of claims means lower admin costs. Lower expected claims means lower profit/contingency charges

          One reason deductibles exist in the first place, whether in Health Insurance or P&C insurance is to lower admin costs. If policyholders submit claims for the cheapest and most frequent services, the admin cost shoots through the roof.

          2) Members are given incentives to utilize less services, comparison shop, etc. Under tradiotional insurance plans, alot of money is spent on needless services as the member has no incentive to get a good deal.

    2. It works like car insurance. The higher the deductible, the lower the premium. $5000/year is a lot of money to pay if you don’t have serious medical conditions. Especially if you are getting the insurance company rate on your prescriptions. Seeing a doc 4x/year for your script plus getting the script plus 2 sick visits a year is probably well south of $5000. Until you hit that ceiling, the insurance company just banks your premium and tries to sell you dental insurance from my experience.

      Being self-employed, I pay $350 a quarter in premiums (male, healthy, early 30s). I have yet to spend more than $1000 in a year on health expenses in the 4 years I’ve had the plan. In 2010, I spent all of $200 on health services. My health care costs for insurance and services were $1600. I couldn’t find a deal that cheap with the same benefits if I should happen to get well and truly sick or hit by a bus.

      1. I get why the premium is less. But why is the premium plus the employer’s contribution of entire deductible less?

    3. My former employer was encouraging them, but claimed that it was more costly for them than their HMO plans, and had to keep shopping around for a new provider every year. That’s contrary to what you’d expect from a high-deductible plan, and I’m not sure what was going on — whether the HMOs were low-balling their premiums to try to keep customers and strangle the HSAs in their crib, or whether there were some sort of regulatory obstacles in the criteria set by the govt. for the high-deductible plan.

      Now that I’m retired, we’ve obtained our own major medical coverage to go with our HSA, and it’s even less expensive than I’d suspected.

  7. That makes too much sense man!

    What we need to do is have a market where someone can insure anyone they want- then all the do gooders can just insure a homeless person each and the problem will be solved…

    WAIT! Why can’t they do that now?

    1. I know you’re just setting this up, but:

      They don’t want to insure a homeless person, they want you to insure a homeless person.

      1. ^^THIS EXACTLY^^

  8. That health plan would rock.

  9. The irony is that plans like this have become more and more the norm as traditional insurance designs have gotten so heavily regulated. I work with a lot of people in Massachusetts, and all of them have HSAs since RomneyCare made HMO plans unaffordable.

  10. I’m all for HSAs, but I don’t see why they should have to be linked to HDHPs. Let consumers decide which insurance to buy, just like they decide which care options to buy.

    Increase the annual contribution limit on HSAs to $20k, but make employer provided insurance taxable income. Overnight, everyone has an HSA. From there, employees can buy insurance out of their HSA either from their employer or from whomever else.

    1. Why would you contribute to an HSA if you didn’t have a deductible-based plan? And once you have a deductible-based plan, why would you go for a low one if you can get your employer to contribute the deductible. Or rather, why wouldn’t your employer gamble on paying lower premiums and giving you a larger fixed sum HSA that they could point to in your compensation package?

      1. Potentially you’d do it as a form of supplemental retirement savings, if you’re already contributing the tax-deferred maximum to an IRA/401K/etc.

        The current tax code morass incentivizes all sorts of peculiar “hacks”, but the HSA idea certainly makes sense in the “health care reform” context.

      2. I forgot to mention, I would allow people to buy insurance with their HSA money. They can spend it on care or they can spend it on insurance. The mix of the two is up to them.

        IOW, I would make it so that the only way an employer could contribute to your health care with money that’s not taxable to you is to put it in your HSA. No more employer-provided health insurance. Employer could still SELL health insurance to employees, but they could just as easily take that money and buy the insurance elsewhere. Or not.

  11. These can work, if and only if, the HSA contribution covers 100% of the deductible so you’re out nothing if you just use services up to the deductible. What I saw when I worked for a place with an HSA is that the benefit started out that way but when times got tough a donut hole emerged. The deductible grew higher, the HSA contribution didn’t. Also, employers understandably don’t want to fully fund this every January, in case employees change jobs. But that means that illnesses and injuries incurred early in the year can wind up costing you a lot of money as the deductible has not been met and the HSA has not been fully funded.

    1. Yeah. God forbid someone has to pay even a few dollars for his own health care.

  12. Or, instead of having your employer babysit you, you can just get paid straight up and put the money in your own fucking bank account and save it for emergencies like health. What, too tempting to spend it all? I am so tired of this clever engineering bullshit for simple things. “Health Savings Accounts” are just asking for government to fuck it up just like they did with the insurance.

  13. But… but… poor people can’t save money! WHY DO YOU HATE CHILDREN?????????

  14. Medicine is cheap, regulations are expensive.

  15. Consumer-driven plans seem to result in real savings?and without sacrificing quality of care.

    But if the consumers drive the plan how do The Right People get to make all the necessary decisions for them? 😛

  16. I am glad you brought this up… Thanks a lot for addressing this problem. I hope this would help people realize the truth about our health care industry today…

  17. currently have a traditional “family plan” through your employer that costs the employer $12,

  18. 12,000 a year. Your employer is very generous, and pays for all of it. You see whatever doct

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