Commentary: HSAs Gaining Popularity, Can Be Better

Published September 1, 2005

Proponents of Health Savings Accounts (HSAs) predicted they would revolutionize the health marketplace. Now, less than two years after becoming law, more than a million people own HSAs. That’s twice as many as in September 2004, according to a study released in May by the trade group America’s Health Insurance Plans.

By most accounts, HSAs are having an enormously beneficial effect on the design of health insurance in this country. Instead of an employer or insurer paying medical bills, more than one million people are managing some of their own health care dollars.

Yet despite their many advantages, health economists argue HSAs can be made even better by improving incentives and creating opportunities for the chronically ill and freedom from unnecessary regulation.

Making Incentives Better

Patients can exercise discretion for many of their health care needs, which is one of the things that attracts people to HSAs. Prescription drugs are a perfect example. Devon Herrick, a senior fellow with the National Center for Policy Analysis who has studied the prescription drug market extensively, says “patients can save a lot of money if they shop for drugs the way they shop for a loaf of bread.”

Current Law

A case in point: The annual cost of brand-name drugs for arthritic pain relief is typically $800 more than for over-the-counter substitutes, and the brand-name remedies are riskier. (Vioxx and Bextra, for example, have been removed from the market.) Since drugs affect different people differently, individual patients are in the best position to determine whether the tradeoff between cost and pain relief is worthwhile.

However, HSA owners are finding not all medical services are the same. A semiconscious patient on a gurney, for example, is not in a position to make choices about alternative treatments. Even if he could, discretion in this setting is typically inappropriate.

The HSA law treats all these cases the same, however. It requires a high, across-the-board deductible and requires the patient to bear the costs of purchases below the deductible amount. (See accompanying figure.) Many health economists believe a better approach would be to allow insurers to design their plans so different deductibles (and copayments) apply to different medical services. Put simply, high deductibles are best in situations where patient discretion is possible and appropriate, while low or no deductibles are better in situations where patient discretion is more difficult or inappropriate.

Managing Chronic Illness Costs

Another area where HSAs could be improved, health economists believe, is to provide financial incentives to the chronically ill to control costs. The chronically ill are responsible for an enormous amount of health care spending. Almost half of all health care dollars are spent on patients with one of five chronic conditions: asthma, diabetes, heart disease, hypertension, and mood disorders.

Treatments for the chronically ill are usually repetitive, requiring the same procedures, visits, and/or medicines, week after week, year after year. Consequently, cost-saving discoveries by these patients are not one-time events. Rather, they pay off indefinitely and could be financially very rewarding to a patient who must pay these costs out of pocket.

Numerous studies have found the chronically ill can reduce costs and improve quality by managing their own care. But health care management is difficult and time-consuming. So patients should reap health rewards and financial rewards from making better decisions. One suggestion is to allow insurers to create versatile HSAs for patients with chronic conditions, adjusting the accounts’ funding to fit specific circumstances.

Reducing Unnecessary Regulation

Overall, proponents of HSAs believe the accounts could be improved and become the dominant form of health insurance if Congress simply stepped aside and allowed the market to make many of the design decisions. As proof, they point to the experience of South Africa.

HSAs (called Medical Savings Accounts) emerged in the 1990s in Nelson Mandela’s South Africa. Since the government never passed a law dictating an HSA design, the plans developed in a relatively free market. Today, HSAs have captured more than half the market for private health insurance there.

“Not only have MSA plans proved popular, they have also developed in ways that are better designed to meet customer needs than in the U.S.,” notes Shaun Matisonn, executive vice president at Discovery Health, a South African insurance company.

In the United States, however, Congress has capped HSA contributions and required that HSAs be linked to high-deductible plans. HSAs could flourish if Congress would allow unlimited contributions to HSAs and permit such accounts to wrap around third-party insurance–paying for any expense the insurance plan does not pay.

John C. Goodman ([email protected]) is president of the National Center for Policy Analysis.