Carefully read Ezra Klein’s piece on why Health Savings Accounts (HSAs) won’t slow the growth of health care spending. Long story short: 5% of the population consumes 50% of the health care. To significantly cut costs, you’ve got to restrain these big spenders. But…
HSAs have a spending cap, and once it’s broken, all care is covered. They do nothing but disincentivize basic care, which doesn’t cost much anyway.
Still confused? People with HSAs normally have castrophic coverage for sums over, say, $10k/year. But if the sums below $10k/year don’t add up to much, and sums over $10k/year remain fully covered, how would this give noticeably better incentives than the status quo? Ezra concludes that the percentage reduction in health care spending from HSA-type incentives is bound to be miniscule.
Clever, but not so fast. Imagine we had a government program that provided unlimited free travel to China. It’s quite likely that 5% of Americans would consume 50% of the free travel to China. Most Americans would go there once, complain that they can’t read the signs, and never return. But a few of us would go every chance we got.
Now a reformer comes along and says: Let’s make people pay for the first $10k worth of Chinese travel, and only have the government pay for amounts in excess of $10k. Does that fact that 5% of travellers consume 50% of the travel dollars imply that this reform won’t matter?
Of course not. There are plenty of people who, say, consume $20k for free, who would consume less than $10k if they had to pay for 100% of the first $10k. There might even be people who would consume $100k of free travel per year in China, who wouldn’t actually spring for the first $10k themselves.
But is “catastrophic” health care spending in any way comparable to free travel to China? A lot of it is. For example, my grandpa got $300k of elective surgery in his last year of life – bad knee, plus complications. And he was a cheap, cheap man. I doubt that he would have paid for the first $10k out of his own pocket.
So I don’t think that Ezra had dealt a mortal or even a painful blow to HSAs. But I would like to thank him for giving me an instructive example to use the next time I teach intermediate micro!
READER COMMENTS
Steve Sailer
Nov 25 2006 at 12:12am
“Long story short: 5% of the population consumes 50% of the health care.”
It’s like the old merchant’s saying about advertising — “50% of all the money I spend on advertsising is wasted; I just don’t know which 50% — except it’s even more true. Nobody knows whether you’ll be in the 5% who needs the 50%. Having spent $31,000 on chemotherapy nine years ago, I can assure you that if that hadn’t worked, I would have spent another $150,000 on a stem cell transplant, whether or not the first $10k was a deductible.
Mike Rappaport
Nov 26 2006 at 3:31am
I posted this on my blog:
I am a big fan of Health Savings Accounts but I recognize that there are real limits on how much money they are likely to save. Allowing people to spend their own money rather than an insurance company’s money on the first $5000 will save some money, but much if not most of the waste occurs after the first $5000. Bryan Caplan tries to minimize this problem, but I am only partially persuaded. Not that many people are like his grandfather. Moreover, people may have important needs that lead them to spend the initial $5,000; after that, they are not significantly constrained.
A more interesting solution would be to expand HSA beyond the first $5000. Why not have people pay 5 percent coinsurance for the amount from $5000 to $100,000. That results in an additional out of pocket of a maximum of $5000 (or a total out of pocket of $10,000 counting the initial deductible). There are many people who would not pay $1000 for a $20,000 procedure unless it is useful.
David J. Balan
Nov 26 2006 at 9:11pm
It is likely the case that the 300K is the cost of the services at the “chargemaster” prices (list prices) of the hospital and doctors. If so, then the price actually paid by insurance or Medicare would be quite a bit lower. But your basic point remains.
Jay
Nov 30 2006 at 11:42am
You’ve written a good post here, but I think it misses the point of Ezra’s article. First of all, the $10K deductible is a bad example. We sell a lot of HSAs and a $5-$6K family deductible or $2-$4K individual deductible is more typical (and the best way to beat the actuaries). These deductibles leave about the same exposure as people normally have on non-HSA plans. The reason they got them though, was because they don’t need copays on doctors visits or Rx before the deductible, not because it has a higher deductible or overall exposure.
Ezra’s point was that once people reached their out of pocket maximum with a claim, which is typically the same as a non-HSA plan, there is nothing to reduce wasteful spending like unnecessary tests and treatments. So, she is correct in saying that healthcare spending will not slow because of HSAs.
Jay Norris
Nov 30 2006 at 12:30pm
… also, while the $2-$6K of healthcare spending that got the patient to their deductible may have been necessary, the expensive part comes after that. Part of the next $150 – $400K is where the waste comes in.
So in your Chinese travel example, it would be better to say that you pick people at random and require them to spend $4-$10K worth of travel to China, or they might die. But once they did that, they could travel to anywhere they wanted in the entire world and somebody else would pay, whether they needed to go there or not.
Bob
Nov 30 2006 at 5:46pm
Focusing on the deductible and out of pocket is only one facet of the equation. You must also factor in the premium savings that comes with such a plan.
As Jay pointed out, most infidivuals are opting for deductibles in the $2500 range while families are in the $5000 range. And, this closely approximates the out of pocket one would experience on a major claim with a typical $1000 deductible copay plan.
But here is a point many of the pundits overlook. By way of example, I had a lady ask for a $1000 deductible, copay plan because she “can’t afford a high deductible plan”.
The plan she wanted was $990 per month for her family and had $3000 out of pocket (per individual) on a major claim PLUS copays.
The plan I suggested had $3600 out of pocket per FAMILY and a premium of $460.
The $990 she paid to the insurance company was money she will never see again.
Same for the $460.
But the premium savings of $530 can be used to fully fund the HSA and still have money left over.
If (in this example) one saves over $6,000 per year in premiums, then where is the challenge in funding the deductible? With the low deductible, copay plan one might say there is a “forced savings” component. If you give it to the insurance company then you won’t spend it yourself.
Sure, that makes a lot of sense.
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