The Entrepreneurial View #485

Popularity of Health Savings Accounts

by Raymond J. Keating

Health savings accounts (HSAs) make sense for what ails U.S. health care, and based on their tremendous growth are quite popular. So, why do some in Congress exhibit such hostility to another choice in the health care marketplace?

According to a survey released in late April by America's Health Insurance Plans, 6.1 million people were covered by health savings accounts/high-deductible health plans (HSA/HDHPs) in January 2008.

That figure is up from 1 million in March 2005, 3.2 million in January 2006 and 4.5 million in January 2007. Over the past year, the enrollment growth in HSA/HDHPs registered 35 percent. From March 2005 to January 2008, HSA/HDHP enrollment skyrocketed by 493 percent. That's impressive.

An Associated Press story noted that AHIP "said more than a quarter of new enrollees were previously uninsured."

HSA/HDHPs also offer lower health care costs for employers. For example, on March 26, 2008, the Kiplinger Letter noted that some businesses have done better than others in holding down health care costs: "The most successful employers are aggressively pushing consumer directed health plans (CDHPs), which put more control in the hands of workers, usually by combining a high deductible insurance policy with a tax advantaged health savings account."

In terms of holding down health care costs in general, HSAs can play a key role in putting health care decisions back in the hands of consumers.

For decades now, health care costs have been rising rapidly. The good part of this rise is new diagnostics and treatments that enhance the quality of care. The bad part is driven largely by the third-party-payer problem. That is, when someone else - like the government or employer-provided health plans - foots the bill, the consumer and provider have few incentives to care about prices and utilization.  As a result, costs rise.

HSA/HDHP counter this trend by restoring insurance to what it's supposed to be, that is, protection against unforeseen, catastrophic events and costs. Dollars are placed tax-free into the HSA by the employee, employer or both. Those resources are now owned and controlled by the individual, who makes health care decisions accordingly. During relatively healthy years, resources accumulate in the account.  Meanwhile, each HSA is linked to a catastrophic insurance plan that kicks in during years with high health care expenditures.

HSA/HDHPs restore proper balance to the health care market. Regular, predictable health care expenses come out of the individual's HSA dollars, while insurance serves its proper role as protection against costly catastrophic events.

So, the HSA story is bright. Popularity is on the rise. Consumers gain control over their health care spending. The previously uninsured get coverage. Businesses save money. And economists note the benefits to the overall health care system.

Nonetheless, some in Congress don't like HSAs. For example, House Ways and Means Health Subcommittee Chairman Pete Stark (D-CA) held a hearing on HSAs on May 14. The negative tone was set by the rather hostile advisory sent out on May 7. In that, Stark was quoted: "HSAs and high deductible plans are a flawed policy approach to making health care more affordable. They make things worse, not better. Instead of using the tax code to encourage people to purchase coverage that may be woefully inadequate, we should focus on providing comprehensive health care coverage to those most in need in the most cost-efficient way possible."

Of course, HSAs are all about expanding coverage in the most cost-efficient way possible.

But some elected officials, like Congressman Stark, want to go in an entirely different direction. Ignoring basic economics and real world experience, they want to push the nation towards socialized medicine. They actually believe that a government-run health care system would work better than one with the private sector at the center. That, of course, is ridiculous. Given the incentives for waste in government, all that nationalized health care guarantees are higher costs, poorer quality, and eventually, rationed care.

If you favor government-run health care, then you're not a fan of HSAs and will work to undermine them wherever and whenever possible. For example, by a vote of 238-179, the U.S. House of Representatives recently passed H.R. 5719, which would sock HSAs with additional and completely unnecessary administrative costs and complexities. This would serve to undermine the cost advantages of HSAs in the marketplace.

The Senate has yet to take up the measure, and the Bush White House, to its credit, has declared its opposition.

The great fear of the big government health care crowd is that more and more people will take note of the tremendous successes of market measures like HSAs. They are trying their best to make sure that doesn't happen. For the sake of consumers and small businesses struggling with health care costs, it is critical that the benefits of HSAs be made clear to all.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.