HSAs Explained

In response to my Wall Street Journal op ed, a number of people have asked me to clarify my position on Health Savings Accounts (HSAs).  Here goes.

Suppose we passed a law tomorrow prohibiting all insurance companies (including Medicare and Medicaid) from paying any medical bills less than $5,000.  What would happen?

The medical marketplace would transform almost overnight.  Within a couple of months, there would be no such thing as a primary care physician (PCP) who did not post prices – at least for routine procedures.  PCPs would offer telephone and email consultations.  They would keep patient records electronically (just like lawyers and accountants).  Overall, there would develop a teeming, bustling, entrepreneurial marketplace for primary care, diagnostic tests and most prescription drugs. 

Specialty markets would develop for the chronically ill, as doctors competed for their business instead of trying to avoid them.  Patient education would become an emerging field, with providers offering to teach diabetics, asthmatics, etc. how to manage their own care.  Internet drug sales would double, triple and quadruple, as brand drugs faced increasing competition from generic, therapeutic and over-the-counter substitutes.  At the same time, overall health care spending would plummet.

(Just thinking about it makes you wonder why we haven't done this already.)

Now, can the widespread use of HSAs create this same transformation? Certainly HSAs and HRAs, along with an even greater number of uninsured and a still larger number of employees facing higher deductibles and co-payments, are already having an impact on the market.  How else can you explain the exploding number of walk-in clinics, the growth of internet drug sales, and $4-a-month-for-generics at Wal-Mart and other big box retailers? 

However, the impact of HSAs will be much more limited than the scenario described above. The reason: while HSAs free the patient side of the market, they do not free the provider side.  Current law requires insurers with HSA plans to create an across-the-board deductible and specify what spending counts toward the deductible.  In the process, HSAs do not become a radical challenge to the existing payment system.  Instead, they become an extension of the current system.

As you approach your doctor's office with HSA in hand, your insurance company has already established with your physician which tasks are covered, which ones are not and how much will be paid.  Of course in principle you can use your HSA to pay for telephone and email consultations, electronic medical records, patient education, etc.  But since none of these expenditures count toward your deductible, doctors have weak incentives to change the way they practice medicine.

HSAs free patients and give them good incentives.  They do not free the supply side of the market, however.  They could, if we changed the federal law.  What we need are completely flexible accounts that can wrap around any health plan. 

See my BA: "Making HSAs Better" at:


Comments (11)

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  1. Jack McHugh says:

    Good work here, John. This really helps readers visualize what we’re talking about.

  2. Uwe says:

    In his "HSA Explained" and his "Making HSAs Better," John Goodman illustrates the torturous thinking behind the HSA movement. In "HSA Explained," John uses the acronym HSA to describe something altogether different: health insurance policies with high deductibles or other forms of heavy cost sharing by patients. For the life of me I cannot figure out why anyone would describe such policies by the acronym HSA. Would we describe the Interstate Highway by the acronym XYZ? As I understand it, HSA stands for "Health Savings Account." It is not an insurance product at all. It is a savings account in a bank or similar instution. Deposits into it happen to be tax-deductible to the owners of the HSA (or deposits into the account by emploers are not tax deductible income to the owner) if the account owner uses the money in a away big daddy government (speak President Bush) wants them to use the account. In this case, it means the account holder must buy an insyrance product of which Big Daddy Government (President Bush) approves — a high deductible policy. It is nothing other than unbridled paternalism. In "Making HSAs Better" John laments that "the curent HSA law's primary problem is that decisions the market should make have been made by the tax writing committees of the Congress." But hat else could Congress do? Does it not, by necessity, have to specify what can and can not be financed out of the tax favored HSA? If Congress did not specify it, would "recuperative" trips to Hawaii or Monaco qualify? What would stop anyone from spending the money any way they wished? John could get the government off our back if he pleaded for the removal of the tax preference to HSAs and, at the same time, worked to eliminate the tax preference now extended to employer paid healht insurance. One could start by adding the employer-paid premium to the employee's W-2 for any employee earninbg more than, say, $100,000. In other words, one could get rid of the tax preference by some progressive scaling back. So here's the mental confusion of the HSA folks: One the one hand they plead that big government give a tax break to those Americans who pick health insurance that big government (and the high-deductible afficionadoes like John) want them to pick. Having succeeded at that task, they then turn around to lament that big government writes the rules around this tax handout. It is nothing if not vaguely amusing. Best regards, Uwe Reinhardt Princeton University

  3. Richard E. Ralston says:

    Thanks. This is the clearest statement I have seen on this issue.

    Richard E. Ralston
    Executive Director
    Americans for Free Choice in Medicine

  4. John R. Graham says:

    Plus: if you have an HSA there is still no price transparency because you have to go to an in-network PCP in order to have the payment attributed to your deductible without wasting time and resources with the insurer.

  5. Dave Racer says:

    John, appreciate this. I have looked at HSAs as a transitional stage.
    Maybe bring a little comfort to Americans who have become risk aversive. But after a few years of seeing how they could hold down spending, let their HSAs build up, perhaps they could see how to live without them. I keep looking forward to the day when I can buy a $25,000 deductible because I have the cash in the bank to cover the rest.

  6. Stan Alekna says:

    HSA's are not a pancea but are a fine step toward solving our health care insurance problems while protecting the finest health care delivery system in the world. That must be our goal. If we destroy the quality and accessiblity of our health care via socialized medicine, we will have accomplished nothing beneficial. HSA's are not available to those on Medicare…. go figure. Stan Alekna, Cornwall PA

  7. Vijay Goel, M.D. says:

    John, interesting take on what the world would look like if insurance backed away from small dollar care and returned to “insuring” the unpredictable.

    I’m curious about your statement (quoted below):
    “Of course in principle you can use your HSA to pay for telephone and email consultations, electronic medical records, patient education, etc. But since none of these expenditures count toward your deductible, doctors have weak incentives to change the way they practice medicine.”

    Do you believe the deductible is the limitation? Seems that deductibility limits would pale in the provider’s mind to cold, hard cash. In my mind the major issue is the mental limits imposed by patients not knowing the services are possible and providers limiting their revenue to fee-schedules and per-visit co-pays. These types of e-communications seem to be proliferating in the concierge practices. If consumers asked (at some reasonable scale) for these services and paid a small fee, don’t you think they’d become more available?

  8. Bob says:

    Amazing what rational thought can provide. However, I have a problem with physicians posting prices for services. Especially for primary care. This could reduce the quality part of the equation to a price war without regard to knowledge, training, experience, wisdom, commitment, sensitivity, etc.

    At the primary care level, to practice medicine properly, it is necessary for a physician to listen to his patients without regard to checking the timeclock every few minutes. Medicine should be practiced and physicians should be rewarded by who can do it better rather than who can do it cheaper.

    Primary care is still very much an art as well as a science. My education and training ($25/mo as a house officer at Yale) should not put me at a level of all pediatricians whose value only responds to a price war. I don’t have the answers, as quality at the primary care level is very difficult to track, as opposed to those procedure driven specialities.

  9. […] No wonder consumer directed health plans aren’t getting any traction.  What was the point of calling around to get the best price?  Was she just making it up off the top of her head?  We have a long way to go before healthcare is an actual “free market” system.  In order for this whole “free market” idea to take hold, I really think it would take government intervention like John Goodman, the “father of health savings accounts” used in his example.  Hmm… free market requires government intervention.  There’s no way in hell people are going to just voluntarily switch to high deductible health plans in this kind of environment. […]

  10. […] This is a perfect example of the point consumer driven health care (CDHC) advocates are trying to make. Here is an exerpt of a post called “HSAs Explained“, from the “Father of Health Savings Accounts”, The John Goodman Health Blog: Suppose we passed a law tomorrow prohibiting all insurance companies (including Medicare and Medicaid) from paying any medical bills less than $5,000. What would happen? […]

  11. asg says:

    Seems like what would happen is that a lot of medical services that used to cost $100 would now cost $5,001.