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Wednesday, March 12, 2008

Health Savings Accounts

Surely by now everyone who pays attention to health care issues knows about Health Savings Accounts (HSAs). But in case someone doesn’t, an HSA is an account held by a financial institution into which an individual can put tax-free money for use in paying medical bills. If the money isn’t used, it can be taken out and taxes paid on it. The holder of the HSA must also have a health insurance policy for catastrophic coverage with a high deductible.

The idea behind the HSAs is that instead of having some third party (like a government agency or an insurance company) make decisions about their health care, individuals should keep the money and do it themselves. The assumption is that if they are spending their own money, they will use services more prudently and shop around for best value. The amount of unnecessary services would be reduced and the health care system, being forced to compete for patients, would become more efficient.

Before commenting on that, let me express my own belief that the appropriate use of market forces would be the most effective way to cause health care to reform. The ability of financial pressure to overcome resistance to change – even in health care - has been amply demonstrated in the past.

Having said that, I am not yet convinced that HSAs will generate the market forces expected from them.

For one thing, there are skeptics who find it hard to imagine themselves picking providers on the basis of price. But even if people learned to do that, our society holds strongly to the view that the stress created by an illness or injury is enough by itself and that financial stress should not be added to it. That is one of the reasons for the catastrophic insurance coverage requirement that accompanies HSAs. Presumably, the balance an individual might have to pay out of pocket after exhausting the HSA and before the insurance kicks in is small enough not to cause significant financial discomfort.

But if individuals are thus protected from financial stress, how much energy will they devote to weighing the financial consequences of healthcare decisions? I suspect not much.

For another thing, it seems likely to me that an HAS holder seeking health care will first select a physician. If the individual thinks that the physician’s recommendations for diagnostic and therapeutic services are unnecessarily expensive, the matter is likely to be negotiated between the two of them, with the physician’s opinion carrying the most weight.

As a result, hospitals and other providers would continue to be economically dependent on maintaining good relationships with physicians who refer cases to them and would be very reluctant to initiate reforms that might put those relationships at risk.

That would mitigate against the system changes that are generally believed to be essential if health care is to become more efficient. At a minimum, such changes are likely to annoy the physician by disturbing his/her established way of working. A provider dependent on the physician for business will not be anxious to do that.

So while I think that we ought to be looking for effective ways to use market forces as a stimulus for health care reform, I suspect HSAs will not prove to be among them.

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