POLICY: Is Cannon facing reality on HSAs? Not exactly

Those of you who are bored this week can entertain yourselves pondering the planetary origins of this ditty called Health Savings Accounts: Do the Critics Have a Point? The answer according the to author, Michael Cannon of Cato is, of course, no. But he does at least burrow deep into the issues. You have to hand it to Cannon and Cato which is the sensible libertarian’s think-tank (I used to call it the thinking man’s right wing shop, until Trapper told me that it’s not right wing!) for at least trying.

Unlike Grace Marie Turner, Greg Scandlen, Ron Grenier, Sally Pipes and all the other loons on the HSA bandwagon, Cannon confronts what HSAs do to the risk pool head on! If you have the intestinal fortitude to dive into the guts of his 23 page report (Full PDF here) you’ll find that on page 6-8 Cannon describes accurately how the introduction of a high deductible low-premium plan for in a single unified insurance pool (which he divides up between two groups–the healthy “students” and the sicker “professors”) destroys that risk pool.

He suggests that basically the healthy members of the group are better off moving into higher and higher deductible plans. Eventually no one will be left able to afford the "sicker" plan, so the effect will have been the movement of everyone to a high-deductible from a low deductible plan.

This ignores two HUGE issues. The first is the loss of the money from the pool to pay for the care of the sick people in it. Unless miraculously in Year 1 overall health care costs collapse, the movement of all the healthy people into a lower premium insurance product will mean that there won’t be enough money in the pool to pay all the health care expenses of its members. Why not? Because it’s the premiums from those healthy "students" that’s paying for the care for the sick "professors". If you stop collecting premiums from the 80% of healthy people and allow them to keep them in cash, there is not enough money left in the pool to cover the care of those who get sick. The math just doesn’t work, as I showed here (and I’m by no means the only one who’s pointed this out). Someone has to make up the difference in year one. (This is BTW why social security privitization is a political non-starter because it demands more money in the first years).

The second issue is that he’s not even satisfied with moving everyone to a HDHP, and he wants an ever bigger selection of variation of insurance plans to offer up. In that case presumably a bunch of the "students" in Cannon’s ideal world won’t purchase any insurance at all (after all that’s what happens in the real world and is something he raises in his example), or perhaps they’ll buy a policy with a $100,000 deductible that costs them $10 a year. Now when the small percentage of the "students" who do need it require care, they’ll have to pay out of pocket.

Except that in reality, no one who needs catastrophic care can afford it out of pocket, and the people who are the least able to afford it should they need it are exactly the ones most likely not to buy insurance–because they’re relatively poor and relatively healthy (remember they’re "students"!). But don’t worry! According to Cannon they’ll have saved up for this eventuality! Which is where the HSA comes in. Of course in reality they’ll get treated and the providers will have to eat the costs. Which is why we have the recent fuss about who gets cost-shifted to whom.

Now there are plenty on the right on the Grover Norquist vein who want this whole thing to collapse and believe that all those "lucky duckies" should be, as Mr Potter is accused of demanding by George Bailey, saving and scrimping and paying cash for everything. But the reason that health nsurance exists in the first place is that people who get very sick can’t afford the costs of medical care because they’re very large compared to their incomes and other predictable expenditures.

Meanwhile those costs are usually incurred largely well beyond the amount of the deductible of a typical HDHP. So the whole cost conscious consumer/patient is largely a myth. Cannon knows this is true. In his book he devoted all of two sentences to solving the issue of the 80/20 rule (in fact in reality it’s 90/10). He claims in this paper (devoting a whole two paragraphs to the topic, so we’re getting some progress!) that people with HDHPs are cost conscious beyond the deductible (even though there’s no reason for them to be) and that if we just allow higher deductibles that’ll help here too. Of course that ignores 100 years of history in which doctors and the system largely decide what happens to very sick people, and all the evidence is that medical culture and the number of physicians per capita is the major determinant of costs. (Go hunt out the Dartmouth stuff for more). Maybe this will change by magic in some consumer nirvana, but count me as a skeptic.

I’m glad that he’s one of the few on his end of the political spectrum
to actually bother with some underlying theory about how this works.
The rest of them just say that HSAs/HDHPs are a minor incremental change– they
just don’t seem to realize that it’s a minor change that’s making an
already broken system worse.

So as far as I can tell Cannon has worked through all the logic of HDHPs/HSAs on a theoretical basis. He comes to the same basic conclusion that I do on how it will play out, but decides that a destroyed risk pool in which participation is voluntary, and a lack of control over provider behavior towards the very sick are not the problems that current critics of the system like me think they are. Even though those are the twin problems responsible for both driving up costs and the incredible injustices of the current insurance system which penalize people unlucky enough to be sick. And therefore he advocates policies that will logically make both of those problems worse!

I just wonder what color the sky is on his planet.

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12 replies »

  1. Rick- if you are of the GOP-bad, democrat-good, fixed ideology, there is no point in having a discussion.
    The GOP and democrats in Congress (and state legislatures) are equally poor as a group at micromanaging everything.
    I would be interested, however, to know if you can give me documented serious complaints against ERISA-regulated health plans (ie. self insured large corporations) that any different/ worse than any state regulated plan. Simply extending ERISA regulations to trade association members would make health insurance more portable (state to state), provide some cost advantage (if the Commonwealth study is to be believed), and perhaps add new players to the health insurance oligarchy that dominates most of the country.

  2. Many good points, but one is missing — Our obsessing with fiscal quick fixes obscures our country’s failure to address key underlying problems: We don’t focus adequately on learning how to keep healthy and at-risk people well, and on discovering the safest and most cost-effective ways to treat ill patients. There is not enough investment in gaining and implementing the necessary knowledge through clinical research, evidence-based decision-support, and financial incentives. See U.S. healthcare: A broken system lacking proper focus

  3. Eric is right, but he’s wrong. Let me ‘splain. No, there is to much. Let me sum up:
    “. . . SBHP could have been put in place with adequate oversight . . .”
    Republicans do not believe in oversight. Hoping for AHPs or SBHPs or HIMMA or MEWAs or whatever they’re calling them this year, with proper oversight, is like hoping for the sun to rise in the West as long as there is a GOP and a US Chamber of Commerce to enable them.

  4. Arnold is of course right. It’s just that we disagree a tad on how to stop that vacuuming, and the Cato-type solutions involve the placing of that cost back onto the sick… to be fair the analysis he lays out in his book (which I will review at some point) is pretty good. (more tomorrow on Cannon)

  5. “the reason that health nsurance exists in the first place is that people who get very sick can’t afford the costs of medical care because they’re very large compared to their incomes and other predictable expenditures.”
    That’s why health insurance *should* exist, but in that case it would be health insurance, not the “comprehensive coverage” that prevails today.
    The reason that health insurance exists as it does today is to vacuum as much money as possible out of the pockets of consumers and into the pockets of health care providers.

  6. Ah, but the person used to the private jet will always have the resources to upgrade if he is unsatisfied with the Hybrid–the point of switching to the Hybrid is so that more people have the ability to drive in an efficient, effective way. This whole issue is just one more symptom of our national disease–the wealthy maintain and increase their wealth while the remaining 98% of people are sliding further and further into the hole. And heaven forbid they get sick while in the hole, because then they are truly stuck.

  7. Well there is that…
    Meanwhile apparently CDHP is doomed because of a new government report! Or so Scandlen says…

  8. Is this where I comment that driving the 50mpg hybrid loses some of its luster when the driver of the car has flown on a private jet to get back and forth from a weekend vacation, and parks the hybrid in a cozy 10,000 square foot home for 2!?

  9. Well as in most of our national problems we need to convert from the 5mpg Hummer to a 50 mpg Hybrid….(or maybe some tiny Renault or Hyundai that doesnt get sold over here)

  10. Matthew- single risk pool, or whatever you want to call it… will officially convert our healthcare system into– healthcare by lobbying. If you want proof, look at what is already going on in Massachusetts.
    The car analogy is close, but I would say the car is running out of gas– and there is a shortage at the pump!

  11. Eric. There should be one pool, period.
    All the things you mention fracture further what is, I admit, already a totally broken insurance system. But if the car is driving on the rims on three wheels, the best policy is not to shoot out the remaining good tire. It’s to stop the car and put some different wheels on it!

  12. Matthew- I take issue with the ‘loon’ comment. The names you mentioned, all of whom (except Ron…) I have interviewed at length, are anything but loony. If I may go out on a limb and summarize for them, they do not see HDHP as the one salvation; rather HSA is a component of rational healthcare system reform.
    Now back to just my own opinions.
    If you were very interested in larger risk pools, you would have supported small business health plans. Critics attempting to balme SBHP for the loss of diabetes coverage, vaccination coverage, etc., were wrong, and everyone knows it. SBHP could have been put in place with adequate oversight to prevent this (and as your many writings about BCBS in CA show, problems can exist on the state level, anyway). This would allow much greater risk sharing (as the recent Commonwealth Fund study showed– 18% more for coverage in small vs. large companies). Also, it would increase portability of health coverage, an often overlooked but essiential flaw in our current system.
    Another risk pooling concept that you do not support (I presume), is the Health Care Choice Act, which would essentially nationalize (not in the socialist sense) the buying of health insurance. Imagine having to get a different credit card for every state you travelled to, that is what health insurance is like today. The HCCA (put forth by John Shadegg, AZ Congressman) would have the effect of making insurance portable and growing the risk pool.
    While I admit that it seemed that proponents of the HSA initially touted it as the panacea, nearly all, including the group you mentioned (Ron excepted), view HSA as a tool, just like technology for the improvement of healthcare delivery and efficiency.