How to Make HSAs Actually Work

First, let me candidly admit that I have no idea if putting Health Savings Accounts (HSAs for short) at the center of the Trump healthcare rework is a good idea. I do, however, have some insights into what made Bush-era HSA plans fail.

Bush-era HSA’s were unavailable to many Americans, because their health insurance companies and employers ultimately made the decision about whether they would be able sign up for an HSA. Many employers elected not to participate in HSA’s by not purchasing health plans that “came with an HSA”.

I was working at the UT School of Biomedical Informatics during the Bush administration’s attempt to deploy HSA’s. I wanted to research and understand how HSA’s would impact the healthcare system, and I knew that the first step was to sign up for one myself. 

But the University of Texas health plan at the time did not offer an HSA. A little investigation showed that I could not just go to any bank and sign up for an HSA. If I had been able to get an HSA, then I would have been able to take it to another employer if I changed jobs… apparently.

I am not really sure because I was never able to sign up for one.

If they are going to work as a mechanism for healthcare reform, HSA’s must be ubiquitous. In order to be ubiquitous they need to operate smoothly and at the convenience of the consumers, rather than the insurance companies or employers. To be smooth, HSA’s are going to have the following characteristics:

  • Any consumer should be able to go to any consumer financial institution that they use currently for banking purposes and get an HSA. It should just be another account type after savings, checking, money market, etc etc. 
  • Spending money from the HSA should be done using standard debit card, ATM AND credit card mechanisms. That will ensure that consumers can instantly make healthcare purchase decisions using a mechanism they already understand. 
  • Decisions about what is appropriate purchases must be fully automated. If I try to purchase movie tickets using my HSA it should fail instantly. If I go to the doctor or pharmacy, it should work instantly. Implementers will need to pay special attention to places like grocery stores where you can purchase both healthcare purchases and non-healthcare purchases at the same time. 
  • Some healthy lifestyle choices should be partially covered by HSAs. Say $50 per month on gym memberships and another $50 per month on provably healthy food options. If these basic lifestyle changes are not incentivized, HSA’s will have lost one of their core potentials. It does not take much money to get a big change in preventative behavior.
  • HSA providers should be able to experiment with even more clever financial incentives. Perhaps the $50 or month that can be spent on a gym should only work if you prove that you actually went to the gym that month.
  • It should be very simple to transfer HSA funds from one bank to another. This is critical because many of the issues that I am listing are implementation details that will be deployed by HSA providers and not by the Federal Government. Moving to “better” HSA plans has to be simple in order to ensure that there is ongoing competition in their operation.
    The launch of Obamacare was one of the most painful government program launches in US history. Republicans tend to criticize Obamacare for its fundamental design, which they say is unfair. But in many cases, small details in the tactical on-the-ground implementation of Obama’s program was as much to blame for any of it’s problems as any of the design flaws that conservative critics point out.
    There is no reason why a Trump-inspired healthcare reform plan will not suffer from the same implementation hiccups. Will the Trump administration will need to suffer their own healthcare dot gov dot floundering, before they wise up to the underlying reality:

    For healthcare reform, the devil is in the details.


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8 replies »

  1. Regarding the benefits of HSA ‘s for the poorer individual. A poor person’s economic position is better served than that of a rich person. In other words the poor person would benefit more from $20 additional money than Uwe would benefit from $40.

    Additionally, whose money is it in the first place? A modern fable exemplifies what is actually happening.

    “Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this…

    The first four men (the poorest) would pay nothing
    The fifth would pay $1
    The sixth would pay $3
    The seventh would pay $7
    The eighth would pay $12
    The ninth would pay $18
    The tenth man (the richest) would pay $59
    So, that’s what they decided to do.

    The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball.

    “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20″. Drinks for the ten men would now cost just $80.

    The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free. But what about the other six men ? How could they divide the $20 windfall so that everyone would get his fair share?

    The bar owner suggested that it would be fair to reduce each man’s bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.

    And so the fifth man, like the first four, now paid nothing (100% saving).
    The sixth now paid $2 instead of $3 (33% saving).
    The seventh now paid $5 instead of $7 (28% saving).
    The eighth now paid $9 instead of $12 (25% saving).
    The ninth now paid $14 instead of $18 (22% saving).
    The tenth now paid $49 instead of $59 (16% saving).
    Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.

    “I only got a dollar out of the $20 saving,” declared the sixth man. He pointed to the tenth man,”but he got $10!”

    “Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar too. It’s unfair that he got ten times more benefit than me!”

    “That’s true!” shouted the seventh man. “Why should he get $10 back, when I got only $2? The wealthy get all the breaks!”

    “Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. This new tax system exploits the poor!”

    The nine men surrounded the tenth and beat him up.

    The next night the tenth man didn’t show up for drinks so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

  2. First, let me agree that the possibility that a healthcare reform should have a worse effect on the poor is decidedly problematic and I am not all “comfortable” with that notion.

    But you posit that “any” tax-deduction benefits the rich over the poor… and I am not sure that is nearly the universal principle that you seem to infer. Which is not to say you are wrong, but just that I do not know of a way to be sure whether you are right or wrong.

    I note that much of the impact, in terms of both newly insured and also for people with low-income of the Obamacare policies, was in their Medicaid reform strategy. I suspect that Trump will also have to have a Medicaid strategy to account for the negative impacts of the HSA strategy on the poor. Does the Trump administration understand this link between two different reform efforts? I have no idea.

    Good points.


  3. Steve,
    I have the same questions about how to make the program more effective.
    I do not think it is just a question of incentive tho. What Aetna can offer is likely to be something that they have to do in a highly regulated manner. While there are lots of things that a Trump administration could do, what I think they could do is substantially de-regulate what things can be paid for using and HSA. Having said that, Trump, like Obama before him, just does not have any information about the results of wide-scale system change. Different ideologies result in different tenants of faith about what “should” work. But what “will” work is much harder to define.


  4. End tax deductions for all of healthcare and while we are at it change the tax system.

  5. Fred:

    You surely realize that any time we make any expenditure on whatever tax-deductible, we grant a higher public subsidy to high-income people than we do to low-income people — see here http://healthaffairs.org/blog/2016/10/03/tax-deductibility-as-a-regressive-federal-subsidy/ .

    Are you comfortable with that idea as an ethical proposition?

    I realize that the same comment applies to all tax-preferred employment-based health insurance. In my view, we should address it, rather than extending this strange social ethic.

  6. Steve, HSA’s are dependent upon the rules that govern and the insurance that surrounds them. I don’t think Pauly rejected HSA’s. If he didn’t reject them that means they are of use and used appropriately have great use.

    What is the reason the older members of your group didn’t sign up for HSA’s? Was it because the underlying insurance plans destroyed the HSA’s value?

    I think HSA’s work better in freer markets where there is more competition and where regulations don’t inhibit them. We have to recognize that insurers weren’t anxious to sell high deductible insurance which limited their premiums. Today we have those high deductible policies eating up financing previously more available. That was the unintended consequence of Obamacare and too much regulation.

  7. Everyone who would contribute to a traditional or Roth IRA should first max out the annual limit to an HSA since it has the same or better tax advantages. The money going it is tax deductible regardless of whether on itemizes. The money can come out at age 65 taxed but without penalty. But it can always be used tax free to pay out-of-pocket medical costs except for premiums. But this could change with reform.

    “Any consumer should be able to go to any consumer financial institution…and get an HSA.”

    One mostly can do this today, and they come with debit cards that only work for healthcare classified merchants. So you can’t purchase bandages at grocery stores, so what? It’s better to leave the money in the account as a tax free investment vehicle.

  8. I added an HSA as an option for our group. As I expected, only the young and healthy signed up. The plan is administered through a private entity, Aetna. What, exactly, would a Trump administration do to force Aetna into making the HSA work better? Why doesn’t Aetna already have the incentives to make the plan work well? I think Mark Pauly had it correct, that HSAs aren’t very likely to make much difference in health care.