Don’t be Fooled, There’s no “Replace”
Conservatives continue to defend their efforts to repeal and replace the Affordable Care Act. Part of this strategy will involve turning health care in to a free market. Earlier, I wrote a piece explaining the unique eccentricities of health care, but today I want to examine the go-to conservative proposal: Health Savings Accounts (HSAs), or more, broadly consumer-driven health plans.
Conservatives argue that forcing consumers to have some skin-in-the-game—essentially using their own pretax money for preventative care and primary doctor's visits—encourages them to be more frugal consumers, and thus keep costs down. But the empirical evidence tells a different story. Take Singapore for example. It established a system that is conceptually similar to what the conservatives propose, where individuals are required to maintain a HSA.
William Hsiao, of the Harvard School of Public Health, points out this belief in comparison-shopping based on prices is misplaced, he says:
“… Singapore’s well-designed and executed 3Ms scheme could not curb rapid health expenditure inﬂation. … we learned that providers compete by recruiting the best-known physicians with higher pay and by having the most sophisticated expensive technology. Price competition is secondary.”
Additionally he notes:
“…the market power on the supply side is much greater than the demand side. Providers can induce demand, offsetting the reduction in patient-initiated demand from being uninsured" (Hsiao 1995).
Both of those conclusions dispute the claim that prices deter patients from consuming unnecessary and expensive care.
That’s the economic theory. But do we have any hard data in an American context?
Well, a Commonwealth Fund Study concluded that “that HSAs are not likely to be an important contributor to expanding coverage among uninsured people.” In order for a tax deduction to work, people have to have a high enough marginal-tax-rate to benefit from the deduction. The problem is that 55% of the uninsured are in the 0% tax bracket. Fundamentally, HSA’s function as a subsidy to the wealthy because they are the only ones that can benefit from HSAs.
Additionally, HSAs do little to lower health care expenditures because they do not target the most costly portion of the population. Remember, the top 5% of spenders are about half of all personal health spending, according to Aaron Carroll, associate director of Children’s Health Services Research at Indiana University School of Medicine.
These people are older and sicker than most, and having “skin-in-the-game” is not going to make them consume less. At the opposite end of the spectrum, people who are currently healthy that had HSAs and other CDHPs were "significantly more likely to avoid, skip, or delay health care because of costs than were those with more comprehensive health insurance."
Lastly, even if I grant conservatives the argument that greater cost-sharing changes behaviors, HSAs actually result in a decrease in cost-sharing. A Health Affairs study said:
“… maintaining or introducing an out-of-pocket maximum while increasing the deductible can greatly reduce cost sharing for those high spenders who are responsible for a large share of overall health spending…we find that current HSA/high-deductible plans fall short of the accompanying rhetoric.”
This is not to say there isn’t some anecdotal evidence in favor of HSA’s. For some people they work as a supplement to cover what insurance doesn't, but in the big picture, they fail to address any of the substantive problems in health care.