HSA Optimal Ins (Theory)

Tax-preferred health savings accounts

Jason Shafrin

Health savings accounts (HSAs) have been a major point of contention for health care reformers. Supporters claim that HSAs can reduce health care costs by decreasing the moral hazard problem inherent when third parties—such as insurance companies or the government—pay for medical services. Opponents claims that HSAs will attract rich and healthy individuals, leaving only poor or sick individuals in the ‘regular’ insurance pool.

One interesting point made in Cardon and Showalter (JHE 2007) is the following:

“Both opponents and advocates of HSAs tend to argue that HSAs will lead to less reliance on insurance, either through higher coinsurance rates and deductibles, or through fewer purchases of policies. This line of reasoning ignores the fact that accumulated HSA balances are wealth, and health insurance protects this wealth. Even individuals with large HSA balances would typically value insurance to protect those balances for future use. HSAs will tend to reduce levels of insurance coverage, but the effect seems unlikely to be as large as some previous researchers suggest.”

The Cardon and Showalter article also gives a nice description of the five main types of tax-preferred health savings accounts.

  1. “Archer medical savings accounts (MSAs): accounts in which an individual and/or an employer can contribute pre-tax dollars to pay for most health care services. The tax advantage is the same as for employer-provided health insurance premiums. Unused monies can accumulate over time. An experiment authorized under the Kassebaum-Kennedy bill (Health Insurance Portability and Accountability Act of 1996) allowed for restricted introduction of MSAs which included the requirement of purchasing a catastrophic, (high-deductible) health insurance policy (MSA/CHP).
  2. Flexible spending accounts (FSAs): like HSAs, but with no link to insurance coverage. Funds not used by the end of the year revert to the employer.
  3. Rollover FSAs: these would allow limited rollover of FSA monies without the restrictions on insurance choices that the current HSA rules require.
  4. Health reimbursement arrangements (HRAs): tax-exempt individual accounts used to pay for medical expenditures. Accounts are funded by employers; employee contributions are not allowed. Ownership of the accounts remains with the employer, unlike HSAs and FSAs.
  5. Medical IRAs. This proposal would allow consumers to make penalty-free early withdrawals from their retirement plans to pay for allowable medical expenditures.”