Devon M. Herrick writes an article (“Why rent…“) creating a clever analogy comparing HSAs to equity in a house. He likens traditional health insurance to renting a home, while having a Health Savings Account (HSA) is more like owning the home. Making contributions to HSAs in essence gives you “equity” towards future health care expenses. On the other hand, if you do not use any medical care with traditional insurance, you lose all of your rent annual health insurance premium.
Mr. Herrick claims that he could cut his health insurance premiums by half if he had an HSA. There are 3 main reasons why health insurance premiums are lower. First, in a mechanical sense, health insurance plans are combined with HSAs which have higher deductibles. This means the insurance company will not pay for the first $1000 or so of medical care. Secondly, since there are high deductibles, utilization will decrease because of a reduction in the moral hazard problem. Finally, healthier people sort into HSAs and thus if everyone was compelled to have HSAs, health insurance prices would not decrease as much because there would be less advantageous selection.
As I have mentioned before in this blog, HSAs are highly unequal, since the rich 1) are the ones most likely to benefit from this legislation and 2) they have higher marginal tax rates and thus will receive a larger tax break for every dollar contributed.
Nevertheless, shifting more costs to the consumers and forcing consumers to face the true cost of medical procedures will help to reduce costs and to ensure than only necessary medical procedures are conducted.
- DM Herrick (2005) “Health Insurance: Why Rent When You Can Own?” Health Care News, The Heartland Institute, May 1, 2005.