The Theory:
No one spends someone else's money as carefully as they spend their own.
Individual people make the best choices for their particular circumstances. These choices are in line with their unique set of priories.
Insurance, by its very nature, shifts financial risk from one party to another. In markets where government has through law, regulation, and subsidy increased the prevalence of insurance, the market can become heavily distorted due to excess risk transfers.
The Problems:
Healthcare savings accounts in Virginia get a worse tax treatment then health insurance. Insurance is usually purchased by employers with pretax dollars. A Virgina HSA on the other hand is only tax deductible up to $3,050 per person, per year. This is not very helpful considering the average yearly healthcare expenditure is about $10,000. This is tantamount to giving a subsidy to insurance.
Employers buy insurance on the employee’s behalf and negotiate for a blend of features and pricing options that often don’t always match the ideal blend that an employee would like.
Medicare and Medicaid offer no incentive for thrift on the part of the participants. The insurance model is not ideal for all of those under the program.
Within most all price sharing setups in health insurance, the marginal dollar is covered by the insurance company. This leads to overconsumption and defensive medicine. The incentives for saving money are non-existent or greatly diminished.
Most insurance companies have in, and out of network providers. The rules are complex and confining. A surgeon may be out of network while working in a hospital in-network. Consequently, out of network charges may apply. Such complication increases the financial risk of seeking care which deters people from getting the services they need.
The Bill:
All citizens that receive health insurance from their employer, Medicare, or the Medicaid program may request the actuarial weighted value of the plan that they are receiving to be deposited into a HSA of their choice at the beginning of the coverage date. All HSAs will be treated with the same tax status as health insurance.
The Result:
People will be spending their own money to purchase Healthcare. Coupled with listed prices at Healthcare providers, the market will be forced to become more efficient.
For young and healthy people, money would accrue and generate tax free interest in the account. The compounding effect would generate an exponential curve in resources that matches, or in many cases, will exceed the exponentially higher average expenses as one ages.
For those that want insurance like they had before, that it still available. They have the actuarial weighted value of their insurance up front at the beginning of the year, they can purchase any plan that suits their needs best.
Direct payment bypasses all of the costs of using an insurance company.
People could link accounts and create groups, build large balances, and buy only catastrophic plans or find other innovative ways to use their HSA’s to guard against risk.
The Bottom Line:
Markets work in generating value when prices carry information. Having almost exclusively third party payment in between consumers and producers blocks many of these price signals that would have efficiently allocated healthcare resources. HSA’s often grow to be several hundreds of thousands of dollars over a lifetime. This HSA law may seem like a small change, its not. The effect on healthcare would be profound, suppliers would be forced for the first time to make a compelling case for the cost and benefits of every transaction. People would grow wealth in these accounts and have strong incentives to stay healthy.
FAQ’s and Objections:
Response 1:
What if someone doesn’t want an HSA?
Answer: Then they stick with the insurance option. Under this law people are given the dollar value of the policy only if they choose.
Response 2:
What if someone gets the HSA, blows all the money and then gets really sick?
Answer: Then they go to any hospital and according to current law, they must receive life saving care regardless of the ability to pay. Ongoing HSA deposits could then be used to pay down any debt accrued. In the future they may opt for insurance. If the issue bringing them to the hospital is continuing, the HSA will grow to match the need since the HSA represents the dollar amount for the cost to insure the person for that year which would now include the cost of the ongoing treatment.
Response 3:
Don’t a lot of HSA’s have a use it or lose it feature?
Answer: Unfortunately so, this law allows for people to deposit the worth of their coverage in the HSA of their choice. I can’t imagine that many people would choose such an arrangement with all options open to them.
Response 4:
What if the HSA becomes very large and people want to withdraw the money?
Answer: Under current law this is possible, albeit with tax consequences. There are already provisions that allow for roll over into retirement accounts.