Criticism of Health Savings Accounts

Are they fair?

Both medical savings accounts (MSAs) and HSAs have come under criticism that they favor the rich (or more properly, healthy, people). There is an element of truth in this in that HSAs are more beneficial for some people than others, but all arrangements of the health care are similarly skewed toward some and away from others. The motivation behind the creation of HSAs was mostly libertarian: to increase the market discipline the healthcare industry faces and to allow individuals to control more of their health care spending directly.

Medical costs typically go up faster than the inflation rate. There are several reasons for this: constant introduction of new technologies, new medications that take enormous resources to develop, the labor intensiveness of the services, and the fact that most people have health insurance. How can insurance contribute to higher costs? Simply that people don’t shop around the way they do for appliances or lawn care services. People rely on their insurance. Free market enthusiasts are disappointed. They want people to be consumers in the healthcare area the way they are consumers in other areas of their lives.

Critics point out that removing healthy people from the insurance pool makes premiums rise for everyone left. HSAs encourage people to look out for themselves more and spread the risk around less. Advocates respond that HSAs also encourage people to be more responsible and discriminating and that they promote a discipline on the industry that will ultimately make healthcare better for everyone.

Another rationale was tax fairness. HSAs give self-employed and uninsured workers the same tax break as people who work for corporations with health insurance. Workers whose employers offer health insurance do not pay taxes on their health insurance premiums. Yet the self employed and those who work for companies that don’t offer health insurance must pay income taxes when they buy health insurance.

Now it is true that HSAs end up being better deals for some people than for others. In general, they are better for “healthy” people, or at least for people who choose not to consume health care services as much as others. So it is not a perfect solution. But the comprehensive insurance plans aren’t entirely fair either, as they end up being better deals for people who go to the doctor a lot. So would be socialized medicine.

A study a few years ago found that accounts such as IRAs and 401(k)s provide the largest tax benefits to households with income between $75,000 and $500,000. New York congressman Charles Rangel wrote in 2006: “HSAs are designed to make Republicans appear to be doing something on healthcare when in fact they are merely pushing their No. 1 priority: tax cuts for the wealthy.”

Are the effective?

Another concern is that the money people save in HSAs will be inadequate. A consultant for the human resources firm Towers Perin was quoted as saying HSAs do not allow for enough savings to cover costs. Even the person who contributes the maximum and never takes any money out would not be able to cover health care costs in retirement if inflation continues in the health care industry.

Moral hazards

A study by M. Susan Marquis and Melinda Beeuwkes Buntin examined risk pooling in health insurance. It is well known that the economic concept of “moral hazard” comes to play in insurance markets. The authors conclude that even despite the motivations for sick people to buy more insurance than healthy people, there is considerable risk pooling happening. They also conclude that HSAs may contribute to market fragmentation if they grow in popularity.

A study at the City College of New York showed that widespread implementation of HSAs would reduce cost sharing for some groups of people. They predict that people who make half of US medical spending would gain no benefit from HSAs.

Another criticism of HSAs (from the libertarian direction) is that they don’t go far enough in reducing government distortion of the health care spending and costs. The federal tax code still allows businesses to deduct costs for medical insurance, so the government effectivley subsidizes health insurance. By eliminating this deductibility, the government would more effectively exit the market and allow HSAs to do what they were designed to do, and increase incentives for people to set up HSAs.


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