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February 02, 2006

Health Savings Accounts: A View from the Trenches

Elizabeth Anderson: February 2, 2006

What can be done to control health care costs while extending access to care to the uninsured?  The Bush Administration's strategy is to move health insurance from comprehensive to catastrophic coverage, and make sick people pay out-of-pocket for less-than-catastrophic costs.  They would get some assistance in the form of tax-sheltered health savings accounts, in which they could deposit funds up to the amount of their deductible, dedicated solely to health care expenditures.

Nifty idea?  Not according to Paul Krugman, who argues in his January 16, 2006 column that this scheme creates perverse incentives to insurers to withhold coverage of routine preventive care for people with chronic illnesses such as diabetes, even if this leads to medical catastrophe later on.  ("[T]he administration is saying that we need to make sure that insurance companies pay only for things like $30,000 amputations, that they don't pay for $150 visits to podiatrists that might have averted the need for amputation.")

That's the supply side.  What about the demand side?  Do workers of modest means find health saving accounts helpful?  One administrator told me of her experience:  when her firm started offering tax-sheltered dependent-care and health-care savings accounts, she was responsible for explaining this new benefit to the employees.  She saw them as wonderful opportunities to save money, and actively promoted them to the staff.  What happened?

None of the lower-level staff signed up for the accounts.  She found this baffling.  Why give up a great tax break?  Set aside the fact that the tax break is not so great for low income people, who face lower marginal tax rates, than for wealthy people.  That didn't seem to be the main issue.

The main issue was that lower-level staff couldn't afford the float:  in a given month, they'd have to pay $250, say, to a dependent caretaker and $250 into their dependent care account.  That's $500.  They'd have to submit paperwork for reimbursement of the $250 from their account.  But they couldn't afford to wait for the money to come back.  The timing was delicate:  if the paperwork was rejected for some reason, they could find themselves out $750 or $1000.  This was way over their heads.  If they resorted to their credit cards to cover their expenses in the meantime, the interest on their credit card debt would swamp any tax savings they might have realized from the account.

The problem could be even worse for health care accounts, depending on the timing of health care expenses.  On top of monthly or biweekly deductions into the accounts, a staff member might have to front $500 for some necessary treatment on a cash-only basis and then wait for $500 to accumulate in the account before being able to get it all back.

What appears to be a potentially attractive deal for people with plenty of cash reserves is not so for people who are living paycheck to paycheck.  My worry is not simply that Bush's proposal is unlikely to do much for exactly the people who most need insurance--the working poor who lack employer-provided health insurance but make too much to qualify for Medicaid.  It is that the Bush administration appears not to have bothered consulting the people for whom the program is supposedly designed, to see whether it meets their needs.  This is either a gross failure of democratic practice, which requires consultation with those affected by one's policies, or else a cynical PR ploy to persuade the public that one is serious about the health insurance crisis, without really doing anything significant.


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