Pros and Cons of Health Savings Accounts (HSAs)
August 23, 2004
Some readers of Health Freedom Watch
are wondering how Health Savings
Accounts (HSAs) will affect their freedom and
whether they should open one. The recently
enacted Medicare Rx law includes a provision that
allows Americans to open HSAs (See
Your Questions about Health Savings Accounts).
There are both pros and cons
with HSAs that should be considered.
Let's look at the pros first. When consumers spend
their own money, they are more cost-conscious.
When someone else pays the bills (even if only in
appearance), consumers tend to overconsume goods
and services and push prices higher. The bottom
line is that HSAs will provide strong economic
incentives for more rational use of medical care,
give patients strong incentives to demand higher
quality care (after all they are paying for it), and
help keep prices competitive.
Now the cons. HSAs keep health insurance and
health care tied to the IRS code. For those worried
about privacy, that might raise a serious concern.
Additionally, HSAs strengthen the federal
government's power to direct consumer behavior.
Ed Crane, president of the Cato Institute, recently
wrote: "Where is the dignity in a tax code that treats
Americans like so many gerbilsdo this and you
get sugar water; do that and you get an electric
shock?" Even so, allowing citizens to put money
(tax free) into privately owned HSAs is a huge step
away from employer-owned health insurance.
Best and Worst Case Scenarios with HSAs
Consider the best and worst case scenarios for using
an HSA. In the best case you accumulate money in
the account for health treatments considered
deductible by the IRS and for services not covered
by Medicare. (Seniors most likely won't be able to
use the money for Medicare-covered services.)
In the worst case, you accumulate money and upon
retirement decide to use it on services not
considered qualified deductible medical expenses
by the IRS. In that situation, you would pay taxes
on the HSA money (but no 10 percent withdrawal
penalty if you are over age 65) and then use it to
pay for those services.
In either case, many Americans would be better off
than they are with today's predominantly employer-
sponsored managed health care.
This article was originally published in the May/June 2004 issue
of Health Freedom