An HSA Isn’t Insurance

My old representative when I lived in Georgia, Tom Price, has offered competing health care legislation to the Democrats’ bills. I’m not a health-care wonk, so I’m not going to get into the meat of his proposal, but apparently one of the key points is limiting the employer-provided health insurance tax deduction and extending a tax deduction to individuals purchasing insurance. While painful, the only way to fix health insurance in this country is to break the link between employment and insurance (and not substitute “Gov’t” for “Employer”, of course).

What I am writing about, instead, is criticism of his position on health care, as offered by Ezra Klein:

In the interview, Price explained that he couldn’t abide by an individual mandate because it meant Congress would define what constituted insurance, and that would harm awesome products of the market like Health Savings Accounts and catastrophic policies. Defining insurance, Price said, is not a good role for Congress.

This is a weird argument given that Rep. Price voted for the legislation that created and defined HSAs.

HSAs are accounts that Congress has blessed with a special exemption from taxation. That means they were created by an act of Congress (the Medicare Modernization Act of 2003, to be precise), and they are defined in legislation written by Congress. You can see the regulations here. Price is really saying that Congress shouldn’t define insurance in a way that harms other things that Congress has defined as insurance. But that makes for a rather worse soundbite. The argument here, however, is not a philosophical question about the reach of Congress. It’s an argument about what the minimum level of health-care insurance should look like.

There’s a problem with this criticism. Health Savings Accounts are not intended to be insurance. Health insurance premiums are amounts you spend every month to guard against having to pay huge amounts of money that you don’t expect to pay. Health Savings Accounts are tax-free accounts where you save money that you DO expect to pay. And fundamentally, the link Ezra provide explains this in a FAQ:

A Health Savings Account is an alternative to traditional health insurance; it is a savings product that offers a different way for consumers to pay for their health care. HSAs enable you to pay for current health expenses and save for future qualified medical and retiree health expenses on a tax-free basis.

You must be covered by a High Deductible Health Plan (HDHP) to be able to take advantage of HSAs. An HDHP generally costs less than what traditional health care coverage costs, so the money that you save on insurance can therefore be put into the Health Savings Account.

An HDHP is insurance. An HSA is a savings account. An HDHP is a true insurance product — risk-pooling amongst a large group of people with the expectation that only a portion of them will develop claims which require payment, and thus all pay only a small portion in premiums of what those claims might actually pay. An HSA is not an insurance product, it is simply a way to pay for day-to-day health care expenses tax-free. There is no risk-pooling, and there is no contract to cover any costs beyond what the individual has saved in his HSA.

Compare this situation to automobiles. In the auto world, there are two common types of insurance — actual collision/liability insurance, and warranties. Collision/liability insurance is similar to an HDHP, in that you are protecting yourself from the financial liability not only for your own vehicle, but for property damage and injury to yourself and others in excess of the cost of your vehicle. Warranties are similar to tradition American full-coverage health insurance, in that they are risk-pooled ways to ensure that mechanical defect of the car does not cost you, the owner, huge sums of money to fix. It is a true insurance product in that the cost of the warranty does not usually approach the full expected cost of a large repair (i.e. new engine, transmission, etc), and thus protects you from large expense. In many warranties, this also shields against cost of small repairs (failure of power window motor, radio malfunction, etc) which might not reach the sticker cost of the warranty, but are included in coverage to attract buyers.

Very few warranties, however, cover daily expenses. They don’t cover filling your car up with gas. They don’t cover oil changes. They don’t cover tires or other wear-and-tear items. They don’t cover getting the car detailed. They don’t cover smog inspection or registration fees. They don’t cover new stereo systems or body kits. This is where an HSA would fit into the mix. If Congress decided that automobiles were as important as health care, they could easily build a Car Savings Account plan that covers your expected car spending. It would give you as an owner a way to build a small tax-free account to cover planned automobile expenses, and likely include some things which might not be covered by traditional insurance (OTC medicines, LASIK, fertility treatments, etc). And if you had a Car Savings Account, people would probably look at you funny if you described it as insurance.

Price was fighting against an individual mandate not because Congress doesn’t know whether to call X or Y insurance, but because he realizes that the individual mandate will likely force people out of HDHP’s and into “qualified” insurance products, which will be host to a bunch of coverage requirements that an HDHP will not. For Ezra Klein, this is a feature, not a bug, because he wants to see individuals who are young and healthy and might choose the HDHP route forced into subsidizing care for everyone else by joining risk pools that will charge them a premium far in excess of their risk profile. Price understood that it’s not about Congress “defining” insurance. “Insurance” is a pretty well-known concept, which HDHPs fit and HSAs don’t. Price understands that a mandate, however, puts politicians in the position of what floor a plan must meet to be a qualified insurance plan, and that Congress will set that floor in such a way to effectively outlaw HDHPs and make HSAs pointless. He sees that a lot of individuals choose these types of plans, and he doesn’t want to take that choice away.

Klein’s last statement is correct: “It’s an argument about what the minimum level of health-care insurance should look like.” Tom Price wants you to have a choice to pick a low-premium, high-deductible plan that only covers you for catastrophic events, and gives you the ability to save and negotiate prices for day-to-day costs which you’ll pay out of pocket. Klein wants to take that choice away and force you into a much higher premium, full-service plan, which you’re unlikely to actually use. A Congressional mandate says that you MUST have care and that it MUST conform to what Congress defines as insurance — thus destroying some products (HDHPs) available in the market as insurance products today. Lack of a mandate ensures that the market provides insurance products that people want to buy, and the fact that Congress chose to also offer HSAs is a tax cut, not defining an insurance product.