AHCA’s incoherent policy on HSA

The American Health Care Act (AHCA) is a bill in search of a policy even as it overturns significant elements of traditional conservative health care policy strategy.

Health Savings Accounts (HSA) have been a core component of conservative health policy thought for a generation.  They work by allowing people to put money into a designated savings account on a tax advantaged basis.  The accounts are tied to a high deductible health plan.  If a person incurs significant claims, the HSA balance pays for those claims.  If a person has a good, healthy and low cost year, the balance grows.  Over the course of a life cycle, the HSA should grow from accumulation and investment when people are young and shrink when they are old.

There is a coherent theory of change with the use of HSA in both a single year and over a lifetime.  The single year theory of change is that high first dollar expenses will lead to lower utilization with minimal real health consequences as people become expert shoppers and evaluaters of health care need and value.  The lifetime theory of change is that an HSA can be built up while an individual is young and healthy and spent when an individual is old and sick.  It prefunds some of the expected health cost obligations on an individual level.

There are several major weaknesses with the HSA strategy.  First it imposes a high cost to people with consistent, recurrent, high cost chronic conditions.  A person with multiple sclerosis will never be able to accumulate any year over year savings in their HSA as they will have used their maximum allowed limit and hit their deductible by the second month of the policy year.  A high deductible plan imposes an illness tax on the chronically ill.  Secondly, the evidence has been weak that people are actually effective shoppers and evaluaters of health care necessity.

In the original version of the AHCA, the subsidies were set up so that they could be split.  If a person found a policy that cost less than the subsidy, the remaining portion of the subsidy would be deposited into an HSA.  This conformed to standard conservative health policy thinking.

The young and healthy people would buy low premium policies with high deductibles.  They would also deposit a significant amount of the subsidy into an HSA.  Over time, the HSA would grow until the cohort of people who were once young, healthy and cheap to cover are no longer young, no longer healthy and no longer cheap to cover.  At that point, the savings they had accumulated in their HSA would be available to pay for either out of pocket expenses  or premiums.

There is a major issue of founder’s debt in this scheme but if we handwave away the problem that killed Social Security privatization in 2005,it is mechanically coherent.

The Monday Manager’s amendment took away the ability of a subsidy to be split between a premium and the HSA.  This was done to get more anti-abortion votes on board.  It will have two effects.  It will limit choice as insurers have no reason to price their products underneath the subsidy point. The second is that it completely destroys the mechanical theory of change for an HSA system.  People with limited incomes will not accumulate reserves in their HSA.    And more importantly, the young can not partially pre-fund their health care expenses when they become old as they can’t rollover a partial subsidy into their HSA.

There is no coherent policy thought here.