How to argue for Health Savings Accounts

Summary: The best defense of Health Savings Accounts is not that they promote wise spending and bring costs down. It’s that they are a step toward a more ethical tax policy.

Conservatives, Republicans, and free-market advocates often tout Health Savings Accounts (HSAs) as a means of controlling costs.  Yet, critics of HSAs will point to low customer satisfaction, or that patients with high deductibles might skimp on necessary care, or that they are ineffectiveDon't be a politician's lab mouse

How does one respond to these criticisms?  There are two general approaches: support HSAs because of their good consequences, or because they are part of a more just, fair, and moral policy.  Both are useful, depending on your audience, but the moral argument is your best bet.

Consequentialist arguments rest on in-depth knowledge of policy details and the results of empirical studies.  For HSAs, I recommend this post by John Goodman and this Cato Institute policy analysis by Michael Cannon. 

This method has its place, but if you start arguing from the results of empirical studies, opponents will surely cite studies that allegedly to show the opposite.  There’s a good chance your audience will just be confused when each side claims to debunk the other with “the latest” study.

To avoid this, address the heart of the matter: ethics.  As I’ve written before, people often base their political beliefs on what they perceive as moral, rather than on economic consequentialist grounds.   How likely is it that people arrive at their opinion based on moral grounds, but then cherry pick data from empirical studies that validate their morally-derived position?  If that’s the case, it’s more honest and worthwhile to address the ethics straight on.

So here’s a moral argument for HSAs:

Why are HSAs even a political issue in the first place?  They are a symptom of an unfair tax code, which includes a tax exemption for employer-provided insurance.  Most of us have insurance through our employer because employers need not pay taxes on money they spend on our insurance policy.  But if you don’t like the few choices your employer offers and want to buy another plan, you face a stiff tax penalty.  Further,  you’re taxed on income you spend on medical care.

But that’s not fair.  Politicians should not dictate whether you buy insurance on your own, through a membership group, or through your employer.  But the tax code does just that. 

It also punishes people who preferred to partially self-insure by spending their own money on medical care instead of expensive low-deductible policies.  HSAs do partially address this, but they can be a hassle, and they still allow politicians or politically-influenced government agents to decide what qualifies as a medical expense.  But that’s none of their business, but it surely encourages lobbyists to “encourage” politicians to include their product as a qualified medical expense.

Using the tax code to influence our purchases is social engineering, where politicians treats us like lab mice in a cage – by punishing us when our values clash with how they think we should live.  As Yaron Brook of the Ayn Rand Institute writes:

Government’s job is not to dictate your values but to protect them. In a free country, you choose values and then use your own money as a tool to achieve them. But a value-rigged tax policy reverses this cause and effect–it uses your money against you, bribing you with tax breaks that let you keep some of your earnings in exchange for abandoning your preferred values.

Since tax policy should be neutral to how we buy medical care and insurance.  Legislators should eliminate the tax exemption for employer-provided insurance and lower tax rates commensurately.   Then HSAs would have no place under a neutral tax system (as they’d be a bias toward high-deductible plans) and should be phased out.

If removing the tax exemption employer-provided insurance is not politically-feasible, then a second-best solution is to extend the tax exemption to all medical insurance and expenses.   This is where HSAs come in.  They are a step in this direction, but they should be eligible to everyone regardless of their insurance plan (not just a qualifying high-deductible plan). Such “Large HSAs” (also here) would allow consumers to buy medical care and insurance with tax-free earnings.

1 Comment

Filed under insurance, tax code, HSAs, morality

One response to “How to argue for Health Savings Accounts

  1. Nice post, Brian!

    I’m interested to know why you think it’s not politically feasible to eliminate the tax exemption for employer-provided insurance.

    Here’s my take: It would be enormously difficult for free-market advocates to sell a tax hike, politically speaking. It’s not just that people would be taxed, however, but that the employer-provided insurance would disappear, and people would be horrified to learn how much that cost them. They wouldn’t think about the fact that they were always paying for it before, likely more than they needed. They would just be aghast at the cost — and many people would continue in the same kind of expensive coverage they have now, and the media would be telling their sob stories left and right. It would be a disaster.

    I think that eliminating the tax exemption for employer-provided insurance would likely have to be part of a total overhaul of the tax system. That’s desirable — but not right now. Given the kinds of politicians we have, any change at the moment would likely be for the worse. (Plus exemptions would surely creep in again, as statist politicians like a complex tax code.) So in our current political climate, the best answer seems to be to put all health purchases on even footing, i.e. tax-exempt. Plus, that would enable people to adjust to gradual change as they learned about the most cost-effective way to buy health care, rather than be kicked in the rear by sudden change.

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