Research & Analysis

Trump's HSA Plan is Unlikely to Reduce Healthcare Costs

I’ll be spending the next few weeks in what is likely to prove a fruitless essay: digging into some of the policy proposals of the 45th president of the United States.

President-elect Trump has stated that he wants to replace the Obamacare exchange health care plans with Health Savings Accounts. HSAs, which are already available to most consumers, make financial sense for many people and in theory could slow the rise of health care costs by incentivizing people to spend less on health care. However, in the context of America's mainly employer-based health insurance market,[1] HSAs are not all that they’re cracked up to be.

Classical economic models

Usually paired with a high-deductible health insurance plan, HSAs give consumers a tax-deductible account of money to spend of healthcare out of pocket.[2] Since consumers are spending their own money and can see the costs, HSAs theoretically incentivize them to comparison shop for cheaper procedures, medications, and doctors, thereby incentivizing competition among health care providers and driving down costs. This is classical economic theory at work.

However, there is scant evidence that this theory holds true in the real world, because in reality the health care market resembles a form of imperfect competition with differentiated products, a limited number of providers, and enormous information asymmetries regarding quality and price (among other reasons). What is worse, human beings don’t shop the way classical economic models would expect them to, especially when making emotionally-fraught decisions about their health.

How people choose

As we see at open enrollment season, even with rising premiums many people who could have taken advantage of lower cost insurance do not. This isn't because people are stupid. Behavioral economics and recent evidence from Medicare Part D tells us that people are loath to switch health insurance providers, especially when it means spending hours pouring over piles of marketing materials and making murky projections about their future health care costs, to say nothing of switching doctors. It’s actually asking quite a lot of people to expend that kind of mental energy, even if they could save hundreds or thousands of dollars.

Consumers have a bias towards the status quo and have trouble making good decisions when faced with too many choices or incomplete information. Repealing the ACA would only exacerbate this problem by eliminating one of the key portals through which consumers received market information: the exchanges themselves.[3] Those who want to replace the ACA with HSAs believe someone shopping for health care to be a Homo economus capable of taking in a large amount of information and making economically rational decisions. This is not borne out by evidence. Often, when faced with myriad choices and complex choices, people choose not to choose.

Back to healthcare

Choice overload is only half of the problem. Modern healthcare is set up to keep the prices invisible from most consumers. Asymmetric information, especially regarding prices, is going to prevent consumers who do want to shop around from actually doing so. Large healthcare providers will still incentivize people to spend more money than they might otherwise for the sake of convenience, rather than encouraging consumers to shop around.

This is especially true since both consumers and health care providers have been primed for the last 70 years not to think consider patient-side costs. If your primary care doctor orders blood work and gives you the option to have it done immediately in the office or gives you the option to have it done yourself at an external clinic, most people will opt for the convenience of having the procedure done in the office, especially when prices remain opaque. I'll be examining price opacity in a future post, but if prices aren't clear consumers will not even be able to make informed decisions, even though their already disinclined to do so. 

In addition to price opacity, in later posts I’ll also be addressing the millions of people Trump’s plan will leave unable to afford health care, the effect on the poor, and the difficulty HSAs will face in driving down costs in a country where most people still won't have have HSAs.

[1] In the U.S., about half of the population receive health insurance from their employer (http://kff.org/other/state-indicator/total-population).

[2] Trump might just continue to allow individuals to utilize these accounts or he may advocate that the government fund them. The difference isn’t germane to this post.

[3] Although Healthcare.gov and the state exchanges have been deservedly derided for their early struggles, they now do a good job of showing people a more accurate estimate of what they might pay for healthcare and insurance.