The Promise Of Healthy Change

HSAs can be improved by helping low earners save and offering free exams

Health savings accounts are the next big thing in medical care. As millions of Americans pick their medical plans for 2005, HSAs are showing up as one of their options. And that's only the start. By 2006 up to 75% of U.S. employers are expected to offer them since Corporate America sees HSAs as a major weapon in the fight against rising health costs.

We think HSAs have potential, especially for employees of large companies. The Bush Administration and conservatives in general strongly back HSAs, and in this partisan election season it's all too easy to evaluate them through a political lens. That would be a mistake. HSAs hold the promise of building a more consumer-driven market for medical services that could curb costs. They may not be the right option for everyone, but everyone should give them serious study.

HSAs allow employees to set up 401(k)-type savings accounts if they agree to buy high-deductible, low-premium catastrophic insurance plans. People can put pretax dollars up to the deductible into the account, invest it any way they want, use it for out-of-pocket medical expenses, and roll it over year after year if they don't use it up. And people can take their HSAs with them if they change jobs, just like their 401(k)s. Consumers are encouraged to find the best deals for lab tests, drugs, and specialist care. The idea is that individuals, because they see the real costs of their decisions, will be less likely to choose unnecessary tests and treatments. Moreover, consumers will learn how to avoid overpriced and inefficient medical-care providers, thus bringing a long-overdue whiff of real competition in the health-care sector. The result: lower medical costs.

Certainly, there are risks to HSAs.The most serious is the possibility of splitting off better-paid, healthier people who join HSAs and pay relatively low insurance premiums from lower-paid, sicker people who don't join and therefore wind up paying much more for their traditional plans. There is also the risk that people will skimp on medical care to save their HSA cash and then end up landing in expensive emergency rooms and intensive-care units later on.

Companies can alleviate these problems by kicking in money to HSAs for lower-paid workers who don't earn enough to set aside savings. And employers could offer free preventive care, such as exams and shots, to make sure no one skimps.

HSAs shift part of the risk of rising medical costs off corporate shoulders onto those of their employees, much as 401(k)s have done with pensions. Forcing individuals to bear more risks is a significant issue. Yet with annual medical costs averaging nearly $9,000 per employee, there's little doubt that U.S. corporations need to offload some of this burden. The sharp rise in medical-benefit costs in recent years has been one reason why U.S. companies are reluctant to hire new full-time employees.

Health savings accounts are not a panacea, but handled correctly, they could turn out to be a policy innovation that can make a difference, both for individuals and the country as a whole.

    Before it's here, it's on the Bloomberg Terminal.