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Pros and Cons of Health Savings Accounts (HSAs)

August 23, 2004

Some readers of Health Freedom Watch are wondering how Health Savings Accounts (HSAs) will affect their freedom and whether they should open one. The recently enacted Medicare Rx law includes a provision that allows Americans to open HSAs (See Answering Your Questions about Health Savings Accounts). There are both pros and cons with HSAs that should be considered.

Let's look at the pros first. When consumers spend their own money, they are more cost-conscious. When someone else pays the bills (even if only in appearance), consumers tend to overconsume goods and services and push prices higher. The bottom line is that HSAs will provide strong economic incentives for more rational use of medical care, give patients strong incentives to demand higher quality care (after all they are paying for it), and help keep prices competitive.

Now the cons. HSAs keep health insurance and health care tied to the IRS code. For those worried about privacy, that might raise a serious concern. Additionally, HSAs strengthen the federal government's power to direct consumer behavior. Ed Crane, president of the Cato Institute, recently wrote: "Where is the dignity in a tax code that treats Americans like so many gerbils—do this and you get sugar water; do that and you get an electric shock?" Even so, allowing citizens to put money (tax free) into privately owned HSAs is a huge step away from employer-owned health insurance.

Best and Worst Case Scenarios with HSAs

Consider the best and worst case scenarios for using an HSA. In the best case you accumulate money in the account for health treatments considered deductible by the IRS and for services not covered by Medicare. (Seniors most likely won't be able to use the money for Medicare-covered services.)

In the worst case, you accumulate money and upon retirement decide to use it on services not considered qualified deductible medical expenses by the IRS. In that situation, you would pay taxes on the HSA money (but no 10 percent withdrawal penalty if you are over age 65) and then use it to pay for those services.

In either case, many Americans would be better off than they are with today's predominantly employer- sponsored managed health care.

This article was originally published in the May/June 2004 issue of Health Freedom Watch.