Health Savings Accounts: Implications for Health Spending

Enrollment in Health Savings Accounts (HSAs) and the high deductible health insurance plans that go with them is increasing rapidly. The accounts benefit from favorable tax status, and President Bush has proposed further expanding tax incentives that favor HSAs. The goal of these policies is to encourage more efficient use of health care resources by improving consumer incentives. This could result in lower health expenditures and lower health insurance premiums. Much has been written in the popular press about HSAs recently, but unfortunately many have incorrectly interpreted the underlying economics. This paper clarifies the incentive and spending effects of HSAs both conceptually and through simulation modeling. We find that switching an average risk pool from a traditional Preferred Provider Organization plan to a typical HS A plan would decrease their spending by five percent.