Michael Cannon’s Large HSA Proposal

My flippant answer to the problems in health care has always been “give us back our money and get the hell out of the way.” The point is that the supposed expert managers (employers, insurers, government agencies) we have hired to run things for us have completely botched the job and should all be fired. After all, every penny that is spent on health care comes from us and it is all supposed to be spent for our benefit.

But, other than expanding HSAs I haven’t had any real idea on how to make that happen. Somehow I missed a long-standing proposal by Cato’s Michael Cannon for “Large HSAs.” I just recently came across a paper Cannon had published in 2008 that pretty thoroughly explains the idea.

The policy proposal is really pretty simple –

  • Increase HSA contribution limits to $8,000 per individual or $16,000 per family.
  • These contributions would replace the current exclusion for employer-sponsored health insurance, and (like the exclusion) would be free of both payroll and income taxes
  • Remove the requirement that HSAs be tied to a high deductible health plan – or any kind of insurance.
  • Allow HSA funds to be used to buy any kind of health insurance from any source, as well as pay directly for services.

The rest of the paper walks through the consequences of these policy changes – how employers and employees (and the unemployed) would likely react to the new conditions and the effects these behavioral changes would have on health care spending and availability. It also considers the political reactions.

Cannon supposes that most employers would use the money currently spent on benefits to raise workers’ wages, but the employee could then direct that money to be deposited into her HSA up to the limit. The employee could then buy coverage either from her employer or on the open market, or she could save the money to pay directly for care, or use some combination of coverage and cash according to her own preference.

Cannon makes the point that not all workers want high deductible health plans, some still prefer HMOS or first dollar coverage. So employers who institute HSA programs under current rules are disadvantaging those employees. The Large HSA would enable even these workers to buy the coverage that works best for them.

I would add a point I have made here repeatedly – that some not-small portion of the population is unable to cope with insurance of any kind. They can’t read or understand the contracts, they may have poor impulse control so find it difficult to make and keep appointments weeks in the future, and so on. For this reason I have favored John Goodman’s universal tax credit idea that would be paid to safety-net providers for those people who do not buy insurance. Cannon’s Large HSA proposal addresses this problem even better – it would enable this population to show up at a clinic when they have a medical need and pay for the service when they consume it.

Cannon also makes the important point that sharing risks between people is not the only form of “pooling” available. It is also possible to “pool” over time – so that the young healthy Greg Scandlen saves money to pay the expenses of the old decrepit Greg Scandlen many years later. HSAs facilitate this kind of pooling.

I’m not going to go into all of the discussions the paper explores here. Cannon considers the varying effects on lower versus higher wage workers, considers the issue of indexing the contribution amount, looks at the possible effects on medical costs, and so on.

He is not proposing this as a panacea for everything in health care. He doesn’t address Medicaid or Medicare, for example. The focus is more on creating a more equitable market for working people.

But this is a serious, innovative idea that deserves more attention than it got when it was first published.