There's a big push for so-called consumer-driven healthcare plans. These are high-deductible health insurance plans tied to either a health reimbursement account (HRA) or a health savings account (HSA). Put somewhat differently, it’s a high deductible catastrophic insurance policy with an attached tax-sheltered account. You've probably been offered the option joining one during benefit season. (The basic difference for employees is the HRA is owned and funded by employers while an HSA is owned by the employee. Like a 401(k), the employees can take the tax-sheltered HSA savings account with them when they change jobs.)
There is a lot of economic theory justifying these plans, much of it similar to the rhetoric that promoted the rise of the 401(k). Well, three decades later the 401(k) has turned out to be a deeply flawed pension. My worry is that the same is likely to be true with consumer-driven healthcare plans, as least as they're currently designed.
A motivating idea behind these plans is that you'll be a smarter consumer of healthcare services if more of your own money is on the line. A cost-conscious consumer will also fight against "moral hazard," the catchphrase economists use to describe the fact that insurance can change behavior. The writer Malcolm Gladwell describes moral hazard this way: If your office gives you and your co-workers all the free Pepsi you want you’ll drink more Pepsi than you would have otherwise. With more money of your own money on the line to pay for those Pepsis you'll grab less of them. What's true for Pepsi holds for health care insurance.
Moral hazard isn't as big a deal as it's often made out. Consumers aren't getting anywhere near the kind of pricing information they need to shop smart. Have you looked at a hospital bill lately? And it's yet one more financial responsibility that is overwhelming people. We're already putting in long hours at work, raising families, managing our 401(k), trying to diet and exercise, volunteer in the community, participate in elections and…. Well, you get the point. (There are other objections that have to do with unique aspects of medical care and medical insurance care. I'm touching on some personal finance reasons for skepticism.)
Still, the these accounts are growing. In 2011 there was $12.4 billion in these plans, spread out among 8.4 million accounts. That’s up from 1.3 million accounts with $873 million in assets in 2006, according to the Employee Benefits Research Institute (EBRI). It represents about 12 percent of the privately insured market, says Paul Fronstin in the EBRI study, Health Savings Accounts and Health Reimbursement Arrangements: Assets, Account balances, and Rollovers, 2006-2011.
Two aspects of the report stood out at first glance. The average account balance is small, $1,470 in 2011. It isn’t a lot of money for dealing with medical bills.
It’s also disappointing that account balance differences between those with healthier behavior and those with less healthy habits were pretty slim. The widespread expectation that cost-conscious decision making would lead to higher account balances isn’t reflected in the data. Let's learn from the past rather than replicate the mistakes of the 401(k).