I am not an economist. I am not trained as one. I do not play one on the blog. But I have a health policy question with potential macro-economic implications?
What effect does a low actuarial value/catastrophic coverage paired with Health Savings Accounts (HSA) regime have on national savings?
Insurance (of any sort) has two major economic value propositions. First, it pools risk so that unpayable costs become payable. This encourages productive risk taking in the face of tail risk. Secondly, because of the pooling function, it reduces the variance faced by any individual in the pool. Lower variance means more predictability which means less uncertainty. Properly priced insurance will lead to lower net social savings as the risk is distributed and people are not in a position to be run over by a five sigma event.
A good real world illustration is the Chinese savings rate. China (as of 2015) has a massive savings rate. The country as a whole saves roughly 50% of GDP. Some of this is due to a government decision to tamp down on consumption in order to fuel investment. A good portion however is due to the immature insurance market. People can not easily buy good health insurance, so they save in case a family member gets cancer. People can not buy long term annuiuties to protect their retirement against the risk of living long and well, so they save. People are attempting to self-insurer. Each person or each family becomes their own risk pool and their own absorber of tail risk. The vast majority of people never get hit in the face by their tail risk, so they effectively oversave while the people who are hit by tail risk are still screwed as they can’t save enough given average lifetime earnings.
The Chinese government is moving towards national social insurance partially in order to reduce the savings rate and increase domestic consumption. People who are hit with extreme tail risk will be better protected while the average person will pay a little bit less to get the same protection. Net society-wide savings, all else being equal, will decline.
Now let’s move over to the HSA world that we may be entering. The theory of change is that people will be price sensitive to their basic medical care as they’ll pay for it directly with pre-tax personal dollars which could otherwise be rolled over into future years. This will lead to both lower utilization and more cost effective utilization which will bend the cost curve while also improving the quality of care. I’m skeptical of those outcome claims but that is irrelevant. Out of pocket maximums for some of the plans floating around start at $10,000 or more as the minimal acceptable level of coverage (55% AV) and go higher depending on the plan we look at. After that, insurance would kick in to cover hit by a meteor coverage. What does this do to net savings?
Right now we know that most Americans’ will have issues meeting a surprise expense of $400. Plenty of Americans either have minimal savings or what savings they do have are highly illiquid. Some of the smarter HSA proposals address this problem by using the Federal government’s immense liquidity to do a one time transfer of $1,000 to an HSA to start people off with some medically liquid savings. But then people are on their own to build up sufficient savings to cover the high probability event of either getting old or getting sick.
For healthy individuals with significant assets including tax advantaged retirement savings, HSA’s probably are a shift in the composition of tax advantaged savings and not a significant net change in total saved. A one off bad year where the out of pocket maximum is met from reserves would not have a significant change in behavior. Individuals with chronic conditions and significant net savings would see a permanent yearly net reduction in their standard of living equal to the difference between the out of pocket maximum minus lower premiums and any pass through on higher wages as the HSA is merely a short term tax shelter where money goes in on Friday and out on Monday to pay the bills.
For people with significant incomes and assets, the HSA regime is economically not too interesting except that it expands yet another tax shelter.
What about people with neither significant incomes and assets. How does this play out economically?
The insurance value of “catastrophic” is currently fairly low. Employer Sponsored Coverage has an actuarial value of about 85%. That, with current essential health benefits, means about a $1,800 deductible and no other cost sharing. That is still an “oh my god” expense for a lot of people with serious disruption. People who are relatively healthy could probably handle a one time shock through debt but if there are multiple shocks in a five to ten year period, the second shock won’t have the reserves in place to compensate. So do these people with a fairly high marginal propensity to consume and a low marginal propensity to save start saving more? And if they do, mechanically that means less consumption and more savings.
Less consumption and more savings when it happens to a lot of people all at once is also known as a recession. Over the long run, more savings theoretically will lead to higher investment which should lead to higher productivity which should lead to higher wages which should lead to a better ability to weather shocks and surprises. There are a lot of “shoulds” in that sentence. The critical one is the linkage between higher productivity and wages. That mechanism has been broken for years.
Furthermore we are in an environment where long term rates are very low, short term rates are still under 1% and capacity utilization is below long term averages. The world is still awash in capital and savings. Do we need more savings as we unravel the low dollar catastrophic insurance function of how health financing system?
I don’t know, I am not an economist. But where and who should I be reading to ask these questions and learn something?