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?
Macro-economic effects of an HSA regime?Post + Comments (70)