NCPA - National Center for Policy Analysis


November 23, 2004

Critics argue that Health Savings Accounts (HSAs) will produce an adverse selection problem, where healthy individuals will leave comprehensive plans, thus increasing the premiums for unhealthy individuals.

This assumption is incorrect, says James H. Cardon, Professor of Economics at Brigham Young University:

  • Health insurance plan choices are linked more with income and other demographics than with health risks; there is no evidence of adverse selection in the health insurance market.
  • Health insurance and life insurance markets are very similar, and some studies indicate a negative relationship between risk and the amount of insurance purchased (people at risk will purchase less insurance).

Furthermore, explains Cardon:

  • Health Savings Accounts will not likely replace comprehensive coverage, but will instead act as an alternative to or replace existing low-coverage health plans.
  • Employers might use HSAs to replace traditional HMOs in the face of rising health care costs, but only if the HSAs are more efficient.
  • Markets will determine whether HSAs or more traditional plans work better; if companies find that HSAs are not a good benefit for employees, they will drop them.

Instead, HSAs will encourage the cost-sharing, by allowing individuals to cover small expenditures through a tax-preferred account while insurers cover catastrophic expenditures, explains Cardon.

Source: James H. Cardon, "Adverse Selection and Health Savings Accounts," Testimony of James H. Cardon before the Joint Economic Committee, United States Congress, September 22, 2004.


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