Health Insurance Design Meets Tax Incentives: Consumer Responses to Complex Contracts

Recent efforts to curb U.S. health care costs have centered on consumer decision-making in insurance. An important innovation in health insurance design is a high-deductible health plan (HDHP) paired with a health savings account (HSA). These contracts aim to control costs by combining insurance choices with tax incentives for saving. Yet the way consumers perceive the complex features of these contracts may dampen any cost reduction and produce unintended welfare effects by distorting plan choices. Using a novel administrative dataset linking health insurance choices, medical claims, and saving in HSAs and 401(k)s from a large U.S. health insurer, I develop and estimate a model of insurance plan choice that integrates HSA saving with deductible choices. The choice model includes risk aversion and a “myopia” parameter that measures the proportion of the marginal HSA dollar allocated toward reducing current health care costs versus saving for future consumption. I estimate 68 percent of HSA saving at the margin is to reduce the deductible, which counteracts the contract's cost-control incentives and leads consumers to choose different high-deductible plans than they otherwise would without an HSA. Several counterfactual analyses quantify the welfare implications of myopia on moral hazard, the consumption smoothing benefits from insurance, and plan enrollment and premiums. By using HSA saving to pay for current costs, the reduction in moral hazard is only 27 percent of what it would be if consumers faced the same deductible without an HSA. While the consumption smoothing benefits from using the HSA to reduce the deductible are worth $765 per contract based on the model’s risk aversion estimates, these gains are small relative to the cost of raising public funds to finance the tax subsidy on HSA contributions. Using the HSA for short-term costs also induces consumers to choose different deductibles than they otherwise would without an HSA. In this context, there is evidence of advantageous selection, with premium differences of up to $1,000 based on whether the contract offers an HSA or only an HDHP. Health insurance contracts that require sophisticated consumer decision-making may work well in theory, but may be less effective and lead to unintended consequences in practice.