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When Health Savings Accounts are being pitched, some reasons to be wary

Introduction by Croakey: Health Savings Accounts let people set aside money on a pre-tax basis to pay for qualified medical expenses. In some countries, these accounts (sometimes also called Medical Savings Accounts) are seen as a way of reducing individuals’ out-of-pocket healthcare costs.

According to a 2010 paper by the World Health Organization, such accounts have been used in countries as diverse as Singapore, China, the United States and South Africa, despite their drawbacks.

From time to time, lobby groups urge Australian governments to introduce Health Savings Accounts, as happened again just recently.

Health policy analyst Charles Maskell-Knight explains below why this is a bad idea.


Charles Maskell-Knight writes:

In The Zap this week I reported that the Australian Dental Association (ADA) in its recent pre-budget submission asked the Government to “consider enabling Health Savings Accounts”.

Several years ago the Australian Medical Association (AMA) released a position statement on these accounts, arguing that “the introduction of Health Savings Accounts could improve access to care for patients by supporting them to invest over the long term to meet their future healthcare needs, as part of a balanced model of public and private health care delivery”.

In The Zap I wrote that many Health Ministers over the years had asked for a briefing on Health Savings Accounts. Now I don’t know if Minister Mark Butler has any interest in the idea, but if he has, this is what he should be told.

When organisations like the ADA and the AMA lobby on public health issues, they are usually seeking better health outcomes for the community. When they lobby on health financing issues, they are almost always seeking better financial outcomes for their members. That is their job, after all.

The ADA gives the game away when it states “by utilising tax deductibility to incentivise individuals to save for their future ancillary health care spending, Australians could be rewarded for proactively managing their health care funding in a way that overcomes the limitations of extras cover and retains their freedom of choice in which practitioner they see”.

The AMA says that “Health Savings Accounts [should] operate with the primary objective of helping patients meet the out of-pocket health costs that are not otherwise covered by public and private health insurance”.

The ADA has a long history of opposition to the preferred provider arrangements used by some private health insurers to try and limit out-of-pocket costs for policy holders.

Health Savings Accounts as envisaged by the ADA would create a pool of dedicated funds that could be used to pay whichever private provider an individual chose to use whatever the provider wanted to charge, without the imposition affecting the rest of an individual’s or household’s budget. And if the pool was enhanced by tax deductibility, so much the better.

Listing the negatives

I am unaware of any research on this issue, but it is plausible that all but the most egregious specialist and dentist overcharging is mitigated by the knowledge that patients have to fund the resultant out-of-pocket costs by reducing other expenditure.

If that constraint was removed, and out-of-pocket costs could be met from a fund (partly supported by taxpayers) outside the normal household budget, that mitigation would be weakened. That is the first reason Health Savings Accounts are a bad idea.

The second reason is that any kind of preferential taxation treatment would produce regressive results. Using the tax scales to apply from 1 July, simple tax deductibility would mean that a $1,000 contribution to their Health Savings Account would cost a person on $90,000 a net $700, while it would cost a person on $200,000 a net $550.

Of course it would be possible, at the cost of some administrative complexity, to create a system where the proportion of a contribution that was tax deductible declined with income. However, even if a neutral result for people making a contribution could be achieved, taxpayers unable to afford a contribution would still be subsidising contributors in better financial circumstances.

The third reason Health Savings Accounts are a bad idea is that hardly anybody will save the right amount – because nobody knows what their future health will be like. Optimists will not save enough; while pessimists will save too much.

If Health Savings Accounts become an important element in financing access to health services, what happens to optimists when their accounts run dry? Will they have to fall back on some public safety net? Or will they just have to fund their dental crowns or orthopaedic out-of-pocket costs from their usual income – assuming it is high enough.

What happens to the excess balances in the Health Savings Accounts of the pessimists who save too much and die before they have exhausted their accounts? Will these amounts be folded into their estates and distributed to their heirs? If they are treated as part of a person’s assets, some older people would eschew necessary treatment in the interests of leaving a larger inheritance.

However, given the accounts would have received taxpayer support on the basis that they would only be used for health costs, there is a strong argument that the amount of taxpayer support should be returned to the government – meaning an elaborate record-keeping system would be needed to identify the quantum of support that had been received.

There is of course a way around the problem of imperfect knowledge leading to under- and over-saving. People could contribute funding to a common pool, and could then draw on the pool as required. The shortfall in contributions by people living longer and drawing more than expected would be made up for by the surplus in contributions from people drawing less and dying sooner than expected.

It could be called something like… I don’t know, maybe “health insurance”?

And, funded by government through a progressive taxation system, it could be called Medicare.


• Charles Maskell-Knight PSM was a senior public servant in the Commonwealth Department of Health for over 25 years before retiring in 2021.  He worked as a senior adviser to the Aged Care Royal Commission in 2019-20. He is a member of Croakey Health Media. Follow on X/Twitter at @CharlesAndrewMK.


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