Association for Public Policy Analysis & Management

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 linking insurance coverage with tax incentives for saving, but their rules are highly complex. How consumers perceive the features of these contracts may dampen any cost reduction and produce unintended welfare effects by distorting plan choices. I empirically examine HSA saving and deductible choices in the context of a large health insurer that fully replaced its traditional low-deductible health insurance offered to its own employees with a menu of HDHPs. I develop and estimate a discrete choice model that extends a standard model of insurance plan choice to incorporate HSA saving. In the years following the switch, the insurer adjusted its menu of insurance deductibles, premiums, and matching rates for HSA contributions, providing identifying variation in prices. Detailed panel-level data includes insurance deductible choices, contributions by both employees and employer to the HSA and 401(k), medical and pharmacy claims of the employees and any dependents, demographics, and information on salary and job characteristics. I find over two-thirds of the marginal HSA dollar is allocated to reduce the deductible, which counteracts the contract's cost-control incentives and leads consumers to choose different insurance plans than they would without an HSA. In this setting, switching to HDHPs did not lower costs as employees offset higher deductibles through HSA contributions. Based on the model's estimates of risk aversion, the risk protection benefits of using HSAs to reduce the deductible are modest relative to the tax expenditure on HSA contributions. 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.