HSA's are a relatively new idea in the U.S., so it may come as a surprise that another industrialized nation has several years experience with the accounts. But they have enjoyed good market penetration in South Africa for long enough to examine some of the results, and yesterday the Wall Street Journal took a look. The majority of the population has publicly funded insurance, mostly due to ability to pay. About 15% have private insurance, most of which are HSA-style plans. Discovery Health, the key HSA provider, has had extensive success with HSA plans and seen its stock price double in a year.
As President Bush proposes changes to make HSA's easier to purchase, it's important to look at other nation's experience with them. And South Africa serves as a troublesome teacher.
The introduction HSAs had some unexpected effects which have wreaked havoc on the country's insurance system. For one, plans are keeping costs low by competing over the healthiest customers. David Adler of the New Republic explored the effect of HSAs in South Africa and wrote:
The South African story, then, is a move from a noncompetitive insurance environment to a competitive one, but the competition wasn't by hospitals to provide the best or cheapest care, but rather among insurers to get the healthiest patients. Consumer-driven plans are central to this process, because they are ideal for "risk-selecting" the young and fit, who have flocked to the new plans. Not in need of expensive medical care, the healthy could watch their account balances grow, leaving the truly sick behind in traditional plans.
Fortunately, South Africa is stepping in to keep insurance companies from this practice. As the Wall Street Journal noted,
Starting in about a year, companies whose insured populations are disproportionately filled with the young and healthy will have to pay a penalty.
The strategy has gotten so out of hand that South Africa, a nation that has in the past accepted very little insurance regulation, is intervening.
Unfortunately, it gets worse. Not only has have the plans stratified the sick versus the elderly, they haven't contained costs at all. In fact, costs have risen.
Between 1996 and 2001, the cost of specialty care increased 43 percent, and the cost of hospital care rose 65 percent. This represents a marked increase from the inflation rates for the five years prior. There have also been substantial increases in plans' administrative costs (which include profits).
So there you have it. The two things that U.S. policy makers fear (decimation of insurance and inability to restrain costs) have already played out in South Africa. HSA backers make a lot of promises, but there's little evidence that all of their lofty goals will play out in the actual U.S. insurance market. South Africa's experience alone is reason to be very skeptical.