And your scenario is chock full of arbitrary assumptions that are based on nothing more than your desire to show that HSAs can’t work. It’s not a credible way to approach the question.

Your new layout sucks, btw.

Au contraire. That’s precisely the argument that has been regularly made by all manner of anti-market types, including Paul Krugman: “Private markets for health insurance suffer from … the economic problem known as “adverse selection,” in which bad risks drive out good.â€?

I’ll try to explain the math to you.

Rather than relying on this kind of tortured hypothetical (and its arbitrary assumptions), lets take a look at actual human behavior in the real world.

In a normal group policy, everybody pays in roughly the same amount in premiums. So you have 100 people in your company, all paying in $500/month to the insurance company. That’s a contribution of $600,000 into the insurance company, and they use that money to pay for health costs, administrate the plan, and make a profit. Let’s say the plan spends $480,000 on medical costs (a respectable 80% medical loss ratio). 10 of the 100 employees have acute diabetes, heart disease, cancer, or other diseases that are either chronic or very expensive. These 10 employees account for $336,000 of those expenditures (this is how it is in the real world, where 10% of the population drives 70% of the costs). The other $144,000 in medical expenses is spread out evenly among the other 90 employees. So we have a situation where the 10 sick employees use $33,600 in health care each, while the remaining 90 use $1,600 each. The health plan has $120,000 left over to administrate the plan and take for profit.

The goal of an HSA is to save money for people and the system by providing them incentive to cut costs on their health care. Let’s look at what happens when these 100 people move to an HSA. Now, instead of paying $500 a month in premiums, everybody pays $100 a month. Now the health insurance company is taking in $120,000 in premiums. Everybody puts the remaining $4,800 into their HSA as their reserve to pay for health expenditures as they come up. We’ll take the pro-HSA crowd on face value and assume that it really works. Everybody (even the sick who have no incentive to save, because they’ll blow through their $5,000 deductible now matter how hard they try) lowers their medical expenses. The healthy people find $100 to save, and the sick people each lower their expenses by $2,100. The medical expenses in this new system drop to $450,000 from $480,000.

A success, right? But wait. Because of the way HSAs are structured, the money comes out a little different for the insurance company. The 90 healthy people used $1,500 each. So, in addition to their $1,200 in premiums, the healthy people each contribute $1,500 of their deductibles. They then each pocket the $3,300 remaining in their HSA. A big win for them.

The 10 sick people used $31,500 each on health care. They spent $1,200 in premiums, their whole $5,000 deductible (so they put an extra $200 into the pot) AND cost the insurance company $26,500 each for the costs that came in above the dedutible. So, the insurance company collected $120,000 in premiums and wound up spending $265,000 in medical expenses for the 10 sick employees. That $297,000 the healthy employees pocketed came out of the insurance company coffers, so they had no money left over to subsidize the expenses of the sick 10 people. This insurance company goes out of business.

The whole point the anti-HSA people are trying to make is that these plans only work for insurance companies if only healthy people are in them. As soon as you put a sick person in an HSA, they’ll blow through their deductible now matter how hard they try, eat up whatever small premium amounts they collected, and the system fails. Any solution that only works for healthy people is obviously not a solution to the health care crisis.