Health Savings Accounts (HSAs) were created as part of the Medicare drug legislation. The Bush administration has promoted this concept as a magic bullet that will both rein in the cost of health care and broaden coverage among the uninsured.
The facts, however, indicate otherwise — HSAs will increase the rolls of the uninsured, contribute to rising health care costs and, to top it all off, create an unprecedented tax loophole for the wealthy.
Individuals who enroll in high-deductible health insurance plans (HDHP), through their employers or on their own, may establish HSAs. HDHPs are health insurance plans that have much higher deductibles than regular health insurance plans, and therefore require those who are insured by them to pay much more money out of their own pockets before the health insurance kicks in.
For 2005, the maximum annual HSA contribution for family coverage is $5,250. However, the maximum annual out-of-pocket amount for HDHP family coverage is about twice that figure. In other words, a family with a high-deductible health insurance policy may have to spend $10,200 before their health insurance pays one penny.
On the other hand, these accounts provide a lucrative tax shelter for those in higher tax brackets. Contributions to the accounts are tax-deductible, earnings on the funds in the accounts accrue tax-free, and withdrawals from the account are not taxed if they are used to pay for out-of-pocket medical costs. These costs can include deductibles, co-payments, and uncovered medical costs (but not the premium costs of health insurance).
The tax-sheltering opportunities that HSAs provide are unprecedented. HSAs are the only feature of the tax code that provides for both tax-deductible deposits into accounts and tax-free withdrawals from the accounts. Furthermore, unlike Individual Retirement Accounts, there are no income limits on who can participate in HSAs. Finally, the wealthy can pay their deductible and other medically related expenses out-of-pocket, allowing the tax-free savings account to grow year after year.
A recent survey of nearly 1,000 primarily large employers by Mercer Human Resource Consulting found that nearly three-quarters of employers are somewhat likely or likely to offer Health Savings Accounts by 2006. In addition, the survey found that employers believe HSAs will be most attractive to healthy, higher-income workers. Just under half the employers surveyed reported that they believed their healthiest employees would be most likely to participate in HSAs, but over 60 percent of them said they believed their higher-paid employees would be most likely to use HSAs.
An analysis by MIT economist Jonathan Gruber, one of the nation’s leading health economists, finds that HSAs would likely cause the ranks of the uninsured to increase by 350,000. Healthier employees will switch to HSA plans, leaving older and sicker employees on regular plans, so that the regular insurance plan costs will shoot up even faster than when the pool as a whole was healthier. As a result, employers will drop these plans at a faster rate, leaving more employees uninsured.
As with any deduction, the higher an individual’s tax bracket, the greater subsidy the proposed deduction would provide. Uninsured low-income families that pay little or no taxes would receive no tax benefit from the deduction, and would not benefit in any way. Middle-income families in the 10 percent or 15 percent tax brackets would save no more than 10 cents to 15 cents of each dollar they would be forced to spend to purchase a high-deductible health insurance policy. These paltry savings are not enough to make even a less-comprehensive plan affordable.
The Center for Budget and Policy Priorities gives an example of a typical HDHP for a family of four. The plan would have a premium of $4,000 and a deductible of $3,350. A low- to moderate-income family in the 10 percent tax bracket would receive a $400 tax credit for the premium. A wealthy family would get $1,400, plus an additional $1,173 for medical expenses up to the deductible: a good tax shelter for the wealthy family. The low-income family probably could not afford the $300 per month net premium on top of paying the first $3,350 in medical bills.
HSAs are no cure for our already failing health care system. Instead, it is time to enact the “Medicare for All” bill to provide health care for everyone, regardless of income or employment status. Still better, in the long run, would be the adoption of a free, comprehensive national health service.