April 5, 2006
OVERVIEW OF THE MAJOR FLAWS WITH HEALTH SAVINGS ACCOUNTS
Established under the 2003 Medicare drug
legislation, Health Savings Accounts (HSAs) are individual accounts in which
individuals who have a high-deductible health policy can save money to pay
out-of-pocket health expenses. In tax year 2006, any individual who
enrolls in a health plan with a deductible of at least $1,050 for individual
coverage and $2,100 for family coverage may establish an HSA.
Contributions to HSAs are tax deductible and may be placed in stocks, bonds, or
other investment vehicles, with the earnings accruing on a tax-free basis.
Withdrawals from HSA also are tax exempt as long as they are used for
out-of-pocket medical costs.
To encourage more people to open HSAs, the
Administration is proposing substantial new HSA tax subsidies, such as providing
a tax credit as well as a deduction for contributions to HSAs, making the
premium costs for HSA-related health plans purchased in the individual market
tax deductible (and providing refundable tax credits for them as well), and
increasing the amount that can be deposited in a HSA each year to $5,250 for an
individual and $10,500 for a couple or family. In total, the Treasury
estimates that the President’s proposals would cost $156 billion over ten years.
These proposals — and HSAs in general — suffer
from several serious problems:
HSAs would weaken the existing health insurance system and could actually
increase the number of uninsured.
The vast majority of
Americans receive health coverage through the employer-based system, under which
healthier and sicker employees are combined into a single insurance pool.
This “risk pooling” facilitates affordable coverage for everyone. If each
individual had to purchase insurance individually based on his or her own health
status, many sicker workers would be priced out of the market or would be unable
to buy coverage at any price.
HSAs, however, encourage
healthier and wealthier people to switch from comprehensive, low-deductible
coverage to high-deductible health plans in order to take advantage of the
unprecedented tax shelters that HSAs provide. (No other savings account
offers both tax-deductible contributions and tax-free withdrawals.)
As healthier and wealthier workers leave comprehensive employer-based plans to
take advantage of the HSA tax benefits, the pool of workers remaining in those
employer-based plans would
consist increasingly of sicker, less-affluent people, who are more costly to
cover. As comprehensive employer-based coverage became increasingly
costly, more and more employers likely would stop offering it.
new analysis by Jonathan
Gruber of M.I.T., one of the nation’s leading health economists, finds that the
Administration’s new HSA proposals would cause a net increase in the
number of uninsured Americans. While 3.8 million previously uninsured
people would gain health coverage through HSAs as a result of the
Administration’s proposals, 4.4 million people would become uninsured because
their employers would respond to the new tax breaks by dropping coverage and
they would not secure coverage on their own. The net effect would be to
increase the number of uninsured Americans by 600,000 despite spending more than
$10 billion annually.
HSAs shift risks to individuals, leave less-healthy individuals facing
substantial costs, and potentially result in worse health outcomes.
For people who need more
health care, the high-deductible insurance policies that must be used in
conjunction with HSAs can mean significantly greater out-of-pocket medical costs
than they would face under the comprehensive health insurance typically offered
today, which usually carries significantly lower deductibles. According to
the Kaiser Family Foundation and the Health Research Educational Trust, the
average deductible for an HSA-qualified family plan offered by employers in 2005
was $4,070, as compared to an average deductible of $679 for a preferred
provider organization (PPO) plan.
These increased out-of-pocket
costs are particularly burdensome for lower-income families because they have
less disposable income. If a medical condition or illness goes untreated
because individuals are unable to pay for appropriate care out of pocket, their
health could decline further, forcing them to make greater use of expensive
services like hospitalization in the future. As President Bush’s Council of
Economic Advisers (CEA) itself acknowledged, the greater cost sharing could
result in worse health outcomes for low-income families.
HSAs have little potential to improve the health insurance system.
HSA proponents argue that
by shifting more of the costs onto individuals, high-deductible plans will lead
people to become wiser health consumers. The HSA approach has limited
potential for cost containment, however, because most of the nation’s
health-care costs are for expensive procedures or treatments — often related to
major illnesses or end-of-life costs — whose costs exceed the deductibles under
high-deductible policies and consequently would still be paid by insurance
companies. For example, the top 10 percent of health-care users account
for about 70 percent of total health expenditures, while the bottom 50 percent
of users account for only three percent of total expenditures.
More fundamentally, for
consumer-driven health care to have any potential, consumers must have access to
easily digestible comparative and clinically based information on the quality
and costs of different doctors and hospitals, as well as information on which
medical procedures are (and are not) necessary in particular circumstances.
Also, a pooling mechanism must exist that enables less-healthy people to
purchase insurance at an affordable price. No
serious plan yet exists to address either of these needs.
HSAs provide the largest tax breaks to those who least need help paying
for health coverage.
Higher-income people receive a
larger tax break for each dollar they put into an HSA than lower-income people
do because they are in a higher tax bracket. For example, someone in the
35-percent tax bracket saves 35 cents in taxes for each dollar he or she puts
into an HSA, while someone who is in the zero, 10-percent, or 15-percent bracket
saves no more than 15 cents in taxes for each dollar put into the account.
In addition, higher-income
people generally can afford to put more money into HSAs each year than
lower-income people can, which makes HSAs even more valuable to them. The
Administration’s proposal to substantially increase the HSA contribution limit
would exacerbate this disparity and
enable affluent households to use HSAs as highly lucrative tax shelters, in
which they could amass hundreds of thousands of dollars tax free.
Attempting to counter the fact
that HSAs are disproportionately attractive to high-income households,
Administration officials have cited a study showing that families with incomes
lower than $50,000 buy 40 percent of the insurance policies bought in
conjunction with HSAs. This study, however,
cannot be used to draw general
conclusions about HSAs because it applied to only a portion of HSA
enrollees: those in the individual health insurance market, who generally
have lower incomes than HSA enrollees who have employer-based coverage.
Other studies show that HSA users tend to disproportionately have higher
incomes. For example, a new Government Accountability Office survey finds
that federal employees who receive insurance through the Federal Employee Health
Benefits Program (FEHBP) and are enrolled in an HSA are
twice as likely to have incomes
over $75,000 as enrollees in other FEHBP plans.
HSAs would significantly increase the federal budget deficit, especially in
future decades when the nation already will be under fiscal strain.
The Administration estimates
that its new HSA proposals would
cost $156 billion over ten years. This cost would be “paid for” through
higher deficits, since the Administration has offered no way to offset the cost
of these proposals.
Even this significant $156
billion estimate understates the true costs of the proposals over the longer
term. The Administration’s proposals would encourage households —
especially affluent households that can afford to save larger amounts — to shift
part of their savings from 401(k)s and IRAs to HSAs in order to benefit from the
latter’s greater tax advantages. (For example, HSAs can be withdrawn tax
free in retirement if they are used for health-related expenses, while 401(k)
withdrawals are taxed.) In future decades, as more and more funds that
would have been saved in 401(k)s and taxed upon withdrawal are saved in HSAs
instead and withdrawn tax free, the costs of these proposals would mushroom.
Some 46 million Americans have
no health insurance, and the health-care system is not delivering sufficiently
high-quality, cost-effective care to many other Americans. Health Savings
Accounts do not address these challenges. Instead, they would increase
deficits while favoring healthy, affluent individuals and weakening existing
sources of health insurance.
 According to CEA, “There were,
however, some health benefits [from reduced cost sharing and greater health
expenditures] for select subpopulations of low-income and chronically ill
individuals, suggesting that care should be taken not to expose lower-income
families to excessively high cost sharing relative to their income.” CEA,
Economic Report of the President 2006, p. 95.