The Senate Republicans’ latest plan to overhaul Obamacare includes a significant expansion of health savings accounts (HSAs), but exacerbates a key longstanding problem: HSAs provide significant tax benefits to those Americans who need the least help. That provides an opening for bipartisan compromise. Democrats and Republicans could find agreement on creating “equitable HSAs” — that is, HSAs that are subsidized more equally for everyone — to reform the health care system.
Twenty million Americans have HSAs. Participants in high-deductible insurance plans can contribute pre-tax dollars to HSAs and use those funds to pay out-of-pocket medical expenses. Patients are not locked into using only those providers that are “in network” and can price-shop between providers and between alternative courses of treatment. By giving consumers greater control over how their dollars are spent, HSAs hold the promise of allowing market forces to improve the health care delivery system.
The problem is that, as currently configured, HSAs are most valuable to high-income taxpayers who have the means to contribute the maximum annual amount (currently $3,400 for an individual and $6,750 for a family) even if they do not need to immediately spend it on health care. (HSA rules allow unused funds to be invested and carried over indefinitely, and the amounts can be withdrawn for non-health care expenses with a penalty plus taxes.) For people with plenty of money, the HSA is a tax-preferred savings vehicle.
HSAs also provide a tax subsidy for high-income earners. Because the amount of the tax benefit from HSA contributions is based on each taxpayer’s marginal tax rate, the federal government provides a larger HSA subsidy to people in higher tax brackets. For example, if a family in the top bracket makes the maximum $6,750 annual contribution, they realize tax savings of $2,673 per year based on the 39.6% top rate; the subsidy is less for people in lower brackets. This tax benefit adds up: According to the Congressional Budget Office, HSAs cost around $2.4 billion a year, with the benefits heavily weighted towards the upper end of the income range.
These flaws should be fixed. First, there is no good reason to focus the HSA subsidy on individuals with high marginal tax rates. A better approach is to set an appropriate subsidy level — say, $1,000 per household — and provide that amount to all taxpayers, regardless of income. For the lowest-income taxpayers, that would mean a direct annual payment of $1,000. This subsidy could be provided to taxpayers earning up to 400% of the poverty level, the top cutoff for premium tax-credit assistance under the Affordable Care Act. Each taxpayer above the direct subsidy level would receive a 33% tax credit for HSA contributions, up to a total of $3,000. Unfortunately, the Senate Republicans’ current plan goes in the other direction: It maintains the structure that favors people in higher tax brackets, and increases the amount that can be put into HSAs, allowing even greater tax savings for the wealthy.
The Senate Republicans’ proposal does loosen rules to allow HSA funds to be spent on premiums and nonprescription drugs — which would be a positive development (and could gain bipartisan support) if paired with a move toward equitable HSAs. But the Republican plan places further limits on the number of consumers who can avail themselves of HSAs: They would only be permitted for high-deductible plans that eliminate coverage for abortions.
That's a mistake. Congress should work to make HSAs more viable, not less. That means allowing HSA funds to be spent on procedures that are not covered by insurance and allowing people to pass unused funds in HSAs to their descendants. And HSAs should be expanded to include people who do not have high-deductible plans, as a means of defraying out-of-pocket expenses in employer-based plans or Medicare.
A more equitable HSA system that incorporated these ideas to promote access and affordability for all would cost in the neighborhood of $95 billion per year. Though not a trivial sum, that is well within the range of expenditures that Senate Republicans are considering in reduced tax credit subsidies ($50 billion per year) and expanding the current, inequitable HSAs (there are no official revenue estimates on the latest proposal, but this is expected to cost in the tens of billions per year).
Equitable health saving accounts can promote bipartisan goals in health care delivery: consumer-driven choice and greater access to affordable care. They should be favored by both sides, whatever the outcome of the current debates over the future of Obamacare.
--- Read Don’t Settle for Less: Key Steps to Maximize HSA Growth Potential on ThinkAdvisor.