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 (HSA rules allow unused funds to be invested and carried over indefinitely, and the amounts can be withdrawn for non-health care expenses with a penalty plus taxes.)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.