Medicare HSA Bill Returns

Congress is considering a bill that could help some clients who are enrolled in Medicare and frustrate others: H.R. 7435, the Health Savings for Seniors Act.

The bill would let Medicare enrollees contribute to health savings accounts.

The measure would offset the cost of that long-sought change by keeping HSA holders from using tax-free withdrawals from the accounts to pay the premiums for their Medicare Part B outpatient and physician coverage, or for their Medicare Advantage coverage.

What It Means

Insurance and retirement advisors with clients who were counting on using HSAs to pay Medicare Part B or Medicare Advantage premiums should be sure the clients know they may have to add income taxes on the withdrawals to their cost calculations, or find other mechanisms for paying the Medicare coverage premiums.

HSA History

Between the mid-1970s and the early 2000s, comprehensive managed care plans became dominant players in the U.S. health finance system. The plans offered a soup-to-nuts approach to coverage. For most care, consumers simply paid small copayments.

The idea was that physicians should manage patients’ use of care in a sensible way, and the out-of-pocket costs should exist simply to keep lonely or bored consumers from getting unnecessary care.

Starting in the early 2000s, legal restrictions limited plans’ ability to manage patients’ use of care, and overall costs soared. Plans believed that one reason for the increases was that the plans paid almost all bills, and patients had no financial incentive to avoid unnecessary use of care or seek out high-quality, low-cost providers.

Congress created the HSA program to give consumers an incentive to save the money to pay their own routine health care bills.

The HSA Law

The HSA program is open to consumers who have high-deductible health coverage that meets HSA program criteria established by the federal HSA law.

For 2022, the minimum HSA deductible is $1,400 for self-only coverage and $2,800 for family coverage. The limit on all expenses for a qualified high-deductible health plan, including the deductibles, is $7,050 for self-only coverage and $14,100 for family coverage.

Health policy analysts call the strategy of requiring HSA holders to have health coverage with a minimum deductible level giving them “skin in the game.”

HSA supporters hope that having relatively high deductibles will encourage consumers to shop carefully for care, by increasing the odds that the first dollars HSA holders spend on care will come from their own pockets.

HSAs and Medicare

Under the current HSA law, consumers can use HSA money to pay the premiums for Medicare Part B and Medicare Advantage coverage.

Consumers cannot use HSA money to pay Medicare supplement insurance premiums.

The Tax Expenditures

Consumers who use HSA and follow HSA rules can exclude HSA contributions from taxable income, exclude investment growth on HSA assets from taxable income, and use withdrawals to pay for eligible health expenses without paying income taxes on the withdrawals.

From the perspective of federal budget writers, the HSA program is a “tax expenditure,” meaning that the federal government is giving up a large amount of federal income tax revenue to let the HSA provision exist.

Treasury Department officials estimate, in the 2022 tax expenditure report, that the HSA program as a whole cost the federal government about $4.5 billion in tax revenue, and that it could cost the government $57 billion in revenue for the period from 2021 through 2030.

One way HSA program architects limited the size of HSA program tax expenditures was to set tight limits on use of HSAs.

One restriction keeps people who are eligible for Medicare from contributing to HSAs.

H.R. 7435

Rep. Ami Bera, D-Calif., introduced the new Medicare HSA bill together with Rep. Jason Smith, D-Mo., April 7.

The new bill is similar to H.R. 3796, a bill that Bera and Smith introduced in 2019, during the previous Congress.

At this point, Bera and Smith are the only sponsors of H.R. 7435, but H.R. 3796 attracted a total of five Democratic and five Republican co-sponsors.

The list of supporters of the new bill includes the Better Medicare Alliance and the National Association of Health Underwriters.

The Congressional Budget Office predicted in 2018, when it analyzed H.R. 6309, a bill that would have simply let Medicare enrollees contribute to HSAs without eliminating HSA holders’ ability to use the account assets to pay Medicare premiums, that simply letting Medicare enrollees contribute to HSAs would cost the government a total of about $5.5 billion over 10 years, including both on-budget effects and effects not directly included in federal budget forecasts.

That amount, by itself, is close to 10% of the Treasury Department’s 10-year tax expenditure forecast for the HSA program as a whole.

A Wild Card

Members of Congress are entering what they see as the last time they can pass major legislation before they go home to focus on campaigning for the November midterm elections.

Lawmakers will be debating aid for Ukraine and COVID-19 pandemic response.

Congressional leaders could use inclusion of little-known but popular, bipartisan bills such as H.R. 7435 to win support for the Ukraine and pandemic response bills.

 (Image: Adobe Stock)