As President Bush puts health savings accounts higher on his agenda, experts are debating whether they are a good idea for solving the problems of the uninsured.
“The more I think about these proposals, the more troubling I find them,” Leonard Burman, codirector of the Urban-Brookings Tax Policy Center, said in a teleconference sponsored by the Center on Budget and Policy Priorities (CBPP). “I don't think the idea [that people will be more cost conscious] is going to play out.”
Health savings accounts (HSAs) are accounts that employees contribute to in order to pay for the first several thousand dollars of their health care costs. The accounts are almost always combined with a high-deductible health insurance plan. Contributions to HSAs are tax free, as is money withdrawn for covered medical expenses. If the money is not used in a particular year, it can accumulate in the account.
The Galen Institute, an organization that supports consumer-driven health care, has a more positive view of HSAs. “HSAs give consumers even more control over their health spending decisions—and provide them with an incentive to spend wisely and save for future health care needs,” the institute notes in statement. But critics argue that sick people are not always in a position to shop around for care; that making consumers more cost conscious won't help lower health care costs because most health care spending is for expenses higher than the amount of the deductible, which is out of the consumers' control; and that HSAs tend to attract mostly healthy people, which will drive up premiums for sicker individuals who remain in more traditional plans.
President Bush highlighted HSAs in his State of the Union address, vowing to “strengthen health savings accounts—making sure individuals and small business employees can buy insurance with the same advantages that people working for big businesses now get.”
In a more detailed statement, White House officials said that the president “proposes making premiums for HSA-compatible insurance policies deductible from income taxes when [these policies are] purchased by individuals outside of work. In addition, an income tax credit would offset payroll taxes paid on premiums paid for their HSA policies.”
The president is also proposing to allow any spending on out-of-pocket health expenses incurred by HSA enrollees—up to $10,500 per family—to be tax free, not just expenses pertaining to the deductible, as allowed under current law. Such changes would make HSAs even more tempting, said Jason Furman, senior fellow at the CBPP. “HSAs are already an unprecedentedly favored tax vehicle. This takes a system already tilted and adds a new tax credit.”
If enacted, these proposals could make HSAs so attractive financially that they could begin to rival 401(k) plans as retirement savings vehicles, said Mr. Furman.
For example, suppose a family in a 25% tax bracket contributed the maximum $10,500 to an HSA that is invested at a 3% interest rate. Under the president's proposal, they would owe a payroll tax of $1,607, but they would also get a tax credit for that amount, so the entire $10,500 would stay in the account. If they contributed the same amount into a 401(k), they would still owe the payroll tax, but would not get a tax credit, so only $8,893 would be deposited into the 401(k) account. The HSA account would end up with $25,486 in it by 2036, versus $21,587 for the 401(k), Mr. Furman explained.
With such results, he said, “a lot of employers who offer 401(k) plans would have a lot less of an incentive to. Their employees could go on their own and get a much better deal from an HSA than from a 401(k), and avoid nondiscrimination rules.”
Barry Barnett, a principal in PricewaterhouseCoopers' human resource solutions practice, said if employers started canceling 401(k) plans and offering HSAs instead, employees and Congress would argue that there has to be some form of retirement benefit, especially as government tries to cut back on Social Security and Medicare entitlements.