Commentary

Health Savings Accounts Work

In December 2003, President Bush signed a health-care law that had two major components. The first was the new Medicare prescription drug benefit that took effect last month. That big-government program has been widely panned as a disaster. The second was a new health insurance option called health savings accounts, or HSAs, which became available in January 2004.

Unlike the Medicare drug program, the response to HSAs has been overwhelmingly positive. In just two years, three million Americans have signed up for an HSA. More than one-third of HSA enrollees were previously uninsured, which means HSAs already may have reduced the number of uninsured by 1 million. Deloitte Consulting L.L.P. reports that, for two years running, insurance premiums for HSAs and similar plans rose at about one-third the rate of increase for other types of coverage.

So in his State of the Union address, Bush proposed expanding and enhancing HSAs. His new Medicare entitlement? He didn’t even mention it. Go figure.

Fortunately, his HSA proposals would make health coverage and care better and more affordable for hundreds of millions of Americans.

HSAs couple high-deductible health insurance with a tax-free savings account (the HSA) for out-of-pocket medical expenses. Individuals and/or employers can contribute money to HSAs tax-free up to the amount of the insurance deductible. HSAs must be coupled with insurance that has a deductible of at least $1,050 for individuals and $2,100 for families.

HSA funds may be withdrawn tax-free for any medical expenses. Once expenses reach the deductible, insurance takes over. Any funds that remain in the HSA roll over from year to year and grow tax-free.

Right off the bat, HSAs save money because high-deductible insurance is cheaper than low-deductible coverage. The Kaiser Family Foundation reports that the difference in premiums between the average HSA-compatible policy and the average for all types of insurance is $1,324. That is more than enough savings to cover the average annual HSA deductible ($1,901) in just two years. Sometimes, the savings covers the entire deductible in the first year.

HSAs also let consumers control more of their health-care dollars and decisions. Since consumers own the money that covers their out-of-pocket expenses, they can see any doctors they like, whenever they like. At the same time, patients scrutinize their medical bills and their doctors’ recommendations more carefully because it is their money on the line.

The chronically ill, however, likely would use up all their HSA deposits in a given year and have little opportunity to save for future medical needs. Even with HSAs, consumers without access to employer-sponsored insurance still pay a hefty tax penalty when they purchase health insurance on their own.

To address those problems, the President proposes essentially doubling the limits on HSA contributions and allowing people to purchase health insurance with tax-free HSA funds. The higher contribution limits ($5,250 for individuals and $10,500 for families) would help the chronically ill and their families by allowing them to put more money aside tax-free for their medical needs. Allowing HSA funds to purchase health insurance would provide tax equity to millions who are unfairly punished by the tax code.

Critics claim that HSAs are only good for the healthy or wealthy. If true, that would mean HSAs benefit only about 80 percent of the population. Not bad, that. But in fact, eHealthInsurance.com reports that half of HSA enrollees are over 40 years old, 20 percent earn less than $35,000, and 40 percent earn less than $50,000.

Unfortunately, the President’s proposals are unnecessarily complex and would continue to restrict HSAs to those who purchase high-deductible insurance. There is no reason why HSA holders should not be able to choose their health plan themselves.

Nonetheless, Bush has made a solid proposal that would improve the quality and affordability of private-sector health insurance and medical care. As for Medicare, well…

Michael F. Cannon is director of health policy studies at the Cato Institute.