June 2, 2016 3:24PM

Members of Congress Introduce Cato ‘Large HSAs’ Concept

By Michael F. Cannon
WASHINGTON, DC - JANUARY 29: (L-R) Sen. Jeff Flake (R-AZ), and Sen. Patrick Leahy (D-VT) speak at a press conference on Cuba at the U.S. Capitol January 29, 2015 in Washington, DC. Flake is introducing legislation with bipartisan support that would lift a longstanding ban on U.S. citizens traveling freely to Cuba. (Photo by Win McNamee/Getty Images)

Sen. Jeff Flake (R‑AZ), Rep. Dave Brat (R‑VA), and other members of Congress have introduced legislation based on the “Large HSAs” concept I first proposed here and developed here, here, here, here, and here.


The “Health Savings Account Expansion Act” (H.R. 5324, S. 2980) would expand the availability and benefits of tax‐​free health savings accounts (HSAs) in several ways. It would nearly triple existing HSA contribution limits from $3,400 for individuals and $6,750 for families to $9,000 and $18,000. It would allow tax‐​free HSA funds to purchase health insurance, over‐​the‐​counter medications, and direct primary care. It would eliminate the mandate that HSA holders purchase a government‐​designed high‐​deductible health plan. And it would repeal ObamaCare’s increase of the penalty on non‐​medical withdrawals. Americans for Tax Reform and FreedomWorks have endorsed the bill.


I’m sure I will have lots to say about Flake‐​Brat, but here are a few initial impressions.

  1. Flake‐​Brat would free workers from the government program we call employer‐​sponsored insurance—but only if that’s what workers want. The federal tax code currently tells the average worker with family coverage she can either surrender $13,000 of income to her employer and let her employer choose her health plan, or surrender a huge chunk of that money to the government by paying income and payroll taxes on it. The Flake‐​Brat bill would allow her to keep that money and either save it, use it to stay on her employer’s health plan, or use it to purchase better coverage somewhere else, all tax‐​free. The choice would belong to her, not to Congress or the IRS.
  2. Flake‐​Brat is a bigger tax cut than you’ve ever seen.  Large HSAs would be the largest‐​ever scaling back of the federal government’s role in health care. The Flake‐​Brat bill is effectively a $9 trillion tax cut. That’s how much money the current tax exclusion for employer‐​sponsored insurance will divert from workers to their employers over the next decade. Flake‐​Brat would return that money to the workers who earned it. Flake‐​Brat is thus an effective tax cut equal to all of the Reagan and Bush tax cuts combined. It is nine times the size of the tax cut associated with repealing ObamaCare. Unlike health‐​insurance tax credits, Large HSAs involve no government spending and would not mandate that taxpayers purchase health insurance, as existing HSAs and health‐​insurance tax credits do. (The bill and its sponsors describe that requirement as a “mandate.”)
  3. Flake‐​Brat would make health care better, more affordable, and more secure. It would do so by dramatically reducing government’s influence over the health care sector. By shifting from employers to consumers nearly a quarter of the $3 trillion Americans spend annually on health care, Large HSAs would begin to make the health care sector and health policy respond to the needs of patients. Large HSAs are also less restrictive than existing HSA law or health‐​insurance tax credits. As a replacement for ObamaCare, Large HSAs would encourage innovative products like pre‐​existing conditions insurance that make coverage more affordable and secure.
  4. Flake‐​Brat shows Congress could create Large HSAs with or without repealing ObamaCare. Large HSAs are the most promising ObamaCare replacement plan to date, but Congress can create them before it repeals ObamaCare. The Flake‐​Brat bill would create Large HSAs even with ObamaCare still on the books. In fact, Flake‐​Brat would build support for repealing ObamaCare by exposing consumers to the full cost of its hidden taxes.
  5. Flake‐​Brat is a marker. The Flake‐​Brat bill defers consideration of a number of issues. All else equal, expanding tax breaks for HSA contributions would reduce federal revenues and increase federal deficits and debt. Like any proposal to level the playing field between employer‐​sponsored coverage and other coverage, the bill creates the potential for employer plans to unravel as (healthy) people choose better options. Were Congress to enact Flake‐​Brat with ObamaCare still on the books, there could be even more complicated interactions. The bill doesn’t totally level the playing field, either. Everyone would get an income‐​tax break, but only those with an employer who facilitates HSA contributions would get the payroll tax break. (Large HSAs can completely level the playing field with a simple tax credit that mimics that exclusion for such workers.) The authors don’t address these issues in the bill, or their supplemental materials. They will have to address them at some point. Fortunately, there are solutions. (For more on those solutions, see the “developed” links in the second paragraph.)

All in all, the Flake‐​Brat bill is a much‐​needed addition to the debate over the future of American health care.