Large Health Savings Accounts, Unveiled

This week, the journal Forum for Health Economics & Policy publishes a paper of mine on “large” health savings accounts, a novel proposal to reduce government control over the U.S. health care sector. 

Government exempts employer-sponsored insurance (ESI) from income and payroll taxes, which seems like a tax cut.  But it operates more like a tax increase because it strips workers of control over their earnings.  Oh, and it drives up health insurance premiums too.

Large HSAs would replace the tax exclusion for ESI with an exclusion for money contributed to a Large HSA, which the worker would own.  The same tax exclusion would be available to all workers, regardless of where or whether they purchase health insurance.

Altering the tax exclusion that way would force employers to shift the money they now use to purchase health benefits – on average almost $4,000 for individuals and $9,000 for families – into workers’ cash wages.  Individuals could then contribute, say, up to $8,000 annually to a Large HSA.  Families could contribute up to $16,000. 

Workers could use those funds to purchase medical care and health insurance, from any source, tax-free.  For example, they could hand the money right back to their employer and stay on the company plan.  Anything the worker doesn’t spend grows tax-free.

Large HSAs have a number of advantages over other tax-based health care reform proposals, including Sen. John McCain’s proposal to provide tax credits for health insurance.  Large HSAs would eliminate the tax code’s influence over consumers’ health care decisions to a greater extent, and with fewer economic and political downsides, than Sen. McCain’s tax-credit. 

One downside of McCain’s tax credit proposal, as well as other reform proposals, is that they discriminate against the uninsurable.  A tax break for health insurance is only valuable if you can obtain health insurance.  Tying a tax break to insurance automatically excludes a lot of very sick people.  In contrast, Large HSAs offer the same tax break to the uninsurable, who arguably need it most.

To read more about Large HSAs, click here (free download).