Health Savings Accounts: Do the Critics Have a Point?

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Executive Summary

Health savings accounts, or HSAs, are a newhealth insurance option that became available in2004. HSAs couple a tax‐​preferred savings account(the HSA) with high‐​deductible health insurance.Enrollees or their employers, or both, make tax‐​freecontributions to the HSA. Enrollees use the fundsin their HSAs to purchase medical care until theyreach their deductibles. At that point, health insurancebegins paying part or all of enrollees’ medicalexpenses.

HSAs reduce government’s influence overconsumers’ medical decisions by reducing theprice distortions created by the federal tax code.However, HSAs as they exist today do not eliminatethose distortions. Current HSA law restrictsconsumers’ health insurance choices, makes itdifficult for the chronically ill to save for theirfuture medical needs, and discourages cost sharingabove the health insurance deductible.

To address some of those shortcomings,President Bush proposes to reduce the price distortionsfurther, through higher HSA contributionlimits and tax credits for individuals whocontribute to their HSAs or who purchase theirown HSA‐​compatible insurance. Although thosesteps would be helpful, HSAs should be expandedfurther still to give individuals full ownershipof and control over all their health care dollars.

Unfortunately, HSAs (and proposals to expandthem) have become politicized. Critics contendthat HSAs benefit only the healthy and thewealthy and that HSAs are ineffective or evenharmful. In most cases, criticisms of HSAs fall flat​.In some cases, the critics do have a point. However,the failures they identify stem not from HSAs orproposals to expand them but from the problemsthat HSAs are meant to correct. Expanding HSAswould help to correct those problems faster.