Health savings accounts are a little-used feature of America’s current healthcare system, which, despite their numerous advantages, have gone largely unnoticed.
Health savings accounts, or HSAs, are pre-tax savings accounts that allow consumers to set aside money for certain health care services. Congress first established HSAs in 2003 under the Medicare Prescription Drug, Improvement, and Modernization Act. Although Federal regulations on HSAs limit their power and usefulness, in a landscape where employees have nearly no control over their healthcare dollars, health savings accounts permit a modicum of control. HSAs present a bipartisan path to healthcare reform that gives employees the power to make healthcare decisions.
The National Health Expenditures Projection by the Office of the Actuary in the Centers for Medicare & Medicaid Services predicts that national health spending will reach $6.2 trillion by 2028. Currently, employers control about $1 trillion of employees’ earnings to provide employer-paid health insurance.
HSAs are a viable solution to giving Americans control over their health care dollars. But as they stand now, the potential of health savings accounts is greatly reduced by Federal regulations, and only allow employees control over four percent of those dollars. They also come with strict regulations: you must be enrolled in a high deductible health plan, generally a plan that only covers preventative services before the deductible. In 2021, you can contribute up to $3,600 to your HSA for individual coverage and $7,200 for family coverage. You also cannot have any other healthcare coverage in addition to your HDHP and cannot be enrolled in Medicare.
Despite their current limitations, HSAs prove successful in many aspects. HSA funds may be withdrawn tax-free for medical purposes, and unused balances roll over year-to-year and grow tax-free indefinitely. Individuals who can invest the maximum amount in their HSA each year can provide a substantial tax-free savings account to provide for healthcare-related costs associated with aging. According to a publication by Cambridge University Press, “Enrollees in HSA-qualified plans are substantially more likely to ask about health care costs, to independently identify treatment options and to select among treatments than enrollees in conventional insurance plans.” Suppose the contribution allowances were increased to the entire $16,000 for families or $8,000 for individuals. In that case, Americans could use their HSAs to shop out-of-pocket for healthcare procedures or purchase an insurance plan of their choice-one that doesn’t disappear if they lose their job, get a divorce, or retire early.
Health savings accounts also hold the key to lowering healthcare costs overall. When patients can shop for healthcare in a competitive market, providers are forced to reduce costs. A study of California employees who were required to pay the difference between the employer’s contribution limit and the price of procedures demonstrated this phenomenon; prices charged at high-price facilities dropped over thirty-four percent, and another 5.6 percent at low-cost facilities. The study illustrated that when consumers bear the burden of cost and the ability to shop for healthcare, providers can and will drop prices to attract patients. The potential HSAs have to lower healthcare costs is unmatched.
It’s hard to imagine a healthcare reform platform that could have broader support. Whilst only a small percentage of adults report having an HSA, nearly all (76 percent of Democrats, 80 percent of Republicans, and 72 percent of independents) support letting workers put all $16,000 of their healthcare dollars into an HSA tax-free.
Shockingly, most U.S. adults have little grasp of how much control over their earnings they are forfeiting. A 2021 Cato/YouGov poll reveals, “Half of U.S. adults (49 percent) do not know employers fund employee health insurance by reducing wages. A third (36 percent) incorrectly believe employers fund those payments by reducing company profits or executive compensation.”
Under the U.S. tax guidelines, employer-sponsored healthcare is exempt from federal income and payroll taxes, inducing employers to substitute health coverage for wages. This exemption is the most extensive special tax break in the U.S. tax code, accounting for $126 billion annually. According to Director of Health Policy Studies of the Cato Institute, Michael F. Cannon, “The tax exemption distorts the efficient functioning of health care markets in three main ways: It encourages people to have more health insurance coverage than they otherwise would. It favors employer-provided insurance over other types of health insurance, and it favors spending on health care rather than non-health expenditures or saving.”
The healthcare exemption shifts control from individuals to employers, reduces low-cost, high-quality care incentives, and reduces choice and competition.
HSAs create lower prices and more competition in healthcare procedures and services. Yet they don’t require a tax increase to fund. For now, HSA expansion presents a viable solution to healthcare reform, which has, unfortunately, gone largely ignored.
