BRIEF: Improving Health Savings Accounts

Background: Health Savings Accounts (HSAs) were first established as part of the Medicare Modernization Act of 2003. HSAs combine high-deductible health plans (HDHP) with a personally owned, tax-preferred and portable health savings account. Individuals with a HDHP may use their HSA to pay for qualified medical expenses. To qualify for an HSA, a high-deductible plan must have a minimum deductible of $1,000 for an individual policy and $2,000 for a family policy. The maximum yearly out-of-pocket spending can be no more than $5,000 for an individual and no more than $10,000 for a family. Tax-free contributions to HSAs are currently capped at $3,400 for individuals and $6,750 for families. All deductibles, out-of-pocket spending, and contributions are indexed to medical inflation.

Benefits: HSAs have dramatically grown in popularity over the last ten years, largely because they provide individuals with more flexibility and control over their own healthcare dollars at a lower cost. The number of enrollees with a HSA-eligible insurance plan has increased from 3.2 million in 2006 to nearly 19.7 million at the start of 2015.

HSAs allow individuals and families to build savings for future health care expenses tax free, thus protecting themselves from unforeseen health care related costs. HSAs provide affordable coverage to individuals and families by offering low monthly premiums. But perhaps most beneficial, HSAs empower consumers with more flexibility and choice to make their own health care decisions. HSAs encourage consumers to be more cost-conscious of their health care spending because consumers pay for medical services directly, rather than through a third party. HSAs may also be used by individuals and families to pay for preventative care, saving them money over the long term.

Shortcomings: While HSAs inject a healthy dose of consumer choice into the healthcare system, restrictions on their use prevent them helping consumers as much as they could. First, Congress mandates HSA holders buy government-designed health insurance plans (HDHP) that conform to government standards.  Second, individuals with HSAs are not allowed to use their accounts to pay for health insurance except during periods of unemployment or when switching jobs. This protects health insurance companies from competition that would lower costs while also limiting consumer options to pay for medical services. Third, the cap on HSA contributions prevents individuals and families from saving as much money for health care costs as they otherwise would.

Solutions: Congress should pass legislation transiting health savings accounts into a free-standing health savings mechanism for all health care needs. This will help elevate the bias in the tax code that favors employer-sponsored insurance, it would free up HSA holders to purchase health insurance only if they want to, and it would empower HSA holders to use funds for all forms of insurance, medical services, direct primary care, and other health-related needs. Additionally Congress should raise the cap on HSA contributions so individuals and families can cover whatever medical expenses they need.

Representative Dave Brat’s (R-VA) and Senator Jeff Flake’s (R-AZ) Health Savings Account Expansion Act of 2016 (H.R. 5324 and S. 2980) would help move HSA policy in this direction. The Health Savings Account Expansion Act would raise HSA contribution limits from $3,400 for individuals and $6,750 for families to $9,000 and $18,000, it would allow HSA funds to pay for health insurance, and repeal the mandate requiring HSA holders buy government-designed health insurance plans.

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