Time To Liberate Health Savings Accounts

Two members of Congress are trying to make paying for health care easier.

Sen. Orrin Hatch, R-Utah, and Rep. Erik Paulsen, R-Minn., just introduced companion legislation that would boost the power of Health Savings Accounts, which allow consumers to set aside money tax-free for health care expenses.

They’re right to bet on HSAs, whose popularity has exploded in recent years. By empowering patients to take control of their care, HSAs have injected some consumerist discipline into the marketplace.

In so doing, they’re helping to reduce overall health spending, which reached $3 trillion last year.

Here’s how HSAs work. The federal government allows contributions of up to $3,350 for individuals or $6,750 for families, as long as consumers have a high-deductible insurance policy. But “high” doesn’t mean sky high. Currently, anyone with at least a $1,300 annual deductible for an individual or $2,600 for a family can qualify for an HSA.

The money going into the account is untaxed, as is any interest it earns. Consumers can also withdraw the funds without paying tax, provided they go toward a qualified medical expense, a copayment, the cost of a prescription drug, or other medical bills.

The money in an HSA account rolls over from year to year. And a consumer can keep it forever, even if he changes jobs or switches insurance plans.

Because consumers have direct control over their HSA dollars, they have a strong incentive to spend their money wisely. Perhaps they’ll pick the low-cost generic over the name-brand drug — or compare what different hospitals charge for an elective procedure.

The high-deductible policy, meanwhile, protects them from financial ruin in the event of a catastrophe.

Last year, enrollment in HSA-compatible plans climbed 13%, to almost 20 million. One in 5 workers is now enrolled in an employer-sponsored HSA plan. More than 2 million people have bought HSA plans on the individual market.

As of the middle of last year, these HSA accounts contained $28.4 billion in assets. Those billions belong to consumers — not insurance companies.

HSA-driven consumerism has helped drive down health costs. A study published by the National Bureau of Economic Research looked at spending data on 13 million people working for 54 large companies and found that costs were “significantly lower in each of the first three years” after a company included an HSA plan in its benefits mix.

President Obama promised that his health reform law wouldn’t interfere with HSAs. But that hasn’t happened. For instance, ObamaCare blocks people from spending HSA dollars on over-the-counter drugs.

The law’s looming “Cadillac tax” — now delayed until 2020 — is supposed to discourage overly generous health insurance plans by taxing individual plans that cost more than $10,200 and family plans beyond $27,000. But it may end up whacking HSA-compatible plans because the tax treats HSA contributions as part of the cost of a policy.

That makes little sense. HSA contributions don’t go to insurance companies — they’re savings owned by consumers. And the data show that HSA contributions help lower long-term healthcare spending — which is exactly what the Cadillac tax intends to do.

The Hatch-Paulsen initiative aims to bolster HSAs — not hinder them.

First, the two lawmakers would allow seniors to contribute to HSAs after they become eligible for Medicare at age 65; they can’t do so under current law, even if they’re still working.

They’d also make it easier for HSA-holders over the age of 55 to make $1,000 catch-up contributions. That would allow people nearing retirement, when they’re likely to face hefty medical bills, to build up their health-care nest eggs faster.

The two lawmakers would also allow employees who have on-site medical coverage at their workplaces to open HSAs. And they’d restore HSA-holders’ ability to use the funds for over-the-counter medicines.

But lawmakers shouldn’t stop there. They should consider making the HSA contribution caps equal to those for individual retirement accounts — $5,500 per person, and $6,500 per person over the age of 50.

Twelve years ago, HSAs didn’t exist. Today, 20 million people count on them. They’ve empowered consumers to take charge of their care and saved the healthcare system money. Lawmakers should be doing everything they can to get them in the hands of more people.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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