Health Savings Accounts and High-Deductible Health Insurance Plans

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Abstract

Health Savings Accounts (HSAs) and high-deductible health plans are prominently featured in many discussions of health reform.  The hope of supporters is that they will make individuals more prudent purchasers of medical care. However, the tax structure and incentives built into HSAs make them most attractive to the high-income and the healthy, populations already advantaged by the current system. HSA/high deductible plans shift more of the health financing burden onto those using significant amounts of care, with negative ramifications for the low-income and high-need. Nor is it clear that cost-containment, higher value shopping, or reductions in the uninsured will follow.

Summary

Health Savings Accounts (HSAs) and high-deductible health plans (HDHPs) feature prominently in many discussions of health reform.

• In the context of proposals from the Obama administration and Congress, they will be of continuing interest as minimum benefit standards and insurance options under broad-based reform are discussed.
• While supporters hope they will make individuals more prudent purchasers of medical care, the tax structure and incentives built into HSAs make them most attractive to the high-income and the healthy, populations already advantaged by the current system.

Tax Advantages of HSAs

• HSAs provide a generous tax incentive for certain individuals to seek out HDHPs with IRS-defined characteristics. Individuals buying qualified HDHPs either through their employer or in the private nongroup insurance market can make tax-deductible contributions into an HSA.
• Funds deposited into the accounts are deducted from income for tax purposes, and any earnings on the funds accrue tax free and are not subject to tax or penalty as long as they are withdrawn to cover medical costs.

HSAs in Practice

• HSAs are intended to encourage more cost-conscious spending by placing more of the health care financing burden on out-of-pocket spending by the users of services, as opposed to having services incorporated in the premium component of insurance coverage, which is shared equally across all enrollees regardless of service use.
• Average in-network deductibles for employees enrolled in their employers’ HDHP/HSA plans are substantially higher than the IRS minimum for qualifying HDHPs.
• Roughly half of those with HSA-compatible policies do not open HSAs, despite the tax advantages, and two-thirds of employers report making no contribution to the HSAs of their workers. As a consequence, low-income or high health-care-need workers with these plans are likely to be exposed to much larger out-of-pocket financial burdens than they would be under a comprehensive policy.

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