Jim de Bree: Voodoo economics of HSAs

Jim de Bree
Jim de Bree

One of the ideas touted by the Republicans to fix Obamacare is the expansion of Health Savings Accounts, commonly referred to as “HSAs.”

In case you have not heard of HSAs, they are similar to IRAs but are directed toward saving for future medical expenses rather than for retirement.

To open an HSA you have to be enrolled in a high-deductible health insurance plan. Participants in high-deductible plans assume the risk of paying additional medical costs before the insurance coverage kicks in. Since the insurance company assumes less risk, the insured pays lower premiums.

Contributions to an HSA are generally deductible up to $3,400 per year for an individual and $6,750 per year for a family. The income earned by an HSA is not taxed. Distributions are not taxed as long as they are spent on qualifying medical expenditures.

The theory holds that the insured contributes his or her savings from the lowered insurance rates into his HSA, and those funds can earn a return until they are later spent on qualifying medical care.

Theoretically, HSAs appear to make a lot of sense. However, as noted by Consumers Union and other groups, in order to benefit from an HSA, you have to be healthy and wealthy.

Most young people cannot afford to put $3,400 into an HSA annually. In fact, according to a study by the Research Benefit Institute, the average HSA had a balance of less than $2,000 in 2014.

Apparently, when people with high-deductible coverage get sick, they find that they have not set aside sufficient funds to pay for their medical expenses.

According to healthinsurance.org, many Americans with HSAs file for bankruptcy because they lack sufficient funds to pay medical bills.

Clearly, those who can afford to put away $3,400/$6,750 annually enjoy a benefit. But those are likely the wealthier and healthier segment of society. Because HSA contributors get a tax deduction for their contribution, and the earnings of the HSA are not subject to tax, the government is effectively subsidizing their future health care costs.

Paradoxically, wealthier people in higher tax brackets get a greater subsidy than those in lower tax brackets. So clearly it is more cost effective for high-income individuals to fund an HSA. Poor people achieve minimal tax savings from contributing to an HSA.

For example, a family earning $470,000 a year saves $2,800 in taxes for making a $6,750 contribution, while a family earning $50,000 a year saves only $1,000. This may explain why a GAO study showed that only half the people eligible to open an HSA actually do so and the majority of HSA holders earn more than $75,000 a year.

Furthermore, banks have found that HSAs are huge fee-generators. For the average HSA holder, bank fees exceed the earnings. When I shopped around for an HSA, I found that typically, to get bank fees waived, an HSA holder has to maintain a minimum balance of $5,000-$10,000.

Several consumer groups have expressed concern that HSAs adversely affect the cost of insurance premiums. Healthy people have accepted a greater share of the risk and have been rewarded with lower premiums.

However, this reduction in premiums adversely affected the risk pool for less healthy people who choose lower deductible plans. As a result, these less healthy have to pay higher premiums.

One of the principal premises touted by supporters of HSAs is that, because people with HSAs are spending their own money, they will shop around and make better purchasing decisions.

But several studies, including one conducted by the National Bureau of Economic Research, concluded that it was difficult for consumers to make wise decisions. Consequently, they delayed or avoided certain medical costs — particularly lab tests, prescriptions, and preventive care expenses.

Clearly the goal of increasing the consumer’s ability to more effectively purchase health care services has not resulted from the implementation of HSAs as proponents suggested.

In their zeal to replace Obamacare with something better, the Republicans have set forth several competing proposals to change the HSA program. Most want to increase the amount that can be contributed.

Since many poor and middle class families are not making contributions today, why would this change make them want to contribute? At the time this column is being written, none of the proposals appear to address the real issues.

HSAs have not delivered what they promised. Their unanticipated collateral consequences hinder the effectiveness of our health care system. Republicans would be well advised to look elsewhere when fixing Obamacare.

Jim de Bree is a retired CPA residing in Valencia. This is his fifth column in a series about health care.

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