Jim de Bree: Voodoo economics of HSAs

By James de Bree

Last update: Thursday, March 9th, 2017

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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Jim de Bree: Voodoo economics of HSAs

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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James de Bree

James de Bree

  • Ron Bischof

    Voodoo economics? There’s a term I haven’t heard for decades, Jim! It was used by George Bush Sr. during the 1980 Presidential campaign that resulted in a victory for President Reagan and a VP spot for Bush.

    Personally, my family has benefited from HSAs when my employer plan shifted to higher deductibles and lower premiums in response to Obamacare. The net benefit was an improvement because I had more control over how my medical care dollars were spent. The funds were managed in a zero expense Fidelity account that was associated with my corporate 401k Plan.

    I’m in the wealthier demographic you noted and could afford to put larger sums into my HSA. I’m interested in how other health insurance tax credits that will be enacted combined with HSAs to begin the shift to consumer focused health spending. That combination is designed to reach a broader population.

    • Jim de Bree

      You are right about George Bush, but HSA’s truly are Voodoo based.

      While I was away, I received numerous e-mails from people telling me that my column was spot on. Their HSA has not worked out the way they expected. But these were likely people with medical issues who may be at the lower end of the income scale who are not as fortunate as you.

      You are truly fortunate to participate in a 401(k) plan that allows you to link your HSA on a no fee basis. I suspect that you are the exception rather than the rule. I am unable to do so and I am now paying a monthly fee. My family incurs significant medical costs, so I am not able to invest my HSA funds on a long term basis.

      Ron your family benefited because you are healthy and have the wealth to put away the funds. In reality, how much additional control does your HSA provide? If you had a PPO plan with lower deductibles you could use the same providers at the same cost. The only way you come out ahead is if your medical costs are less than your deductible or co-payment maximums.

      Finally consumer based spending means nothing unless the purchasing power of the entire population is put into a pricing pool. Oligopolies of providers and insurance companies determine pricing. An individual’s purchasing power is like throwing pea into the ocean. One of the principal drivers of costs is that purchasers are fragmented and lack the ability to extract optimal pricing from the providers.

      We have historically enacted anti-trust regulations to prevent oligopolies from taking advantage of the consumer. We need some sort of mechanism in the health care arena. The only way to avoid this is to implement a way to have volume pricing.

      • Ron Bischof

        We’re not going to agree because our approaches to market economics of health care financing fundamentally differ, Jim. I don’t share your exception for this service, treating it as if it’s differs from other cost financing and risk mitigation. Regulating another sector of the economy as a utility isn’t fundamentally in the best interest of the majority of health care consumers. Allowing consumers to make choices on resource allocation is always and forever superior to government regulation.

        The approaches you suggest rely on further government intervention to solve the problems that regulatory disruption and mandates have created. These too will have unintended consequences. Government mandated risk pools aren’t the only way to achieve purchasing power and I need not list here the ones you and I already participate in.

        All parties affected, including you and I, will seek our self-interest while industry engages in continued rent-seeking if health care financing and regulations remain Federalized, an extra-constitutional approach.

        “Fairness” is subjective.