White House, industry promote health savings accounts

March 1, 2006

The main strategy of the Bush administration for controlling healthcare costs and expanding access to care is to encourage more individuals and employers to adopt consumer-directed healthcare (CDHC) programs. Coverage programs that combine a high-deductible insurance policy with a tax-advantaged savings account for paying healthcare costs are becoming more widespread, according to recent surveys. They can save employers money, provide less-costly insurance to individuals, and they fit conservative Republican policies that shift more responsibility for healthcare decisions from insurers and providers to consumers.

In his State of the Union address in January, President Bush championed several tax policies designed to expand the use of health savings accounts (HSAs) as an alternative to traditional insurance.

Bush asked Congress to:

Under the Medicare Modernization Act of 2003, people can make tax-deductible contributions to HSAs to cover medical expenses, provided they purchase high-deductible insurance policies to cover catastrophic costs.

Employers may contribute pretax dollars to an HSA; money spent on healthcare from an account is not taxed; and unused contributions roll over tax-free each year. Insurance companies have moved quickly to expand choices for HSA-related policies, with deductibles from $1,000 to $5,000 or more per year. These catastrophic policies tend to be less expensive than traditional coverage plans, making them more affordable for small employers and uninsured individuals.

WISER CONSUMERS

Advocates of using market forces to control healthcare spending believe that HSA plans make consumers more aware of the cost and effectiveness of treatment options. The theory is that consumers who pay for their routine care and for prescription drugs from these accounts will become more prudent healthcare purchasers. This ultimately will reduce unnecessary healthcare spending and spur the development of a more quality-oriented, cost-effective medical system. The emergence of HSAs during the last three years also provides consumers with more choice in providers and services and offers access to lower-cost insurance for self-employed and uninsured workers.

However, critics contend that HSAs are attractive primarily to healthier and wealthier individuals who can benefit from HSA-related tax advantages and anticipate relatively low healthcare costs. The growth of HSAs, though, threatens to remove this low-cost population from the broader insurance risk pool, which ultimately would drive up costs for higher-risk people.

Moreover, many low-income people who have purchased catastrophic policies because they are more affordable are able to contribute little or nothing to their HSA.

The bigger concern is that they will not have funds to pay for needed treatment and are unlikely to seek routine preventive care that can save money over the long run. Bush's proposal to raise contribution limits to HSAs will do little to help low-income workers support these plans. Patient advocates regard HSAs primarily as a way for employers to shift healthcare costs to workers, and to reduce their outlays for health insurance and payroll taxes.

GROWTH SPURT

Despite these criticisms, HSAs are expanding quickly. The number of people enrolled in HSA-eligible insurance policies has tripled since March 2005 to about 3 million today, according to a recent survey of insurers by America's Health Insurance Plans (AHIP). A separate analysis predicts that 15 million Americans will have HSAs by 2010. AHIP reports that insurers are offering HSAs in more markets and to a wider array of large and small groups and individual customers.