The
idea behind Health Savings Accounts (HSAs) is quite
simple. Individuals should be able to manage
some of their own health care dollars through accounts
they own and control. They should be able
to use these funds to pay expenses not paid by third-party
insurance, including the cost of out-of-network
doctors and diagnostic tests. They should
be able to profit from being wise consumers of medical
care by having account balances grow tax free and
eventually be available for nonmedical purchases.
As
of January 1, 2004, 250 million nonelderly Americans
now have access to HSAs, provided they are combined
with catastrophic insurance.
Creating
a Level Playing Field for Individual Self Insurance
Health
Savings Accounts are designed to help correct a
major flaw in tax law that distorts our entire health
care system.
Every
dollar an employer pays for employee health insurance
premiums avoids income and payroll taxes.
For a middle-income employee, this generous tax
subsidy means that government is effectively paying
for almost half the cost of the health insurance.
On the other hand, the government taxes away almost
half of every dollar employers put into savings
accounts for employees to pay their medical expenses
directly. The result is a tax law that lavishly
subsidizes third-party insurance and severely penalizes
individual self-insurance. This encourages
people to use third-party bureaucracies to pay every
medical bill, even though it often makes more sense
for patients to manage discretionary expenses themselves.
The
new law, part of the recently enacted Medicare prescription
drug bill, gives deposits to HSAs the same tax advantages
formerly granted only to health insurance premiums.
Employer and employee deposits to HSAs will avoid
all federal income and payroll taxes. When
combined with individually owned insurance, HSA
deposits will be a deductible expense, even for
income tax filers who do not itemize.
Making
Choices
Advances
in medical science have reached a point where we
can probably spend the entire gross domestic product
on health care — in useful ways! The
Cooper Clinic in Dallas now offers a super-duper
checkup (with a full body scan) for about $2,500
or more. If everyone in America took advantage
of this opportunity, we would increase our nation's
annual health care bill by one-half. There
are more than 900 diagnostic tests that can be done
on blood alone, and one doesn't need too much imagination
to justify, say, $5,000 worth of tests each year.
But if everyone did that we would double the nation's
health care spending. So how do we decide
which procedures are worthwhile and which are not?
There
are basically only three ways. In other developed
countries, these decisions are made either directly
or indirectly by government. But government-imposed
rationing is arbitrary, inefficient, unfair and
probably unacceptable to most Americans. The
second method is to restrain spending using managed
care techniques. But during the 1990s voters
expressed discomfort with having employers and large
insurers ration their health care. The third
option is to allow individuals to make their own
choices between health care and other uses of money,
through a vehicle such as HSAs.
Restoring
the Doctor-Patient Relationship
Patients
will make better choices if they can rely on doctors
who put their interests first. In a managed
care world, doctors too often look to employers
and insurers for guidance in deciding how to practice
medicine. In a very real sense, providers
view insurers rather than patients as their customers.
With HSAs, however, physicians will be free to act
as the agents of their patients.
Expanding
Options
Since
1996, a pilot program has made Medical Savings Accounts
available to small businesses and the self-employed.
But because of the many restrictions, only about
70,000 people have these accounts. A U.S.
Treasury Department ruling in 2002 allowed large
companies to establish Health Reimbursement Arrangements,
and at last count, 1.5 million employees had enrolled.
But these accounts are also unreasonably restricted.
Flexible Spending Accounts offer consumers the chance
to withhold funds tax free for medical care.
But these have a use-it-or-lose-it feature which
requires employees to forfeit unused funds to employers
at the end of the year. This forfeiture provision
encourages employees to waste money on unnecessary
care and makes most people apprehensive about depositing
money except when they can precisely predict their
future medical needs.
How
HSAs Work
HSAs
will be the most flexible, consumer-friendly accounts
yet devised. They will allow individuals and
employers to make deposits each year equal to their
health insurance deductible. The health insurance
policy that accompanies an HSA must have an overall
deductible of at least $1,000 for an individual
or $2,000 for a family policy. A typical plan
will work like this: When individuals enter the
medical marketplace, they will spend first from
their HSA. If they exhaust their HSA funds
before reaching the deductible, they will then pay
out-of-pocket. Once they reach their deductible,
insurance pays all remaining costs.
Annual
HSA deposits cannot exceed the amount of the health
insurance deductible, and typically cannot exceed
$2,600 for individuals and $5,150 for families.
However, the account balances can earn interest
or be invested in stocks or mutual funds, and they
will grow tax free. Thus a young person could
accumulate hundreds of thousands of dollars by the
time he or she retires.
HSA
balances belong to the individual account holders
and remain theirs if they switch jobs, become unemployed
or retire. The funds can be used to pay expenses
not covered by insurance, insurance premiums while
unemployed and health expenses during retirement.
In the event of death, HSAs may be bequeathed to
a spouse, or (like an IRA) the funds may flow to
other heirs.
Conclusion
The
concept of HSAs is not conservative or liberal.
It's an empowerment idea. It should appeal
to liberals who want an alternative to HMO rationing.
It should appeal to conservatives who want an alternative
to government rationing. It should appeal
to everyone who suspects that impersonal bureaucracies
care less about us than we care about ourselves.
