2005 January 24 Monday
US Health Savings Accounts Starting To Grow In Popularity

Teresa Chovan and Hannah Yoo of the Center for Policy and Research of an organization called America's Health Insurance Plans have written a brief report on the growing popularity of Health Savings Accounts to pay for medical care. (PDF format)

Health Savings Accounts (HSAs) are designed to give consumers financial incentives and information to choose their health care providers and manage their own health expenses. HSAs were created in December 2003 as part of the Medicare Modernization Act of 2003, and regulatory guidance was released by the Internal Revenue Service mid-year 2004. Modeled after Archer Medical Savings Accounts (MSAs), individuals’ HSAs must be coupled with a High Deductible Health Plan (HDHP) to cover current and future health care costs.


Responding companies reported a total of 346,000 people covered by individually purchased HSA/HDHPs in September 2004. A subgroup of companies reported the percentage of policies that were sold to previously uninsured people, compared to those that were replacement policies. For those providing this data 3 , the survey showed that 30% of policies were purchased by individuals who previously did not have coverage.

If you know anything about the rules for health savings account eligibility (e.g. can self-employed people create HSA accounts at places like Fidelity or Schwab? or how much money do you need to put in to get started or how much can you deduct from income each year to put in an HSA?) then place post in the comments. I haven't had time to check out the HSADecisions web site which AHIP co-sponsors with the US Small Business Association. It might provide useful information for the self-employed.

Found that previous link on the Heritage Foundation Policy Weblog. (which really ought to put names on posts) Heritage Foundation wonks are fond of HSAs.

So what does this all mean? First, HSAs help to make health care affordable; in a broader point, cutting down on disintermediation, the basic idea of consumer-directed health care, really does work.

Second, HSAs aren't just for the young, the healthy, and the wealthy. They work for almost anyone.

Third, these numbers show that HSA plans are affordable for working Americans and that a refundable tax credit for health care, such as Stuart Butler proposes here, would be sufficient to help many of the working poor leave the ranks of the uninsured.

In my view there is an urgent need for changes in the tax treatment of medical spending to reduce the ranks of the uninsured and uninsurable. People need to be encouraged to save for major illnesses and for retirement medical costs. The current US system of health care that ties health care so heavily to employers causes lots of people to lose coverage between jobs (when they can least afford to pay medical expenses) and to find themselves in the ranks of the uninsurable when they develop a chronic medical condition. It should be possible to pay ahead in pre-tax dollars on long term catastrophic care insurance policies when employed and to have that coverage continue when unemployed.

The other compelling argument for tax-advantaged medical savings accounts is that the medical care market suffers from the distorting effects of too many intermediate agents between providers of services and recipients of services. A person who goes in for medical care under their employer's medical insurance gets the services from the provider but the provider is paid by an insurance company that is paid by an employer. The provider is therefore too disposed toward serving the interests of parties other than the patient. With HMOs the problem is made even worse as the provider comes out best by avoiding provision of services. The interests of the patient are not always well served by such arrangements.

Medical savings accounts in which most services are paid for directly but where catastrophic illnesses are paid for by insurance both increase market forces and provide funding for medical care when the costs are too high for most people to be able to afford to pay. Such accounts also make it easier for the self-employed and the unemployed to have medical coverage.

Share |      By Randall Parker at 2005 January 24 12:25 PM  Economics Health

Proborders said at January 24, 2005 3:38 PM:

Randall, states could improve their "mini" COBRA programs. The federal COBRA program could be improved. What if a former employee could have COBRA rights until he/she is eligible for Medicare (instead of for 18 or 36 months)?

The federal tax system could be changed such that people would be able to deduct certain medical expenses from their incomes (even if they use the standard deduction).

Example: Mr. Smith works for an employer that doesn't offer health insurance. Mr. Smith pays $200 a month for health insurance. Because Mr. Smith doesn't have large federal tax deductions (1040 Schedule A deductions), he uses the standard deduction when he files his federal tax return. Even though Smith paid $2,400 in health insurance premiums, he receives no federal tax reduction for paying $2,400 in health insurance premiums. If Smith could deduct $2,400 from his taxable "federal" income, he could save $360 (if he is in the 15% tax bracket).

Randall Parker said at January 24, 2005 3:55 PM:

Proborders: My lack of enthusiasm for extending COBRA is due to the fact that some employer-provided medical benefits are not what I'd want to be stuck with after I left an employer. The employee doesn't get to choose the insurance policy. If the employer only offers an HMO then that is what you are stuck with. If the HMO is local in scope and you are leaving to work in another part of the country then having an HMO in one part of one state is rather inconvenient when you have just moved 1000 miles.

Tax deductible medical expenses: But if someone has a high income and is making a lot of money one year and then gets sick and can't work the next year (imagine a real estate agent for example) and therefore makes no money the tax deductibility of their medical expenses isn't helping them any. People need to place income into a tax-advantaged account while they are working to use when they are not working.

Also, they need to be able to buy catastrophic health insurance years in advance of any terrible outcome.

Essential elements of a plan that I see:

- ability to choose your own insurance. Your insurance shouldn't have to change when you change jobs.
- ability to save years in advance of having any serious illnesses and expenses.
- ability to pay more expenses directly from an HSA rather than thru an employer paid medical insurance policy.

Pico said at January 26, 2005 12:30 PM:

Here is an interesting perspective on saving social security-


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