Expanding Health Savings Accounts Could Lead to Even More Uninsured

Contrary to the president's claims, his proposed tax cuts to expand health savings accounts would likely increase the number of uninsured Americans by weakening employer-sponsored health care. A recent study by noted MIT economist Jonathan Gruber estimated that the president's proposals would increase the ranks of the uninsured by 600,000 people.

The proposals would provide the same tax breaks for coverage purchased in the individual market as for employer-sponsored coverage. This would lead some employers, particularly small businesses, to stop offering coverage to their workers on the assumption that workers could purchase coverage on their own. But many workers would be unable to purchase coverage, since insurance companies in the individual market are generally free to vary premiums — or even deny coverage completely — on the basis of applicants' age or health status. For example, many workers aged 50-64, particularly those in fair or poor health, could face premiums that are unaffordably high.

To be sure, the new HSA tax breaks would enable some people who don't currently have coverage to purchase it. But because of the tax breaks' negative effects on employer-based coverage, Professor Gruber's study found that more people would likely lose coverage than gain it. HSAs thus represent a step backward in the effort to reduce the number of uninsured Americans.

By increasing participation in HSAs, the new tax breaks could also make the comprehensive coverage that many Americans now enjoy much more expensive. HSAs encourage healthier and wealthier people to switch from comprehensive coverage to high-deductible health plans in order to take advantage of the unprecedented tax shelters HSAs provide. Unlike all other savings vehicles, HSAs offer both tax-free contributions and tax-free withdrawals. That makes them much more valuable to high-income people (whose taxes are reduced by 35 cents for every dollar they put into an HSA, since they are in the 35-percent tax bracket) than to low- and moderate-income people (who are in the zero, 10-percent, or 15-percent bracket). As healthier and wealthier workers left comprehensive employer-based plans, the pool of workers remaining in those plans would consist increasingly of sicker, less-affluent people, who are more costly to cover.

And as comprehensive employer-based coverage became increasingly costly, more and more employers would stop offering it.

In addition, low- and moderate-income workers in poor health will have difficulty setting aside enough funds in their HSAs to pay the high deductibles associated with them. (To qualify for an HSA, you must enroll in a health plan with a deductible of at least $1,050 for individuals or $2,100 for families. Often the deductibles are much higher.) As a result, they may end up going without needed medical care or depleting their limited savings to pay the deductible.

Finally, HSAs represent a step backward in the effort to restore federal budget discipline. The president's HSA tax proposals would cost $156 billion over the next decade, according to the U.S. Treasury. That means bigger deficits — even bigger than the large deficits already forecast for when the baby boomers retire. And bigger deficits would make substantial cuts in Medicare and Medicaid, like the nearly $150 billion in cuts proposed in the president's new budget, much more likely.

Edwin Park joined the Center on Budget and Policy Priorites in February 2001 as a senior health policy analyst, focusing on Medicaid, SCHIP and expanded coverage for the uninsured.

Health Savings Accounts: An Idea Whose Time Has Come

Health Savings Accounts (HSAs) are generating a lot of news and a lot of noise, partially because of their tax advantages. They are funded with pre-tax dollars, grow tax-free, and are free from taxes when the funds are withdrawn for qualified health expenses. They must, under current (but evolving) legislation, be tied to a high-deductible health plan (HDHP). HSAs are a creation of government, and that's crucially important.

During World War II, the government imposed wage and price controls. As part of those controls, employers were allowed to sponsor health benefits on a pre-tax basis. This precedent set the stage for employer-sponsored health insurance and the third-party payment system that we have today. That precedent did not, however, allow pre-tax payment for health care at the individual level. Government is going to be a powerful influence on health care for many years to come, and employer-sponsored health insurance appears to be here to stay.

Given those two pillars of health care in this country, HSAs help the situation in both the short term, and more importantly, the long term. In the short term, or the plan year, they put the individual on the same playing field as the corporation—namely they can deduct the cost of health care pre-tax. This will encourage the uninsured to purchase coverage of HDHPs. They are a powerful tool in controlling health costs, in some cases with cost shifting to employees, and in others with no cost shifting whatsoever. High deductibles are neither good nor bad; they are only a purchasing price point. For example, in my state of New Jersey, health insurance for a $500-deductible family policy costs about $ 1,250 per month. A policy with a $2,500 deductible costs about $425 per month. Based on this scenario, the annual savings of going with the high-deductible policy is approximately $9,900 ($825 x 12). An employer saving $9,900 in premiums would theoretically be pleased to put $3,000 into the HSA of the employee, as the employer is still saving $6,900 after this payment. The reality is most families would have something left over at the end of the year out of the $3,000, which they can keep for future health needs.

If employees start off their careers in such plans, they can put aside a significant amount of capital during their working lifetimes. It is highly likely that as Medicare becomes less of a benefit (because of government financing problems…this IS going to happen), we will have personal funds in an HSA to support our future needs. This is why HSAs are good for the long term, and here is the important part: HSAs will ultimately form a national trust of health care dollars that are family-based.

No one in government will tell us that Medicare will be a cheapened benefit when the boomers retire en masse, but it will be cheapened nonetheless. The alternative is that Medicare will absorb 40 percent of the budget and that isn't going to happen, so providing in part for your own medical future is a good idea and HSAs are a good place to do it.

David Lenihan is a founder and CEO of CareGain, a technology company based in East Windsor, N.J. CareGain provides enterprise software solutions to health plans and third-party administrators.