In light of recent reform debates, this Article timely provides a detailed analysis of Health Savings Accounts (HSAs). HSAs are designed to help control health costs while promoting the “patient-as-consumer model” and allowing taxpayers to select their desired healthcare provider. Today, taxpayers enrolled in high-deductible health insurance plans receive “an above-the-line” tax deduction for contributions made to HSAs. These contributions are also deductible from the Federal Insurance Contributions Act (“FICA”) tax base and are not subject to Social Security and Medicare taxes (such deduction for FICA purposes is not available for 401(k) or IRA contributions). Generally speaking, high-deductible plans put patients’ personal funds at stake for ordinary healthcare costs, thus, increase the price sensitivity for healthcare services much more than in non-high-deductible plans with flat co-payments. The HSA funds can be utilized for any “qualifying medical expenses” including prescription drugs, doctors’ visits, and various procedures but excluding payments for medical insurance and over-the-counter medications. Any gains derived from investments made to HSAs are exempt from income tax if those funds are used to cover medical expenses. Funds in HSAs can be carried over from year to year, even if the taxpayer decides to switch to a plan that is not a high-deductible health plan. HSA withdrawals for non-healthcare spending are subject to income tax and an additional excise tax of 20%. The HSA model rests on the notion that by making patients price-aware and giving them greater control over their health spending, HSAs allow market forces to improve pricing and the healthcare delivery system as a whole.
The Authors situate HSAs in the midst of the current ideological divide between Republicans who advocate for HSAs and Democrats who resist their existence. HSAs were central in Republican health reform debates and attempts to repeal the Affordable Care Act. On the other hand, Democrats have continually opposed expansion of HSAs on distributional grounds contending HSAs predominantly advantage higher-pay individuals who can utilize them as investment and tax savings vehicles. This is due to the fact that low income taxpayers have less money available to commit to use for health care. Moreover, the HSA functions as an “upside-down” subsidy because de facto the higher the taxpayers’ tax bracket is, the larger the subsidy the federal government provides them through the current design of the HSA benefit. Likewise, since HSA contributions are above-the-line deductions, they are not subject to income-based limits that have often applied to below-the-line deductions. Lastly, funds from the HSA can be withdrawn for any purpose, without penalty by taxpayers over age of 65, which as the Authors point out, turn the HSA into additional retirement benefit to wealthy individuals that use it to supplement their 401(k) or IRA accounts in light of their benefit in deferring income tax liability. This benefit carries over to the next generation as investment gains are permanently untaxed when passed to an heir at death of the HSA owner with investment assets receiving stepped-up basis under default rules.
The Authors then acknowledge that regardless of political ideology, there are apparent advantages to encouraging people to reserve funds for health care uses and to afford out-of-pocket medical expenses. Too many people (24 million individuals according to the Authors) report they could not cover their out-of-pocket expenditures without borrowing or selling property. While affirming that HSAs have the potential of tending to the issue of insufficient funds to cover medical expenses, the Authors claim that our current policy is distributionally regressive, contribute to increasing inequality, and does not achieve its stated purpose. They argue that the current design of HSAs fails to offer suitable support across taxpayers with various income levels, thus undermines the stated policy goal of promoting participation in healthcare markets. Nevertheless, the Authors believe that with proper redesign, HSAs can address distributional concerns in a satisfactory way to both conservative and progressive legislators while providing benefits to a larger segment of the population.
As a normative solution, the Authors propose a market-based consumer-driven social policy. As opposed to the idea of universal basic income proposals that involve large, unconditional cash grants, the Authors base their proposal on conditional government subsidies of cash grants availability to a limited portion of the population coupled with restrictions on their use. They suggest creating “Equitable HSAs” that rely on cash subsidies to help facilitate larger participation of people with fewer economic resources in healthcare markets. In contrast to current HSA policy, the “Equitable HSAs” will not require participation in a high-deductible plan but will only require insurance that covers minimum basic services and some preventative care. The proposal entails a multipart subsidy: a cash grant of $300-$1,000 per individual for low-income taxpayers varied by household size and a complementary tax credit to higher income taxpayers that gradually phases out. Here, too, gains of “Equitable HSAs” will be exempt from income tax so long as the funds are used to cover medical expenses only. To prevent HSAs from being converted into retirement savings vehicles, withdrawals for non-health care purposes, even after the age of 65, would be subject to a 100% penalty up to the subsidy amount, and withdrawals beyond the subsidy amount will be included in income and subject to an additional penalty of 20%.
Lastly, the Authors discuss in length the potential advantages and disadvantages of cash grants as a tool for carrying out social policy from both an egalitarian perspective and a market libertarian perspective. They state that their proposal of “Equitable HSAs” is the ultimate solution to create an ideological bridge between the Republican goal of facilitating market-based forces in the healthcare marketplace with the Democratic goal of advancing egalitarian healthcare policies and strengthening the progressivity of the Tax Code. The Authors’ proposal also includes a detailed estimate of its cost of about $70-$230 billion a year to the U.S. government, depending on the size of the subsidy per individual. Yet, what the proposal lacks is addressing possible budgetary-balancing options. Proposing new cash grants and tax expenditures will likely be criticized on the immense financial toll it will impose on the U.S. budget. Providing probable positions for offsetting the additional budgetary cost derived from the Authors’ proposed new subsidy will increase its feasibility and practicability.