More people have health savings accounts (HSAs) connected to high-deductible health plans (HDHPs) than ever before — and that number could skyrocket in coming years.
HDHPs, which now make up nearly one-third of US health plans, usually have lower premiums than a PPO and HMO with a higher deductible, which means the individual pays more of the actual health care services. Supporters view HDHPs as a way to keep employer health care costs under control and reduce unneeded medical services and tests.
HSAs allow people to put money tax-free into an account that remains tax-free — even when you remove the money — as long as it’s used for health care purposes. It is also a better deal than retirement accounts, such as IRAs and 401(k)s, which the government taxes either when the member puts money in or takes it out.
HSAs work this way: employees create the HSA and employers may contribute to the account, which stays with the individual regardless of employer.
Employees and employers can contribute up to $3,400 annually for single coverage and $6,750 for family coverage.
The Medicare Prescription Drug Improvement and Modernization Act of 2003 created HSAs, which Republicans say puts the health care consumer in control.
HSAs on the rise
Since Congress created HSAs in 2003, HSAs have taken hold in the health care system as employers look for ways to cut health care costs. The Kaiser Family Foundation’s 2016 Employer Health Benefits Survey found that 19 percent of covered workers were in an HSA-qualified high-deductible health plan, which was an increase of four percentage points in one year.
The Kaiser Family Foundation found that employees enrolled in an HSA receive an annual average employer contribution of $686 to HSAs for single coverage and $1,208 for family coverage. However, the Kaiser Family Foundation also found that many employers don’t contribute to employee HSAs at all.
Devenir, an independent investment advisory and HSA consultant company, reported in 2016 that HSA assets increased by 22 percent year over year to $34.7 billion. HSA investment assets reached about $4.7 billion in June 2016, which was a 23 percent increase year over year, according to Devenir.
Devenir said the average account holder has a $15,092 total balance (deposit and investment account).
Devenir projects that the HSA market will exceed $50 billion in HSA assets with 27 million accounts by the end of 2018.
“Our data shows that consumers over time are accumulating savings for future medical expenses, but there are many account holders who have medical expenses that come up throughout a year and use their HSA for those expenses,” Jon Robb, senior vice president of research and technology at Devenir, told Fiorente Media.
HSA explosion on the horizon?
The Obama Administration didn’t talk much about HSAs, but with a Republican in the White House and GOP controlling both houses of Congress, health care reform will likely include more emphasis on HSAs and consumerism.
In fact, President Donald J. Trump included HSA expansion as a plank for his health care reform plan during the campaign.
Robb said he is “cautiously optimistic of the current political environment,” but also cautions not to expect immediate changes.
HSAs’ growth happened despite regulation changes that have made them less desirable. For instance, the Affordable Care Act required a doctor’s prescription for over-the-counter medicines or drugs for someone to use HSA funds. Previously, a health savings account holder could get over-the-counter medicines without a prescription. By requiring a doctor’s prescription, it is harder for someone to use HSA funds to purchase over-the-counter medication.
Those kinds of restrictions will likely end in a Republican Congress.
An example of a more HSA-friendly Congress is the Health Savings Account Act of 2016. Sponsored by Senator Orrin Hatch (R-Utah) and Congressman Erik Paulsen (R-Minnesota), the legislation would have:
- Renamed HDHPs to a more positive-sounding HSA-qualified health plans
- Allowed spouses who both reach 55 to make increased catch-up contributions to the same HSA
- Made Medicare Part A (hospital insurance benefits) beneficiaries eligible to participate in an HSA, as well as allow those in the Indian Health Service, TRICARE plans, and members of a health care sharing ministry, people who receive primary care services in exchange for a fixed periodic fee or payment, and those who receive health care benefits from an onsite employer medical clinic.
- Authorize over-the-counter medicines and drugs to be eligible for HSA expenses without a doctor’s prescription
- Allowed people to use HSA distributions to purchase health insurance coverage
- Amended federal bankruptcy code to exempt HSAs from creditor claims in bankruptcy
The legislation died with the end of the 114th Congress, but expect similar legislation — either separate or as part of a larger Republican-backed health care reform plan.
HSAs and retirement
Members are able to invest stocks, bonds and mutual funds in an HSA account. This is why some view HSAs as a retirement health care plan.
The members can invest each year tax-free and let their money accrue until retirement when they can tap into their HSAs.
An added benefit of that way of thinking is that the government doesn’t tax HSA funds at withdrawal as long as members use them for qualifying health care expenses. The government taxes any other expense 20 percent.
This is a better deal than a retirement account, such as a Traditional IRA, a Roth IRA, and 401(k), which the government taxes either at the time someone enters money into the account or a person takes it out depending on the plan.
One issue with retirees and HSAs is that Medicare is not considered a HDHP so that means Medicare beneficiaries can’t contribute to an HSA. That’s the case even if a person already has an HSA. They can use money from an HSA to pay for health care, but Medicare enrollees can’t add to it. The legislation mentioned above hoped to change that for Medicare Part A (hospital).
People with HSAs who are 55 or older can make catch-up contributions of $1,000 per year on top of the $3,400 for single coverage and $6,750 for family coverage.
HSAs and low-income people
Skeptics acknowledge that HDHPs with an HSA reduce costs and services, but they also worry that low-income and chronically-ill people won’t use health care services when needed.
A recent study looked at how HSA-eligible plans affect health care services use and spending among lower income workers compared to higher income workers.
The study found that the HSA plan led to a decline in non-preventive outpatient visits at all income levels, but the decline was twice as large for workers and dependents with incomes less than $50,000 than those with incomes of at least $100,000. Most of the decline was in specialist visits.
The study also found reduced influenza vaccinations and preventive office visits for lower-income people compared to higher income workers.
Another issue with HSAs is that “they require an educated and savvy consumer who can devote a great deal of time and effort to understand their plan and shopping for care,” wrote Kathryn Phillips for HealthAffairs.
“HSAs and other consumer-oriented reforms have an important role in improving our health care system, but without a better understanding of their actual use across populations, they are most likely to benefit those who need the benefits the least. Trump promises health care reform that will ‘Make America Great Again.’ We must make it great for everyone,” Phillips added.