Health Savings Accounts (HSAs) are a popular and important way many people pay for medical expenses. They are also a great way to save—better, for example, than an IRA or a 401(k) plan.
Because of various quirks in the law, HSAs are not available to a large number of people—including people on Medicaid or Medicare and most people who buy their own insurance in the (Obamacare) exchanges.
Under the reconciliation bill just passed in the House of Representatives, more people will have access to these accounts and there will be new opportunities to use them.
Currently, individuals and their employers can make tax-free deposits to HSAs, provided the individual is also covered by third-party health insurance with a high deductible. Money can accumulate and grow tax-free. After age 65, the money can be withdrawn for non-health expenses without penalty, but it is subject to normal income taxes.
As of 2023, there were 37.4 million accounts with $46.4 billion in assets. Industry experts think the House bill will lead to an additional 20 million people with an HSA.
Here is a summary of the hits and misses in the Republican bill, as it faces a vote by the Senate.
The Good. By far the best feature of the bill is a provision making all bronze and catastrophic insurance plans offered through the (Obamacare) exchanges automatically eligible for an HSA account. This is likely the main reason why the number of HSA accounts is likely to soar.
Another provision would allow the use of HSAs to pay monthly fees for direct primary care (DPC). This used to be called “concierge care” and in the past it was available only to the rich. But the price has come way down. Atlas MD in Wichita, for example, charges $50 a month for a mother and $10 for a child. In return, the family has 24/7 access to a physician’s practice that provides all primary care. Often, the family has the doctor’s personal phone number.
DPC has become increasingly popular, and employers often pay the monthly fee for their employees. Under current law, however, the employer cannot put funds in an HSA account, let the employee choose a DPC doctor and pay that doctor from the account. The House bill will create that opportunity.
According to the Congressional Budget Office (CBO), the ten-year cost of all of the HSA changes combined is almost $44 billion. Yet the cost of the two best provisions is less than $6 billion. More on that below.
The Questionable. The bill allows annual withdrawals of $500 (individuals) or $1,000 (couples) for gym memberships and other physical activities. (No sailing or golfing expenses, however.) The problem is that these are not medical expenses. If we are going to allow gym memberships, why not hundreds of other nonmedical expenses—including sailing and golfing? The CBO says the cost of this provision is $10 billion.
The bill also doubles the annual HSA contribution that is allowable for individuals with incomes up to $75,000 and couples who earn up to $150,000. The problem here is that only about one in ten account holders are contributing the maximum allowable right now. At a cost of more than $8 billion this is an expensive change that will only affect a small part of the market.
Instead of these questionable measures, the Senate should consider making all Obamacare silver plans (the most popular choice) automatically eligible for an HSA.
Missed opportunities. While the House should be congratulated for making many desirable improvements in the HSA law, it unfortunately failed to correct a fundamental flaw: an inflexible across-the-board deductible. Common sense would suggest that different medical expenses need different deductibles. The biggest problem with chronic illness, for example, is noncompliance with a drug regimen. That is why some Medicare Advantage plans make maintenance drugs for chronic patients (such as insulin for diabetics) available for free or at very low cost.
In the first Trump administration, an IRS ruling waived the deductible requirement for 14 specific services and medications that serve as treatments for such conditions as diabetes, asthma, heart disease, and depression. This was an executive branch decision to modify existing legislation, however. To make it permanent, Congress needs to codify it. Ideally, Congress should remove the deductible requirement altogether and let the role of deductibles be determined in the marketplace.
One way to think about the combination of allowing gym memberships and failing to address the deductible issue is to see that the House risks being accused of creating benefits for the healthy while ignoring the sick.
Another missed opportunity was the failure of House Republicans to give 80 million Medicaid enrollees access to what I will call a Roth HSA.
Private companies managing Medicaid (or the state itself) should be able to make deposits to an account that would cover, say, all primary care. Enrollees could use the money for health care during an insurance year. Afterward, they could withdraw any unspent funds for any purpose. If there were no taxes or penalties on non-medical withdrawals, health care and non-health care would trade against each other on a level playing field under the tax law. People wouldn’t spend a dollar on health care unless they got a dollar’s worth of value.
An early study by the RAND Corporation suggests that these accounts would reduce Medicaid spending by 30 percent. Aside from payments for the disabled and nursing home care, if Medicaid spending could be reduced by 30 percent, the savings would amount to almost $1 trillion over ten years. This saving would be shared by the beneficiaries and the taxpayers who fund Medicaid.
