FEBRUARY 3, 2006 -- The White House plan to spur sales of health savings accounts is more "radical" than advertised, posing a major threat to comprehensive health care for most Americans and to the federal budget, liberal analysts said Friday.
The health savings account (HSA) proposal is "almost designed to undermine traditional [employer-sponsored] insurance," said Len Burman, a senior fellow at the Urban Institute.
The plan would create powerful new tax incentives and thereby pull healthy people out of the risk pool, said Burman and other analysts in a telephone press briefing sponsored by the liberal Center on Budget and Policy Priorities (CBPP). That mixing of risks historically has kept traditional comprehensive benefits affordable for sicker people and those with lower incomes.
White House officials deny they are aiming to unravel traditional employer-based coverage, saying they aim to give employers more "flexibility."
Jason Furman, a New York University economist, said HSAs also would be so loaded up with tax breaks they'd become a highly attractive way to invest, not just for health care but for retirement. But the 10-year price tag for the HSA proposal would be well above $30 billion over 10 years, the analysts said, and warned that the amount doesn't begin to measure the deficit hit.
The impact on federal revenues can't be measured by five- and 10-year budget forecasts because the large volume of untaxed HSA withdrawals wouldn't occur until well beyond those timeframes, according to the CBPP.
The Bush Plan
Initial descriptions of the HSA plan prior to the State of the Union address focused on new deductions for HSA premiums—regardless of whether one itemized deductions. But the plan also would allow far greater contributions into HSAs than currently permitted. And it would provide for a new tax credit for HSA contributions.
Now, contributions into HSAs can match the deductible in the accompanying high-deductible health plans sold with the accounts. But even if deductibles are higher, individual contributions into an HSA can't exceed $2,700 and family contributions can't top $5,450.
Under the president's plan, contributions matching the amount of the deductible can be much greater. So if individuals pay a deductible up to $5,250, they or their employer can contribute that sum into the HSA. The corresponding maximum for families is $10,500.
Contributions also would be permitted for the first time for matching all out-of-pocket spending under their HSA health plan, not just deductibles.
President Bush also would spur HSA sales by allowing a tax credit for payroll taxes paid on HSA contributions by individuals. The rationale is that employers use pre-tax money to fund traditional health coverage, so it's only fair that individuals who enroll in HSAs can do that too.
Way Better Than 401(k)s?
Furman said the result is that HSAs would be a great way to have a tax-free investment vehicle. Earnings on sums invested in HSAs accumulate tax free, and aren't taxed if withdrawn for health care expenses.
In fact, because of the tax advantages over 401(k)s, they'd be a much better way to invest for retirement, he said. Unlike 401(k)s, money contributed into HSAs can be deducted from taxable income. Donations into 401(k)s don't earn tax credits, the way they would under the Bush HSA plan. And money coming out of 401(k)s is taxed, while it isn't if withdrawn from HSAs for health care reasons.
If $10,500 were invested today in an 401(k), it would be worth $16,190 by 2036 assuming a 3 percent rate of return on investment, he said. The same sum in an HSA would be worth much more—$19,115 if withdrawn for non-medical uses and therefore subjected to taxation, or $25,486 if withdrawn for medical expenses.
"You can end up 50 percent better with this as you would with a 401(k)," Furman said.
Wealthier and healthier people less worried about health costs would drift away from traditional employer-sponsored health plans, he said. But sicker and lower-income people who rely on the broader benefits of low-deductible plans would face rising premiums because of the loss of healthy enrollees.
"This will eliminate entirely a key incentive to pull people together," he predicted. The tax credit in particular exacerbates the effect, but the premium deductions by themselves also would drive up the costs of traditional comprehensive coverage for middle and low-income Americans, the analysts said.
White House Defends Plan
White House officials earlier this week denied the plan would erode the protections vulnerable Americans have in the employer-based system.
Bush "is very supportive of employers continuing to offer health insurance," White House economic adviser Allan Hubbard told reporters Feb. 1. "There's no reason why they wouldn't continue to offer it. This is just going to give them more flexibility."
Hubbard said workers in many companies still could get coverage despite costly medical conditions that might preclude them from coverage outside the workplace.
At the same time, Bush aims to help chronically ill people who don't get coverage at work with a new $500 million program, Hubbard added. The money would be used for grants to 10 states "to develop new approaches to dealing with the chronically ill who are buying insurance at the individual level."
And employers would have the option of donating even more money into HSAs in the case of chronically ill workers, he said.
With more of their own money at stake in buying health care, HSA enrollees will restrain rising health costs, even though much of health spending is covered by insurers even with high-deductible plans, Hubbard said. When people are actively engaged in pricing health care and assessing its quality as they would be with HSAs, "that also translates even when they don't have money at stake."