Reforming Health Savings Accounts (HSAs): Improving Access, Flexibility, and Equity in Healthcare

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Understanding Health Savings Accounts (HSAs) and Their Role in Healthcare

A Health Savings Account (HSA) is a tax-advantaged savings account that allows individuals to save money for medical expenses. The contributions to an HSA are made with pre-tax dollars, and the funds can be withdrawn tax-free to cover “qualified medical expenses,” such as deductibles, copayments, prescription drugs, and some dental and vision costs. After age 65, you can withdraw HSA funds for non-medical expenses without penalty, though those withdrawals will be subject to ordinary income tax, similar to 401(k) or IRA distributions.

To be eligible for an HSA, you must be enrolled in a high-deductible health plan (HDHP). In 2024, the minimum deductible for individuals is $1,600, and for families, it’s $3,200. The HDHP also has maximum out-of-pocket limits of $8,050 for individuals and $16,100 for families.

How HSAs Are Viewed Under Tax Law

Critics argue that HSAs are regressive, meaning their tax advantages benefit wealthier individuals more. This is because the tax break associated with HSA contributions is more valuable to those in higher tax brackets. For instance, someone with a 45% tax rate would save more on their contributions than someone in a 15% tax bracket. In 2020, the tax break for HSA holders was estimated at $12 billion, but the overall cost of tax exemptions for employer-based health insurance was much higher—around $170 billion. This suggests that while HSAs might be regressive, they’re not nearly as problematic as the broader tax exclusions for employer health insurance.

Moreover, some proponents of HSAs also support broader reforms, such as fixed-sum tax credits for health care, which aim to eliminate the regressive nature of the system while ensuring everyone benefits equally.

HSAs as a Tax-Free Savings Option

HSAs are among the best long-term savings options for healthy individuals because they allow money to grow tax-free and be withdrawn without penalty for medical expenses. They also offer unique benefits for retirees—specifically, the ability to pay Medicare premiums without tax consequences. For retirees, this feature makes HSAs more attractive than IRAs or 401(k)s for healthcare-related savings.

That said, the current structure of HSAs primarily favors the healthy, as it requires high-deductible health plans, which can be burdensome for individuals with chronic conditions or high medical costs. There are calls for changes to the system to make HSAs more accessible and beneficial for those with ongoing medical needs.

Making HSAs More Accessible for the Chronically Ill

People with chronic illnesses, such as diabetes or heart disease, could potentially benefit from more flexible HSA rules. Evidence suggests that many patients with chronic conditions can manage their own care effectively, and allowing health plans to deposit more money into their HSAs could empower them to take control of their healthcare spending. This approach would also align with successful models like the "Cash and Counseling" program in Medicaid, which lets patients manage their own care budgets, resulting in cost savings and better outcomes.

Improving HSAs for Primary Care

Direct Primary Care (DPC) is an increasingly popular model where patients pay a flat monthly fee for access to a primary care physician. The cost for services can be significantly lower than traditional healthcare models. However, current law restricts HSAs from paying for DPC services. If Congress allows HSA funds to cover DPC costs, it could provide more affordable and accessible primary care options, giving patients more control over their healthcare decisions.

Combining HSAs with Price Transparency and Medical Tourism

The integration of HSAs with reference pricing—where healthcare providers offer services at a fixed price—could incentivize patients to shop around for the best deals. For example, in California, the use of reference pricing for hip and knee replacements significantly lowered costs across the state. HSAs could be used to help patients save on procedures that fall below the reference price, encouraging cost-consciousness and competition.

Medical tourism, where patients travel to other countries for cheaper healthcare services, could also be supported by HSAs. If employers use HSA funds to pay for these procedures, it could provide substantial savings, especially for complex surgeries like joint replacements.

Why Seniors and ACA Exchange Participants Can’t Contribute to HSAs

Once individuals reach Medicare eligibility, they are no longer able to contribute to an HSA, a rule that many seniors find confusing. While HSA funds can be used for Medicare premiums, allowing seniors to contribute further would essentially allow them to deduct their premiums, something the tax code does not currently allow.

However, a potential solution could be the creation of a Roth HSA, where individuals contribute after-tax dollars, but all withdrawals—whether for medical or non-medical expenses—would be tax-free. This would offer a way for seniors to save more efficiently for healthcare costs.

Simplifying Medical Savings Accounts

There are currently three primary types of medical savings accounts—HSAs, Health Reimbursement Arrangements (HRAs), and Flexible Spending Accounts (FSAs)—each with its pros and cons. FSAs encourage short-term spending, HRAs provide flexibility but lack portability, and HSAs offer long-term savings potential but are tied to high-deductible plans.

A better solution could be to consolidate these accounts into one, combining the benefits of each and eliminating the drawbacks. This would make medical savings more straightforward and accessible for everyone.

Conclusion

HSAs have evolved over the past few decades, but there is still room for improvement. With nearly 30 years of experience under our belts, it’s time for sensible reforms that allow these accounts to better serve individuals with chronic conditions, seniors, and those in the ACA exchanges. By removing some of the restrictions and expanding the flexibility of HSAs, we can create a more efficient and effective system for managing healthcare costs.