HSAs: Revenue-hungry Democrats have spared a choice tax break one available even to the rich and preserved one of the GOP's favorite plans. Could real health care reform be advancing under the radar?
By all political and fiscal logic, health savings accounts should be on their way out. That's what we once expected, and that's what liberal critics of HSAs wanted. But ObamaCare is now the law of the land and HSAs, enacted and promoted by a Republican Congress and President George W. Bush, are still here.
Democrats changed only two aspects of these plans in their quest for revenue. Holders of health savings accounts can no longer use the money to pay for over-the-counter drugs, and the tax penalty for spending HSA money on nonallowables rises to 20%. Neither revision alters the HSA basics, which in the current political climate are remarkably generous to high-income taxpayers.
An HSA holder can still deduct up to $6,150 ($7,150 if over 55) this year for a family high-deductible insurance plan. Unlike most other deductions or credits, this one doesn't phase out as income rises. The money grows tax-free and is not subject to tax when spent, as long as it goes toward medical expenses. As the New York Times' personal finance columnist Ron Lieber notes, the HSA "is a rare triple play in the world of tax breaks."
HSAs aren't a big-ticket budget item, at least not yet. Congress' Joint Committee on Taxation estimates they'll cost $6.5 billion in lost revenue from 2009 through 2013. But if their popularity continues to grow, they could cost far more in later years. Even now, they should have cost enough to rate notice by revenue-hungry Democrats, who left no seat cushion unturned in their quest for small change to pay for ObamaCare.
These were the people who voted with a straight face to squeeze out a paltry (by D.C. standards) $2.7 billion over 10 years with a tax on tanning salons. That's just a bit more revenue than what the JCT estimates will be lost to HSAs ($2.1 billion) in 2013 alone.
Money aside, HSAs are unpopular with liberal health care reformers because they require the purchase of high-deductible insurance plans, which require out-of-pocket payment for most routine medical costs. That, of course, is their main selling point as a market-oriented reform.
High-deductible plans are meant to turn patients into cost-conscious consumers, who are rewarded for their frugality by being able to save tax-free in an HSA. Critics on the left argue that patients need a more paternalistic approach, and that HSA holders will save money by forgoing needed medical care.
So why, against all these head winds, did HSAs survive? On-the-ball lobbying was part of the answer. As Lieber notes, the American Bankers Association's HSA Council got wind of anti-HSA sentiment among Obama's advisers during the presidential campaign; the group was buttonholing members of Congress as soon as Obama took office.
But it wasn't just that the HSA Council wouldn't leave Congress alone. It also had an objectively strong case to make essentially, that HSAs and the relatively cheap high-deductible plans linked to them were just the ticket to attract healthy, high-paid workers into the risk pool and make ObamaCare work.
Now that ObamaCare is on the books, that argument is now a likely scenario. Mandates on employers and individuals to buy insurance will push them to look for the cheapest plans that meet legal requirements. As long as high-deductible plans are available, they will get plenty of takers.
This ironic turn of events is more than a consolation prize for conservatives. It is a chance for them to lead American health care toward a consumer-based market model instead of the Democrats' single-payer dream.
The core case for HSAs and high-deductible insurance that they put the cost-cutting decision in the hands of individual patients, not private insurers or the government remains as strong as ever. It will get that much stronger as health costs inevitably rise.
Opponents will do all they can to choke off the consumer-driven health care revolution, perhaps by claiming that the high-deductible plans aren't actuarially sound. You could say that a long fight is just beginning. But that's far better than saying that it has already ended in defeat.