Lanhee Chen: The antidote to Obamacare: health savings accounts
Supporters of the Affordable Care Act have heralded the recent slowdown in health-care spending as evidence that the law is working. Unfortunately for them, Obamacare has nothing to do with the trend.
Economists have argued that the slowdown can be explained, in good measure, by the sluggish economy and consumers bearing greater financial responsibility for their health-care decisions. In fact, President Barack Obama’s signature law is impeding progress on health costs.
For years, conservative health-policy analysts have highlighted the power of consumer-directed arrangements such as health savings accounts to restrain costs, help consumers gain more control over their medical decisions and improve the quality of care. Yet Obama-care, as well as some state policies, are undermining the effectiveness of HSAs.
Republicans now have an opportunity to rally around reforms to replace Obamacare and address health-care spending. Making HSAs more attractive and widely available is an important piece of the puzzle. As I’ve argued before, it’s time for Republicans to stop bickering over who hates Obamacare more and get on with promoting a package of reforms to replace it.
HSAs are employer-sponsored, tax-advantaged accounts that are fully owned by employees and used to fund out-of-pocket health-care expenses. Employees must purchase a catastrophic insurance plan to go with their HSA. Such plans carry annual deductibles of at least $2,500 a year for family coverage, and have monthly premiums that cost about 15 percent less than those of conventional plans. Annual out-of-pocket expenses are capped at $12,500 a family.
The main attractions are the significant federal tax benefits. Employees can make pretax contributions of as much as $6,450 a year for a family. Earnings are tax-exempt, and qualified medical expenses can be paid from the account tax-free. Employer contributions are not considered taxable income to the employee. All but three states (Alabama, California and New Jersey) confer the same tax advantages on HSAs as the federal government.
Together, HSAs and high-deductible health plans have become increasingly popular. About 11 percent of workers in employer-sponsored plans are enrolled in an HSA-qualified plan, up from 2 percent in 2006. Among employers offering health benefits, 17 percent offer an HSA, also up from 2 percent in 2006.
HSAs give consumers greater control over how they direct their health-care spending. They are able to roll over unspent amounts from year to year. And because HSAs are coupled with high-deductible health plans, consumers have incentives to consider costs before making health-care decisions.
Recent studies show that HSAs help reduce health-care spending. The Employee Benefit Research Institute in July found that one Midwestern company whose employees were offered only an HSA saw a 25 percent reduction in spending in the first year, with smaller savings in subsequent years. A 2012 study by the RAND Corp., benefits consulting firm Towers Perrin and the University of Southern California concluded that annual health-care spending could be reduced by $57 billion if consumer-directed health plans accounted for half of employers’ plans.
Despite HSAs’ growing popularity and success at controlling costs, many liberals are on the warpath to get rid of them, or at least to curb their effectiveness. Economist Paul Krugman, for example, has written repeatedly that HSAs will increase the number of uninsured people while benefiting only the wealthiest taxpayers.
Recent federal policy has codified some of the liberal distaste for HSAs and made them less desirable for consumers. Obamacare, for starters, bans the use of HSA funds for over-the-counter medications without a prescription — an increasingly restrictive limit given the Food and Drug Administration’s push to make common prescription drugs for high cholesterol, allergies and other conditions available over-the-counter.
Obamacare also doubled, to 20 percent, the taxes due on money withdrawn from an HSA and used for nonmedical purposes. These taxes exceed the early withdrawal penalties for tax-protected retirement plans. The health-care-reform law, moreover, drastically decreases the maximum allowable deductible in HSA-linked plans offered by small employers. Although the intention was to reduce out-of-pocket payments, this change will increase monthly premiums and make coverage less affordable.
Finally, the law places HSAs in jeopardy by giving federal regulators the authority to define the “essential benefits” that all plans must provide. This could prevent insurers and employers from offering certain catastrophic plans.
Policy makers should be encouraging the use of HSAs. They should permit taxpayers to use the accounts for health-care or long-term-care premiums and over-the-counter medications. Medicare enrollees and veterans, now prohibited from making contributions to HSAs, should be permitted to do so. Republican Sens. Orrin Hatch of Utah and Marco Rubio of Florida, along with Rep. Erik Paulsen, R-Minn., include these changes in legislation they are sponsoring.
The effort to constrain rising health-care costs isn’t just about limiting spending for its own sake. Only by lowering costs will more Americans be able to access quality, affordable health care that doesn’t come with trillions in new federal spending, higher taxes and piles of new government regulation.
Although HSAs won’t cure all of Obamacare’s ills, they have an important role in a Republican strategy to replace the fundamentally flawed health-care law.
Lanhee Chen is a Bloomberg View columnist and a research fellow at the Hoover Institution at Stanford University. He was the policy director of Mitt Romney’s 2012 presidential campaign.