“Each of the proposals outlined above would help hard-working Americans pay for their health-related care. Each would benefit hard-working lower-income Americans and other marginalized people nearly exclusively . . . All would reduce the financial barriers to care – particularly high-value care. All would empower people by giving them more control over their treatment decisions.”
William G. (Bill) Stuart
Director of Strategy and Compliance
June 10, 2021
The Biden Administration and Democrat leaders in the House and Senate are working diligently on comprehensive healthcare legislation to be introduced later this year. The Democrats are focusing on five large topics:
- Reforms to public marketplaces created by the Affordable Care Act, including making permanent the higher premium subsidies authorized for two years under the American Recovery Plan Act earlier this year.
- Prescription-drug pricing, an issue that enjoys broad bipartisan support but sharp divisions in the manner of achieving the goal.
- Medicare enhancements, including adding dental and vision coverage and lowering the age of eligibility to 60.
- Funding for a dramatic expansion of home- and community-based services.
- Proposals to address health equity, a topic as broad as Medicaid reform, and differences in maternity outcomes and behavioral-health services among different races.
It’s an expansive agenda – one made increasingly difficult by the Senate parliamentarian’s recent decision that Democrats can’t use budget reconciliation multiple times in a single year. Democrats were counting on using reconciliation, a process that allows legislation to bypass the Senate filibuster rules if its provisions affect federal spending or taxes, to avoid compromises to secure at least 10 Republican votes by bypass a potential filibuster.
If Democrats are willing to consider a much smaller effort that can attract broad bipartisan support to help hard-working Americans pay for their medical care, they could do far worse than support the package outlined below.
Health Savings Accounts and Healthcare Reform
The seeds of Health Savings Accounts were planted by, among others, three leading Democrats in the US Senate more than two decades ago. The enabling legislation enjoyed board support because it included a new entitlement program (which means that it’s funded based on eligibility rather than congressional appropriation), a Medicare prescription-drug benefit, as well as the expansion of what had been Archer Medical Savings Accounts from a limited demonstration project to a full-blown program.
Since then, however, they’ve been viewed through partisan lenses. Most Democrats haven’t supported changes to Health Savings Account law. In my travels on Capitol Hill (limited to virtual visits with several senators, members’ legislative aides, and committee staff members), I’ve concluded that the opposition is driven by two beliefs:
First, that Health Savings Accounts benefits primarily the wealthy.
Second, that Republicans position Health Savings Accounts as the central feature of their efforts to create a new coverage landscape in place of the Affordable Care Act.
It’s difficult to overcome the first objection, which is emotional, with the relevant facts. Only about 4% of owners fund their Health Savings Accounts to the maximum ($3,600 or $7,200 in 2021) annually. Industry studies show little difference in family income, health status, family size, or age between employees who elect to participate in a Health FSA program and those who fund a Health Savings Account. The primary determinant of who funds which account is simple: It’s the account that their employer offers.
Yet Democrats still see Health FSAs as the working man’s reimbursement account and Health Savings Accounts as a tax benefit for the wealthy. With those impressions in place, it’s difficult to change minds.
The second objection is a concern. I’m pretty connected to the Health Savings Account provider community, and I know of no one who touts these accounts as the solution to the high cost of medical coverage and care. Those of us who champion Health Savings Accounts see them as a part of the solution to making care more affordable, regardless of the underlying structure of the coverage system.
Gaps in Reimbursement
One problem with Health FSAs, the Democrats’ reimbursement account of choice, is that not everyone can participate. Health FSAs are employer-sponsored plans. As such, there are two important gaps in access: employees whose companies don’t offer a Health FSA, as well as the millions of people who aren’t part of a traditional employer-employee relationship. These people experience the same issues managing out-of-pocket costs as workers who participate in a Health FSA, but they don’t have access to the tax benefits that a Health FSA offers.
In contrast, a Health Savings Account is not an employer-sponsored program. A self-employed person – a freelance webpage designer, Uber driver, financial advisor, plasterer, or cosmetologist – can enjoy the benefit of paying eligible health-related expenses with pre-tax dollars if she’s enrolled in an HSA-qualified plan and meets other eligibility requirements. Among traditional employees, some people – such as working seniors, and employees with high deductibles whose plans aren’t HSA-qualified – may incur substantial medical claims without access to a tax-advantaged account.
There are several legislative paths to expanding the number of Americans who can pay their health-related out-of-pocket expenses (and even medical coverage) with tax-advantaged funds. These paths would help these people save between 20% and more than 35% on all their out-of-pocket medical, dental, vision, and over-the-counter expenses. Picture a family with a gross income of $57,000 and $3,000 in medical, dental, and vision expenses. A reimbursement account would help them pay those bills with only $2,000 to $2,400 – rather than $3,000 – of that income. Tax savings of $600 to $1,000 may not be a game-changer to some families, but it sure sounds good to a couple who need to replace a water heater or want to take the family on a much-deserved long weekend getaway.
A working group of Health Savings Account experts, actuaries, and advocacy organizations has been working for about two years on this proposal. The concept is simple. Today, the rules for an HSA-qualified medical plan are very prescriptive: minimum deductible, maximum out-of-pocket, and all non-preventive services applied to the deductible. This approach has its shortcomings:
- Many plans have deductibles far higher than the statutory minimum of $2,400 (self-only coverage) or $2,800 (family coverage), but some other feature of the plan – perhaps a copay for PCP visits or generic drugs – disqualifies the plan. Enrollees have high out-of-pocket costs but can’t open and fund a health savings account.
- A growing number of states are proposing mandatory first-dollar coverage for certain services (male contraception, behavioral-health services, breast-cancer treatment) that aren’t preventive. These efforts, if successful, disqualify anyone covered by any insurance plan issued in that state – even, say, a woman whose plan requires first-dollar coverage for a vasectomy – from funding a Health Savings Account.
- The rules make no provision for high-value versus low-value care. A plan can’t provide full coverage for a diabetic’s annual foot exam or behavioral-health counseling for someone in distress. This lack of flexibility can exacerbate these conditions in cases in which an ounce of fully-covered care would be better than a pound of acute treatment.
The solution is an Actuarial-Value (AV) approach. AV refers to the average percentage of all claims paid by the insurer for a particular plan design. If the plan has a $4,000 self-only deductible, then perhaps patients pay 35% of total claims (as deductibles, coinsurance, and copays) and the insurer pays 65%. In that case, the AV is 65. In contrast, when people enrolled on a plan with a $500 self-only deductible may pay only 10% of the total claims, the AV is 90.
Creating a path to designing HSA-qualified plans based on AV – rather than the current prescriptive requirements – would improve the financial lives and health conditions of millions of Americans. Anyone with a plan whose AV fell below the ceiling could open and fund a Health Savings Account to pay current and future eligible expenses with pre-tax funds. And insurers and employers could design plans that offer first-dollar high-value care to enrollees with specific medical conditions and apply the deductible to other medical services.
Think for a moment about the 10,000 Americans who are turning age 65 today. During the past two decades, their retirement savings have endured the dot-com meltdown of 2000, the market’s sideway performance during the middle of the first decade of the 21st century, the recession of 2008, and the COVID-19 pandemic. Battered portfolios (or lack of sufficient savings) are forcing millions of Americans to remain working after their 65th birthday.
Here’s the problem: Any working seniors who collect Social Security benefits to supplement their wages must enroll in Medicare Part A (which carries no premium for most Americans). And many who work at companies with 19 or fewer workers are required to enroll in Medicare Part A and Part B (which carries a premium of $144.50 or more monthly).
These workers aren’t eligible to accept an employer contribution or make pre-tax contributions to a Health Savings Account, even if that’s the only coverage their company offers. Let’s break this down:
- In the first case above, current law discriminates against any working senior who is otherwise eligible to fund a Health Savings Account but for the need to supplement her income with Social Security benefits. That sounds like discrimination based on age and income.
- In the second case above, current law discriminates against working seniors whose small companies’ insurers require them to enroll in Medicare to remain covered on the employer-sponsored plan. That looks like discrimination based on age and small-company status.
The simple solution is legislation stating that working seniors enrolled in Medicare who are otherwise eligible to open and fund a Health Savings Account are now permitted to do so. This provision would do nothing more than to level the playing field between working seniors and their younger co-workers.
Divert Cost-Sharing Subsidies to Health Savings Accounts
The Affordable Care Act created a program called cost-sharing subsidies, which reduces the out-of-pocket costs on a sliding scale for people enrolled in nongroup products whose income falls below 250% of the federal poverty level. The objective is to reduce dramatically their financial responsibility – from, say, a $4,000 deductible to $250 – so that out-of-pocket costs don’t represent a barrier to care.
This program creates a serious financial distortion. Subsidies go straight to insurers, rather than patients, thereby eliminating any incentive to manage care effectively. In contrast, imagine a program in which the low-income enrollee in that plan with a $4,000 deductible received, say, $3,500 in a Health Savings Account. She could spend the money not only on medical deductibles, but also a fluoride treatment, dental cleaning, or pair of glasses for her children. Wouldn’t that approach empower her to manger her family’s care better than a subsidy paid to a medical insurer that would benefit her only when family members receive medical care? She could also contribute to the account up to the statutory maximum – deposits don’t have to come from earned income – if she needs more money to pay for her family’s care.
The Bottom Line
Each of the proposals outlined above would help hard-working Americans pay for their health-related care. Each would benefit hard-working lower-income Americans and other marginalized people nearly exclusively, with little or no benefit (depending on the proposal) to people with above-average incomes. All would reduce the financial barriers to care – particularly high-value care. All would empower people by giving them more control over their treatment decisions.
These should be objectives that enjoy strong bipartisan support, even in today’s highly partisan political crucible.
What We’re Reading
Are you a good candidate to roll balances from another Health Savings Account or an Individual Retirement Arrangement to a Health Savings Account? Learn more about these strategies here.
Have you talked to your financial advisor about diversifying your tax liability in retirement? Most analyses debate the appropriate breakdown between tax-deferred and Roth accounts. But Health Savings Accounts deliver the best features of both plans.
Do you know a recent college grad (or child about to turn age 26) who’ll be enrolling in medical coverage for the first time? Time for them to learn a quick lesson. This article provides some insight into how to choose a plan and introduces the financial advantages of participating in a Health Savings Account program.