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Start healthcare reform with health savings accounts

April 29, 2017

Congress left Washington last week without passing a plan to repeal and replace Obamacare. They are now back with an amendment to the failed American Health Care Act.

A growing number of Americans aren’t waiting for lawmakers to figure out how to make health insurance more accessible and affordable. They’re reclaiming control of their health care dollars from their insurers and assuming responsibility for spending that money themselves.

Health Savings Accounts (HSAs) have given them the power to do so. Created by Congress in 2003, these tax-advantaged vehicles have allowed more than 20 million people, whether they purchase insurance on their own or get it through their employer, to cut their insurance costs and secure care on their own terms.

Expanding access to HSAs should be a centerpiece of any congressional effort to expand access to quality, affordable health care.

The conventional approach to health insurance keeps consumers in the dark about how their health care dollars are spent. Patients pay premiums every month and rely on insurers to cover their medical expenses, no matter how small or routine.

Consequently, patients have little incentive to be cost-conscious. The more care they consume, the more value they capture for their premium dollar. The health care marketplace becomes an all-you-can-eat buffet.

Because consumers are not sensitive to the cost of care, they have little incentive to shop around for lower prices or better value. After all, their insurers are picking up the bill.

Providers, meanwhile, don’t have much incentive to be transparent about their prices or the quality of care they deliver. Their customers — patients — aren’t asking.

HSAs inject much-needed competitive forces into the health care marketplace. Patients put pre-tax dollars into their accounts and use them to cover out-of-pocket medical expenses. The contents of the accounts grow over time, with interest, and roll over tax-free from year to year.

Because patients control their health care dollars, they have an incentive to spend them wisely. That forces providers to compete for patients’ business.

To protect against potentially catastrophic costs, like those associated with serious illness, HSAs must be coupled with high-deductible insurance policies to form what are called consumer-directed health plans. High-deductible plans tend to carry relatively low monthly premiums. That leaves patients with more money to deposit in their HSAs.

This arrangement helps make health insurance, well, insurance again. Just as drivers cover the cost of gasoline and routine oil changes out of pocket, patients pay for basic prescriptions and doctor visits out of their HSAs.

And just as car-owners file insurance claims if they get in a serious accident, after paying their deductible, patients file claims if they get seriously ill and have to head to the hospital — after paying their deductible.

By encouraging cost-consciousness, HSAs save patients and the health care system money. A 2012 RAND Corporation study found that families spent an average of 21 percent less on health care in the first year after switching to consumer-directed health plans.

A 2015 study published by the National Bureau of Economic Research looked at health care spending for 13 million people at dozens of large companies. Costs for workers who adopted consumer-directed plans dropped 15 percent in each of the first three years after enrollment.

It’s no wonder HSA use is skyrocketing across the country. Between 2015 and 2016, the number of HSAs grew 20 percent. Total HSA assets have increased from $1.7 billion in 2006 to $37 billion last year.

These gains have come despite strict federal limits on HSAs. The IRS currently caps what individuals can deposit at $3,400. Families are limited to $6,750 a year.

Republicans can encourage HSA adoption by raising contribution limits to match those of IRAs — $5,500 for individuals and $6,500 for those 50 or older. Anyone who opens an HSA should also be eligible for a one-time $1,000 refundable tax credit that they can deposit in their accounts.

Allowing patients to use their HSA dollars to cover over-the-counter drugs and monthly insurance premiums would also make these accounts far more attractive.

The growth in HSAs is bringing competitive market forces to a health sector plagued by soaring costs and inefficiency. Republican lawmakers should do their best to encourage this trend.

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