By Ryan Ellis
The White House this week is hosting a listening session with conservatives on “Building Great Healthcare in America.” Where should this begin?
Without a doubt, the signature conservative healthcare policy achievement of all time is the creation of the “health savings account,” or HSA. Since their genesis in 2003 (itself a compromise to help pass Medicare’s prescription drug benefit and private sector delivery portal), HSAs have become the core nucleus of free market healthcare reform.
An HSA is a triple tax-free account. Contributions are tax deductible. The money deposited can earn interest or even be invested with tax-free growth. HSA dollars can be distributed without tax if used for healthcare expenses. There is no “use it or lose it” with HSAs — any money not spent rolls over year to year, just like an IRA or a 401(k).
The only catch is that in order to have an HSA, you must have “skin in the game,” namely a high-deductible health insurance plan. These type of plans have become much more the norm since 2003. The Centers for Disease Control reports that the percentage of working Americans with these plans grew from just under 15% in 2007 to over 43% a decade later.
Americans have responded by opening more and more HSAs every year. A recent survey found that 22 million American families have an HSA, and that collectively these hold an estimated $64 billion in assets, mostly cash deposits. This means that 1 out of every 7 families with private sector health coverage now uses an HSA.
HSAs are good for one main reason: They allow people to spend their own money on their own health services. Rather than pay a high premium to an insurance company to use all the healthcare they want, an HSA qualified plan turns patients into consumers, giving them an incentive to ask what things cost, to shop around, and to inch the health sector closer to a free market.
How can President Trump and congressional Republicans build on this success and make HSAs even more attractive? There is no shortage of good ideas. Sen. Marco Rubio, R-Fla., has introduced the Health Savings Act of 2019. It has some 20 improvements to HSAs, the fruit of years of experience managing these accounts in the real world.
I would propose three big HSA reforms that any politician can run on, though. These three HSA changes, more than any other, would catapult HSAs to the next level, and would very likely result in HSAs becoming the dominant way working Americans receive their health insurance.
Expand the definition of an HSA-qualified plan. When HSAs were created, the idea was to use them to help families take on higher deductible health insurance. Premiums would go down, and the savings could be deposited into the HSA to help meet the deductible. What Congress probably never envisioned was the rise of plans that have high deductibles but are not HSA-qualified for technical reasons. The solution is to update the definition of a plan which can be paired with an HSA.
Since the passage of Obamacare, the principal way a “skin in the game” insurance plan is measured is not by its deductible, but by its “actuarial value,” the average share of health spending paid for by the insurance plan. In Obamacare plans, a “gold” plan has an 80% actuarial value, a “silver” plan has a 70% actuarial value, and so on.
HSA-qualified plans should be defined as any plan with an actuarial value level of a certain amount or lower. That would then allow freedom to design insurance features underneath that bright line in a more flexible way than HSA-qualified plans must do today. (For example, you could have an HSA plan with a $10 drug copay under the deductible if you wished, something not allowed now.) It would also greatly expand the number of people eligible to contribute to HSAs, perhaps tripling the number.
To allow even more freedom, healthcare-sharing ministries and direct primary care plans should also be HSA-qualified for those preferring protections outside traditional insurance models. Finally, HSAs should not be disallowed merely because services are received from an on-site medical clinic, the Veterans’ Administration, the Indian Health Service, or Medicare.
Raise the HSA annual contribution limit. The law sets a limit on how much may be contributed to an HSA in a calendar year. For 2019, up to $7,000 can be contributed to an HSA for a family, $3,500 for an individual, plus an extra $1,000 “catch up” contribution if the account holder is over age 55. However, someone can easily spend more than that using an HSA-qualified plan. The out-of-pocket maximum (the annual deductible, plus coinsurance and copays after the deductible) for an HSA-qualified plan is currently pegged at nearly $16,000 for a family and nearly $8,000 for an individual.
The regular HSA contribution limits should be increased to these latter amounts, which would more than double the annual HSA contribution cap (the $1,000 catch-up would be unchanged, but spouses could contribute to the same account). Not only is this a tax cut conservatives can tout as moving toward a consumption based tax code, it also would help remove the anxiety many first-year HSA adopters have that they may run out of money before the account has a chance to build up.
Allow HSA dollars to pay for health insurance premiums. Many are unaware that HSA money usually cannot pay for health insurance premiums, just out-of-pocket health expenses. A commonsense solution would be to allow HSA dollars, which already enjoy tax advantaged status, to pay for HSA-qualified health insurance premiums. That way, families could have a true defined contribution healthcare experience. They or their employers could contribute tax deductibly to an HSA, and from there could pay for health insurance or direct health expenses on this pre-tax basis. In order to make sure HSA dollars are not used to purchase insurance which could procure an elective abortion, this proposal should be paired with a clarification that such abortions are not qualified medical expenses under the tax code.
Any conservative politician should be able to run on these three simple ideas to make HSAs better — allow more plans to become HSA-qualified, raise the HSA contribution limit, and allow HSA dollars to be used to purchase HSA-qualified insurance. Combined with the zeroing out of Obamacare’s individual mandate and the Trump administration’s expansion of health reimbursement arrangements, association health plans, and short-term, limited duration plans, an expansion of HSAs is the beginning of a real alternative to the Left’s socialized medicine agenda.
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