HSAs most important legislation of 2003

Harvard Prof. Martin Feldstein writes on the op-ed page of today’s Wall Street Journal (paid sub required, $1 at your newstand) that “The health savings accounts that President Bush recentlly signed into law may well be the most important piece of legislation of 2003.”

Harvard Prof. Martin Feldstein writes on the op-ed page of today’s Wall Street Journal (paid sub required, $1 at your newstand) that “The health savings accounts that President Bush recentlly signed into law may well be the most important piece of legislation of 2003.”

I’ve posted five times on HSAs. Search “HSA” to see links to several other articles and relevant IRS documents.

 

Feldstein was chairman of the Council of Economic Advisers under President Reagan. His impact graphs:

 

The new HSA law (a part of the recent Medicare reform bill) eliminates the preferential subsidy for comprehensive insurance by giving the same tax treatment to individuals who set aside income to pay cash for a larger share of their own health care. Anyone under the age of 65 can establish a Health Savings Account if they have a “qualified” health-insurance plan. A “qualified” plan is an insurance policy that has a minimum deductible of $2,000 for a family and a $10,000 limit on the family’s annual out-of-pocket expenses. The deductible is designed to make individuals more cost-conscious in their consumption of health care, and the annual limit on out-of-pocket expenses is there to prevent financial hardship or a lack of care because of an inability to pay. Individuals or their employers can make annual pretax contributions to Health Savings Accounts of up to 100% of the health-plan deductible, with a maximum of $5,150 in 2004.

 

An individual can withdraw funds from his HSA without paying tax if the money is used for any kind of health bills, including prescription drugs, dental care and long-term care. Any funds not used in one year are automatically carried forward to the future. Individuals can also withdraw funds from these Health Savings Accounts for nonmedical expenses by paying tax as they would for any IRA withdrawal. And the individual pays no tax on the interest, dividends or capital gains earned on the HSA investment.

 

Here’s an example of how such a “qualified plan” and an HSA can substantially reduce costs for a family without increasing its financial risk. California Blue Cross now offers a traditional low-deductible plan (a deductible of $500 per family member, up to a maximum of two) with an annual premium of $8,460. It also offers a high-deductible plan that is similar except that the deductible is $2,500 per family member, also up to a maximum of two. The annual premium for the high-deductible plan is only $3,936, a premium saving of $4,524. The premium saving is so large that it actually exceeds the maximum additional out-of-pocket cost that the family would face if it reached the maximum deductible for both individuals!

 

The traditional tax rules are the only reason why someone in the past would have chosen the low deductible policy. A family that earns $50,000 faces a marginal tax rate of about 45% (a 27% federal income tax rate, 15% payroll tax rate and a state income tax rate of about 5%). If the $4,524 premium saving was turned into taxable salary, the individual’s net income would rise by only 55% of $4,524, or $2,488. But when the saving of $4,524 is put into a Health Savings Account, there is no tax to pay and the funds can accumulate tax-free.

 

High-deductible policies give individuals and their doctors an incentive to avoid wasteful health spending. When spending comes from the individuals’ own Health Savings Accounts, individuals and their doctors have a strong reason to balance the costs of medical procedures against the potential favorable impact on health. The same incentive can influence the choice among hospitals and among different prescription drugs. And because these cost incentives reduce the need for HMO rules that limit the availability of care, individuals can have greater scope for choosing the care that they want.

 

In short, the new HSA tax and insurance rules can be the beginning of successfully controlling medical spending and bringing it in line with what patients and their doctors really think is best.

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