Improving Access to Affordable Health Coverage by Expanding Access to Health Savings Accounts
2005-06
In December 2003 President Bush signed legislation creating a new kind of affordable health coverage, Health Savings Accounts, or HSAs.
People with HSAs have a tax-free account with money to spend on routine medical costs, combined with an inexpensive, high-deductible insurance policy to pay for catastrophic medical care in case of major accident or serious illness.
Unlike employer-based health benefits, HSAs are private, personal and portable. Any unspent money in the account rolls over from year to year. When people with HSAs change jobs or leave the workforce their health coverage goes with them.
With HSAs, health care consumers are now able to shop around, compare prices and providers, and select the medical services that are best for them. The consumer, not faceless insurance executives or distant government regulators, control HSA dollars, and the resulting market competition is putting urgently-needed downward pressure on rising health care costs.
More than a million HSA holders
So far over a million people across America have acquired Health Savings Accounts. More than one-third of these people were previously uninsured, and 27% of small employers buying HSA plans for their workers had previously offered no health insurance. One company reports that it enrolled more than 12,400 new individuals in HSAs in Washington state – 58% of these enrollees had been without health coverage.
Government barriers to HSAs in Washington state
Despite this progress, HSAs are more expensive in Washington than in states where health insurance is less highly regulated. Washington requires insurance policies to pay for 49 separate mandated benefits and services. Such heavy regulation works against the cost-cutting purpose of HSAs and artificially inflates the cost of health insurance. Several independent studies show state mandates add at least 15% to 20% to the cost of health insurance.
Washington’s community rating law also drives up the cost of health insurance in our state. The law requires insurance companies to treat everyone purchasing health insurance as if they were among the costliest population of the insured, rather than tailoring the price of an insurance policy to the customer’s individual needs.
Ways policymakers can improve access to HSAs
There are several ways state and federal leaders can make health coverage more affordable for everyone.
1. Legalize basic catastrophic health insurance. Currently, all catastrophic insurance policies sold with HSAs in Washington must bear the full burden of all the mandates enacted by the legislature over the years. That means HSA coverage in Washington costs more than it needs to. Legalizing basic health insurance would:
2. Exempt HSAs from community rating requirements. This would allow fair and accurate pricing of HSA-based health coverage, because the cost of an HSA would be based on the true health risk a person brings to the insurance pool. As a good first step, exemption from community rating could be offered to people who had no health coverage in the previous six months.
3. Offer HSAs to state and local government employees. Governments are often slow to take advantage of innovations that develop in the marketplace. In this case, however, early adoption of HSAs as a choice for public employees would improve the quality of benefits and significantly lower rising health care costs for state and local governments. The federal government already offers several HSA options within the Federal Employees Health Benefits Plan.
4. Encourage insurance companies to enter Washington’s HSA market. Over the years private insurers have steadily left our state, leaving consumers with fewer choices. State lawmakers and the Insurance Commissioner should adopt rules that encourage more insurance companies to offer HSAs in the Washington market, thereby promoting price competition that benefits consumers.
5. Make catastrophic insurance premiums tax-free. Under current federal law, premiums paid by individuals for the catastrophic insurance that goes with each Health Savings Account is still subject to federal income tax. As HSAs become more popular, Congress should revisit this part of the law and consider making catastrophic insurance premiums part of the tax-free treatment of HSAs.
6. Repeal the comparability rule. The comparability rule in federal law prevents employers from offering health insurance to key employees only. Under current law, if an employer cannot offer HSA coverage to all of his employees he cannot offer it to any of them. Health benefits should be treated equally with other forms of compensation which vary among employees, such as salary, vacation time and performance bonuses. Congress should allow employers to offer health benefits to at least some employees, especially if this coverage is all that the employer can afford.
The reason HSAs are attractive to a wide variety of people is they end the unequal tax treatment between businesses and individuals. For the first time individuals now gain the same tax advantage when buying health insurance that businesses have enjoyed for more than sixty years.
HSAs put people in charge of their own health care. These plans do not require pre-authorization from medical gatekeepers, insurance bureaucrats or government regulators before using the benefits. HSA plans are flexible and portable, and their tax advantages help consumers save for their future health care needs. The low premium payments are attractive to people who are currently not covered by health insurance, and to small employers who otherwise could not offer coverage to workers. All in all, HSAs offer a practical solution to many of the ills that now plague our health service delivery system.
See our full study, “The How-to Guide to HSAs” on our website at www.washingtonpolicy.org, or call toll-free 1-888-972-9272.