by Fred Adams
Vice President
HSA for America

Bush Touts Health Savings Accounts

In his 2006 State of the Union address, President Bush mentioned Health Savings Accounts (HSAs), and his priorities of confronting the rising cost of health care, helping people afford the health insurance they need, and making coverage portable so that people don’t lose their health plan when they change jobs.  HSAs, which now cover over 3 million people, are already lowering people’s costs, in many cases are totally portable, and provide powerful incentives that will reduce healthcare costs for all.

Health savings accounts allow individuals to purchase lower cost high-deductible health insurance, and establish a savings account in which a family can make a tax-deductible deposit of up to $5450 each year to be used to cover future medical expenses.  Money can be withdrawn tax-free to pay for covered expenses before the deductible is met.  It can also be used to cover expenses that are not normally covered by health insurance, including dental treatments, eye glasses, alternative therapies, and even household medical expenses like aspirin.  This in effect makes all these expenses tax deductible.

If the money is not withdrawn to cover medical expenses, it grows tax-deferred like an IRA.  The money can be withdrawn penalty free at age 65 for any reason, and tax-free if it is used to cover any medical expenses.  This would include Medicare premiums, nursing home charges, or long-term care insurance.

In addition to tax savings, HSA owners enjoy lower rates on their health insurance.  These plans are typically 30%-40% less expensive than traditional plans.  Small companies that switch from group plans to funding individual HSA plans for their employees save even more.  Any money the employer contributes to the HSA for the employee is tax-free, and if it is an individual plan and the employee leaves the company, they can take their health insurance with them.

For the past 60 years, most health care has been paid for and controlled by third parties such as the government, insurers, and employers.  Consumers rarely compared prices or quality of service when shopping for health care – partly because this comparison was usually very difficult or even impossible, and partly because the price often just didn’t matter to the consumer, who was only responsible for a moderate co-payment.

Today people are waking up to the idea that they should look at their health insurance the way they look at their automobile insurance or homeowners insurance.  The coverage is to pay for the major expenses, not the routine oil changes.  Because HSAs require that the insured cover the first $1000 or more in health expenses, there is incentive for the consumer to demand information about health care pricing.  This puts market pressure on the providers, and is the beginning of dramatic change in the system.

The most exciting thing about HSAs is this potential impact they could have on the cost of health care.  No system has yet been devised in the history of mankind that does more to increase quality and lower prices than a competitive market system.  As more and more consumers begin to own health savings accounts, health care providers will be forced to compete for their business by providing better quality service and better prices.

The other factor in play is the financial motivation the individual will have to stay healthy.  The vast majority of health care spending today is due to degenerative diseases such as high blood pressure, diabetes, metabolic syndrome, cardiovascular disease, and other modern ailments that are primarily the result of lifestyle choices.  The consumer who wisely spends his HSA dollars on preventive care (which can be done tax-free) and pays attention to diet and exercise could be rewarded with a substantial amount of money in their Health Savings Account by age 65.  As an epidemic of diabetes and other obesity-related diseases loom over us, it is nice to see the government setting up a system that rewards healthy behavior.

Health savings accounts have the potential to be a powerful force of change in the healthcare system.  By instituting competitive pressures, encouraging greater price transparency, and rewarding consumers who are proactive about their health, the growing adoption of Health Savings Accounts will help make health care more affordable for everyone.

HSA for America
749 S. Lemay Ave, Suite A3-116
Fort Collins, CO 80524
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