Health Savings Accounts: What are They and Will They Endure?

by Vicki Parker

You might remember them. Before the Affordable Care Act a/k/a Obama Care was implemented in March 2010, Health Saving's Accounts (HSAs) were formed. Health Savings Accounts were developed with the Medicare Prescription Drug Improvement & Modernization Act in 2003. They replaced Medical Savings Accounts (MSAs) which were created with the Health Insurance Portability & Accountability Act in 1996 and are now grand fathered. The purpose behind HSAs was to help reduce the rising costs of U.S. healthcare. Though they were designed to make “able” individuals increasingly responsible for their own health care costs and choices, it seems the notion didn't take off, and what's more, it did little to reduce rising costs or increase personal responsibility for healthcare.

"Able" was a key component to HSA philosophy, but another component was the concept that individuals or families with a HSA pays a larger portion of their own healthcare costs forcing them to be frugal with healthcare decisions. This frugality was to allegedly translate to health-oriented lifestyles and a resulting reduction in the need for healthcare, which in-turn, would serve to drive costs downward. It didn't work! The primary reason seems to be that folks are simply not able to sock money away for their own healthcare during long periods of rising inflation and low interest rates on savings. In fact, they are not able to save for anything. According to the Center for Federal Tax Policy, "saving and investment have declined substantially as a percentage of GDP over the last 40 years."

The concept is relatively simple. You contribute up to a maximum allowable amount for 2017 of $3400 per covered person each year or $6,750 per family. Sadly, that represents a whopping $50 increase over 2016 despite the rising costs of healthcare and the uncertainty of Obamacare. Your contributions, however, are tax deferred. What you contribute to your HSA is your money. It belongs to you and you control when you withdraw it except that withdrawals must be health-care related (medical, vision or dental) or you subject yourself to a 20% tax penalty by the IRS.

There is no limit on the amount which can accrue in an individual HSA which is a side blessing for healthy folks and a curse for those who aren't so lucky. The longer the HSA accrues, the more an individual obviously secures toward potential future healthcare costs while consistent withdrawals by an unhealthy individual creates the need to consistently and perhaps permanently fund the HSA. It should be clear that the best time to sock money into a HSA is when you're young and healthy.

The premise behind HSAs is that cumulative contributions should put you in a financial position to afford you a higher deductible on your health insurance plan. You are then free to shop for far less expensive plans with very high deductibles which are designed to offset catastrophic healthcare costs only such as cancer or traumatic accidents. While higher deductible plans carry much more affordable premiums, they are not a part of the HSA itself. The HSA is merely a cumulative account where you bank monies in the interests of your own healthcare - a type of self-insurance. Even saving the maximum allowed under the law each year for 30 years would not generate enough savings to cover any catastrophic injury or life threatening illness, so the basic premise is to shift ordinary medical care expenses to the patient and ensure frugality in the process.

For Example:

John and Jane, a young married couple of 2 years with no pre-existing or existing medical conditions, apply for healthcare coverage and are quoted between $800 and $1200 month by several different providers for family coverage for a standard 80/20 plan. That translates to between $9,600 to $14,400 a year in annual premiums for an 80/20 plan. Notably, $14,400 represents nearly 70% of the total income of a person making a wage of $10.00 per hour. Minimum wage doesn't even reach this level in many States.

What can John and Jane do? They could set up a family HSA and set aside the tax-deductible maximum of $6,750 each year - $562.50 month collectively or $281.25 each. After two years of savings, John and Jane will have exceeded $10,000 in savings and then be able to obtain a high deductible plan which is far less expensive, but that premium will come as an added cost to the HSA contributions. In 4 years time, John and Jane could have set aside $27,000 for healthcare costs barring no illnesses or injuries.

The savings John and Jane realize in premiums can be used to fund the HSA - in theory. John and Jane are not allowed to claim health expenses on their taxes in this scenario and they are not able to use the monies for non-medical purposes. They would be able to “bank” the money until retirement and only post-retirement, use it for non-medical purposes.

HSAs were not and still aren't without opposition. They are as controversial as Obamacare. Proponents believe HSAs will have the affect of making healthcare problems worse because individuals with ongoing health problems will avoid HSAs or simply cannot afford them to begin with. Proponents also point out that medical expenses should be tax-deductible for all individuals, and not just those who have a HSA.

Proponents argue that HSAs are a high-deductible health insurance option which keeps rates low for those who could actually afford to pay larger premiums in the first place. They argue that HSAs are a tax savings for the wealthy and do nothing to solve increasing health care premiums for the average American, specifically the millions of Americans earning minimum wage or less.

Advocates believe that the overall effect of HSAs will reduce health care costs. Advocates feel that entrusting individuals with more control over their personal healthcare choices will have the affect of weaning out unnecessary tests and treatment. For instance, those who run to the emergency room as though it were a doctor's office or those who seek medical attention for simple first aid, etc. Proponents would argue the converse - that those participating in high-deductible plans are more likely to delay or avoid the care they need and consequently, actually increase their overall health-care cost in the long run.

Proponents argue that many families simply cannot afford to put aside a deductible for each family member. And if you are self-employed, a HSA does not preclude the requirement to pay employment tax on your earnings.

Against this backdrop, it's difficult to see how HSAs are going to resolve the healthcare crisis or replace Obamacare.

It appears despite best intentions, that HSAs are actually best suited for the youngest and healthiest of those seeking medical coverage. If you inherited a lump sum from a relative or you are otherwise in a position to begin funding a HSA, it is a wise move toward keeping premiums down. If at any point you obtain more affordable healthcare coverage (through an employer, for example), you can use your accruals for co-pays and unexpected medical costs. You cannot use HSA monies for over-the-counter drugs, however.

If you are interested in a HSA, simply find a health insurance plan that accommodates them. Annual deductibles vary from $5000 to $10,000. This high deductible has the affect of reducing your monthly cost for premiums by half. Then find a FDIC insured bank who also accommodates HSAs. The bank will issue you a debit card to be used solely for healthcare needs. Many banks will also issue annual reports for tax or other purposes. You can then actively use this debit card at the doctor's office, hospital, or pharmacy.

The upside to using a HSA is that if you are generally healthy throughout the life of the HSA, you can use any remaining funds for non-medical reasons on a tax-deferred basis at retirement.