Health Savings Accounts:
A Missed Opportunity

Commentary

Health Savings Accounts (HSAs) were created by Congress in 2003 as a lower-cost alternative to traditional health insurance, and a means of reducing U.S. health care costs. In a speech to the National Association of Health Underwriters on January 31, 2007, Senator Orrin Hatch of Utah said, “By focusing attention on the individual’s stake in health care expenses, these plans promise to hold down health care inflation.” On the surface, this sounds promising. However, U.S. health care costs continue to spiral out of control.

To understand why HSAs miss an opportunity to rein in health care costs, let’s first examine how they work. HSAs have two components:

• a tax-exempt savings account for medical expenses; and
• a qualified high-deductible health insurance plan (HDHP).

The savings account concept is fairly straight-forward and similar to an Individual Retirement Account (IRA), except that withdrawals from an HSA may only be used to pay for qualified medical expenses. Contributions to the savings account are tax-deductible within limits that are adjusted annually for inflation. In 2007, an individual can contribute $2,850 for self-coverage, or $5,650 for a family plan. Dental and vision care are qualified expenses, but cosmetic procedures are not. HSA funds may not be used to pay for health insurance premiums, except in extreme circumstances, such as following job loss.

HDHP premiums generally cost much less than traditional health insurance, because the policyholder pays for all medical care up to a set deductible, which starts at $1,100 for individual policies and $2,200 for family coverage. Generally, the higher the deductible, the lower the premium will be. Out-of-pocket costs are limited to $5,500 for individual plans and $11,000 for family plans, and may be paid from the HSA.

In theory, consumer directed health plans like HSAs give patients incentive to shop for the best combination of care and value, since they are paying the costs directly out of their own savings accounts. In reality, once the deductible is met, the insurance company covers the balance of the costs. Therefore, consumers are not concerned whether a surgery costs $20,000 or $120,000.

Of importance to the medical tourism industry, HSAs offer patients no incentive to take advantage of the substantial savings offered by overseas surgery.

Quality medical care is available overseas at up to 80% less total cost than U.S. prices. Congress has missed an opportunity to reduce soaring health care costs through the HSA program by not including incentives for consumers to pursue low cost options for the most costly procedures.