Congress Declares War on HSAs

While Congress has been debating health reform, employers have been creating new consumer-driven plans that lower costs and improve the quality of care. More than half of employers now offer consumer-driven options, including Health Savings Accounts (HSAs) and by 2010, nearly 18 million people will be enrolled.

Federal legislation can stop progress in its tracks, however. The Senate proposal, for example, does not directly outlaw HSA-eligible plans; but it restricts HSA options in insidious ways that will delay, deny, defeat and ultimately kill them. 

The Senate Bill Favors Premiums Over Savings. Right now, HSA plans are the only form of health insurance under which an individual’s out-of-pocket exposure is limited by law. Currently, the limits are $5,950 for individuals and $11,900 for families. For example, a plan could have deductibles as high as $5,950/$11,900 so long as the plan pays all costs above those amounts. Curiously, under the Senate bill the health insurance maximum out-of-pocket would be the same as under HSAs. However, the Senate bill limits the deductible for small group plans to $2,000 for singles and $4,000 for families — roughly one-third the level allowed under current HSA law. The additional out-of-pocket exposure under the Senate bill is from copays and coinsurance above the deductible. Given the option to do so, many people would choose a $5,950 over a $2,000 deductible and place the premium savings in an HSA. But this is a choice the Senate bill would deny them.

But why? With the same out of pocket exposure, why should Congress care whether or not a citizen decides to finance medical services through third-party insurance (higher premiums) or individual self-insurance (health savings)?

The Senate Bill Ignores Cost Reductions from HSA-Eligible Plans. Consumer-driven health plans have been shown to lower overall health costs. According to an American Academy of Actuaries study, “The total savings generated could be as much as 12 percent to 20 percent in the first year. After the first year, studies indicate trend rates lower than traditional PPO plans by approximately 3 percent to 5 percent.” HSA-eligible plans empower individuals, emphasize personal responsibility, and encourage more effective use of health and health care services. Yet, Congress has ignored the data and is set to limit the ability of the private sector to take advantage of these proven cost-control options. 

The Excise Tax on Health Insurance Limits the Potential of HSAs. Under the Senate proposal, a 40 percent excise tax would apply if health plan costs exceed $8,500 for an individual. If one puts the maximum $3,050 into an HSA that leaves only $5,450 to purchase medical insurance, dental coverage, vision, and all other federally-mandated health care benefits.  For ages 55 or older, the maximum HSA is $4,050. For those citizens putting in the maximum HSA leaves only $4,450 for health premium before a 40% excise tax would apply.

How much will medical insurance and other health plans cost? Amazingly, the actual benefits are not defined in the Senate proposal. The Secretary of Health and Human Services (HHS) will determine the coverage requirements and rules applicable to all plans, including HSAs. Yet how can anyone (including the Congressional Budget Office) price the cost of health reform without knowing the scope of coverage and benefits? What we do know is that an arbitrary one-size-fits-all cap on tax advantaged health costs will limit consumer options for HSAs.

Regulations Will Stifle HSAs. In the Senate bill, “the Secretary (of HHS) shall define the essential health benefits” that all individuals will be required to obtain. Broad categories of health care are listed without any specifics on treatment or financial limits that may apply. The guidelines include a charge to the Secretary to ensure that the scope of benefits is “equal to the benefits provided under a typical employer plan.” Since by definition, new HSA-eligible plan designs and concepts are not “typical,” we will likely wind up with restrictions on new-generation HSAs. A one-size-fits-all government approach that regulates and approves only a narrow range of “typical” products will stifle creative solutions.

Regulatory Powers Could Make HSAs Illegal. Many in Congress oppose HSA-eligible plans and consider them “under-insurance.” They believe contrary to evidence that HSAs are only for the young, healthy and wealthy. With broad powers, the Secretary could easily outlaw HSA-eligible plans by requiring the essential health benefits to include coverages that violate HSA eligibility under federal law. For example, in the proposed bill a special low-cost, non-group catastrophic plan is allowed for individuals under age 30. Rather than designating an HSA-eligible plan, section 1302(e) of the bill describes the catastrophic plan as requiring a minimum of three primary care visits. Yet such a requirement would disqualify the plan from also being HSA-eligible. All HSA-eligible plans could be killed with a similar standard for “essential health benefits.”

Restrictions on Purchasing Over-the-Counter Drugs.  In the Senate bill, people will no longer be able to purchase most over-the-counter (OTC) drugs with the HSA funds. This will greatly hamper the incentive people have to control drug costs. As a prescription drug, Claritin costs about $2.50 a day. The OTC price immediately dropped to $1 a day and it’s now about 50¢ per day. By prescription, the heartburn drug Prilosec costs about $4 a day. It is now available OTC for as little as 50¢ a day. Obviously, it makes no sense to prohibit patients from making these kinds of lower-cost choices.

Other Restrictions on the Use of HSAs. The penalty for non-medical HSA withdrawals is increased from 10 to 20 percent. This weakens existing patient HSA options and flexible uses under a bill that begins to redefine medical products and services to be non-medical (e.g. OTC drugs). Unless advocates for HSAs are alert, other restrictions may also be included in a final bill. For example, one proposal would require expensive third-party adjudication of HSA withdrawals — to “prove” the medical expenditures were for medical care. Other (possible) proposals would limit the annual dollar amount that can be contributed to HSAs. Restricting HSAs is a process likely to continue as the reform debate winds forward. 

HSA Rewards Left Out. The newest generation of consumer-driven plans includes rewards and incentives for healthy behaviors. The Senate proposal specifically outlaws health status in determining premium rates. On a positive note, if a recognized “wellness program” is in place, some post issue rewards are allowed. However, letting an insurer or employer put dollars directly into an HSA account is not listed in the allowable application of rewards.

Price Controls. HSA-eligible plans allow younger adults to purchase catastrophic protection at 30 to 40 percent lower premiums than traditional insurance. Studies have shown that 30 percent or more of those purchasing HSA-eligible plans were previously uninsured. Actuarially, young adult claims are about 20 percent of older adults. But, the Senate proposal requires young adult premiums to be no less than 33 percent of older adults. This requirement will substantially raise the cost of single and family premiums by 50 to 100 percent or more. Artificial government price controls will deny equitable risk pricing and defeat efforts to lower the uninsureds. 

Bottom Line. The proposed Senate bill is designed to delay, deny, defeat and kill HSAs. It is a death by a thousand slices. Why? Maybe it’s because consumerism puts decisions and power in the hands of individuals. The Senate health reform does not focus on improving health or health care. It is more about political power, centralizing federal control, growing government, and expanding bureaucracies. Economically, they are killing the goose that laid the golden egg.  Killing HSAs is only a part of that strategy.

Ron Bachman is president and CEO of Healthcare Visions, Inc. and a foremost expert on health care consumerism, consumer-centric Medicaid and Medicare, uninsured population, and mental health.

Comments (25)

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  1. Nancy says:

    This is very worrisome. I like my HSA and don’t want to lose it.

  2. Bruce says:

    This post completely dispels the notion that the Obama Administration has any interest whatsoever in controlling health care costs.

  3. Tom H. says:

    The collectivist mentality cannot sstand the idea of good things happening as a result of individual decision making. The ONLY WAY these folks will even consider controlling costs is by command and control.

  4. Larry C. says:

    This is not good.

  5. claudia A says:

    It has become more and more evident that this Congress cares not a fig for the people. Only for themselves and what ‘pork’ they can stuff into a bill. Note how the senate is somehow making parts of the bill non-rescindible. is this even legal?
    I happen to be on Medicare and never did subscribe to Advantage as it meant changing doctors. it is supposed to be bankrupt but funds are to be taken away nevertheless because we, the seniors are now persona non grata, even though we worked and paid taxes all of our lives. At least, most of us.
    I also know the NHS very well, the UK version as I was brought up there. It has becomean unsustainable mess with money given to administrators rather than nurses-WHO NURSE! and doctors and real care for patients. Hopsitals are filthy, infections abound. My sister had one infection after another ina period she was in hospital (wards only and mixed at that!) She was so weakened she landed in a nursing home (good) where she died. The same thing happened to a cousin of mine. The elderly are not washed and left in their filth.
    This is what will happen here I think. Or the death pill because a Panel will decide whether you should get treatment or not. A Panel of NON-medical persons. Is this the same as a Death Panel? I think so.

  6. Susan M says:

    The Obama Administration has only one interest and that is to turn the greatest country in the world into a third world country in record time. Healthcare is merely one mechanism in achieving that goal. Controlling costs and/or fixing some of the things that need fixing in our health care system is nothing but meaningless rhetoric. The liberals want to control our lives – period. They are willing to tee up social cohesion at the expense of innovation and growth – a proven recipe for socialism. Call a spade a spade!

  7. Steve Hyde says:

    My congratulations to Ron for an excellent analysis. It’s spot on. While it correctly addresses the death-of-a-thousand-cuts risk to HSAs in the Senate bill, it simulataneous provides a laundry list of issues for followup action by concerned HSA consumers, like myself, to do everything we can to lobby those who will write the regulations (i.e., the “Secretary”)to be as HSA-friendly as possible. We empowered consumers must become active advocates for our own interests and those who will follow our needs.

    Ironically, the egregiously unfair 40% excise tax on “Cadillac Plans” will push more and more people into the highest deductible health plans they can find, thus giving a boost to whatever HSA allowances are allowed to remain. (They must have named the high-cost plans after the GM product because nobody will want them either.)

  8. John R. Graham says:

    I concur: A thorough analysis. If I might dare to add to it: The regulations on Medical Loss Ratios (MLRs) also threaten HSAs and other consumer-directed spending.

    Indeed, they give a disadvantage to PPOs in general versus staff-model HMOs (such as Kaiser permanente) because the latter can move administrative costs to the provider-side of their complexes.

    Specifically for consumer-directed health plans (which are usually a sub-set of PPO), the accounting is a killer. Let’s over-simplify and say that CDHPs simply shift costs without savings (which we know is not true). Say a zero-deductible PPO costs $6,000 and spends $4,800 on patient-care, for an MLR of 85%. A consumer directed plan, for which the patient’s deductible is $1,200, will result in costs of $4,800 of which $3,600 will be patient-care, for an MLR of 75% – out of compliance with the proposed “reform”.

    In fact, the MLR will be even worse, because the “real-world” HSA plan will reduce overall medical spending, but because some of the administrative costs are fixed, they will not come down by as much.

  9. Bart Ingles says:

    Interestingly, the nominal tax savings for a covered employee of “average” health is around 40% of the insurance premium. Makes me think that the 40% excise tax was basically intended as a recapture of the tax exclusion for high-cost plans. They were prevented from doing this directly by their own pre-election rhetoric. But that’s what they’re doing– taxing benefits. The fact that they’re also throwing non-employees under the bus is beside the point.

  10. Ralph F. Weber says:

    But if you look closely at the “alarming growth”, you will see that most of it is government spending, while private sector spending has been much more flat.

  11. Broassoc says:

    GOVERNMENT WANTS ALL THAT CASH FLOW TO COME THROUGH THEM. Then they can keep what they want.

  12. Chris Ewin, MD says:

    Well-said Ron.
    The loss of HSA’s would be tragic for the consumer.

    In terms of MLR’s, it’s become very clear that primary care physicians with direct practices are lowering the cost to patient care for the patient and employers/small businesses (50%) instead of the huge annual cost increases. We decrease hospitalizations by 50-60%.
    It is the choice of 45,000 patients in 21 states and growing.
    The Senate bill is designed to kill HSA’s whereas real innovation would be to recognize direct practice primary care physicians as “medical care” so patients could use their HSA’s to pay for 24/7 access to their trusted PCP on pre-tax dollars with
    no co-pays/deductibles…
    That is reform…

    HSA”s have been one of the answers to real HC reform…

  13. Susan says:

    John,Your thoughts and writing are great.

  14. artk says:

    Dr. Ewin: I understand that there are specific ammendments in the house and senate versions of the health care bill that encourage Direct Practice Primary Care. Here’s the url

    Also, how does Direct Practice differ from the old technique of capitation?

  15. Peter Zorin says:

    To all commentators on this article and its author who advocate with passion for HSAs:

    It appears that all comments here are on border of demagoguery and hypocrisy.

    Fact one: How can a consumer control cost via HSA, if one doesn’t know cost of medical service he or she would receive? Is it posted in any medical office or hospital you visit?

    Fact two: The real beneficiaries of HSAs, as of now, are taxpayers in higher tax brackets since money put in those accounts is tax free, …..and investment industry since money in HSAs are allowed to be invested in mutual funds.

    The last one is beyond of common sense associated with purpose of savings in HSAs, and these guys are piggybacking, at least, on potential and most likely time wise unexpected needs of regular consumers. What if the investment went “south” and one needs the money right away? The offer to invest in those funds sounds as good as the recent “no down payment” mortgages.

  16. Ronald Feldman MD says:


    If you can shop for an accountant, or a dentist, or….???, you may do the same for physicians. All you need to do is ask. Any practice will quote standard fees for visits and procedures.

    Why do you want to entrust all your decisions to a 3rd party, especially a government whose payments don’t cover expenses in many cases?

    I suppose if you haven’t had much contact with health care, centralized decisions make sense, but any practicing M.D. knows one size doesn’t fit all.

  17. Peter Zorin says:

    Dr. Feldman,

    I appreciate your perspective and might go along with it. However, most of health concerns requiring medical attention aren’t allowing time for shopping – it isn’t a car repair. The concept you have in mind, perhaps, would work and probably worked in the past for family practitioners. However, nowadays, most of them are associated with big medical practices, which, so far, do not post any price lists.

    In addition, how a simple consumer would know what procedure to inquire about? Also, should one select major procedure based on its price or qualification of specialist and his staff that would perform it?

    Should doctors earn salary based on their qualifications or be businessmen and investors as their main life goal?

    What are the primary reasons for high cost of our medical care?

  18. Don Levit says:

    I see the HSA as a way to increase one’s deductible to save on premiums.
    Isn’t it beneficial to reward the low users of health care with lower premiums and a fund to pay for their exposures?
    Don Levit

  19. Bart Ingles says:

    Peter: My HSA was held as an interest-bearing savings account in a credit union. The stock market was not an issue.

    Most HSA money is used for co-pays and prescriptions, where consumer awareness is actually useful. The idea was never to encourage people to price shop for a trauma center or brain surgeon.

    I think HSAs, pro or con, are the least of our concerns right now.

  20. Kristina says:

    What about HRA accounts? Would they bve affected to wit hthe new healthcare insurance changes? Presently, as a township, we offer HRA type of health insurance plans to employees. We are up for renewal, so this is an important consideration for us, who use tax payer dollars to support this benefit package.

    Any and all comments are welcome.

  21. Ron Bachman says:

    Thanks to all who took the time to comment on the concerns raised and information presented in the blog.

    Peter Zorin provides examples of the misunderstandings of those who only seem to have a “No, because..” attitude. If he looked at the facts, (1) individuals better control utilization and to some degree they shop for costs. The history is lower costs for Rx as individuals move to generics and use fewer prescriptions. They don’t suffer any healthcare loss, they simply better utilize services that are currently use to excess as they appear free or have a good ROI ($10 copay for a $120 medication). Second, lower income purchasers (<$25k) are saving funds nearly as well as higher income, especially if employers make HSA contributions. If products allowed HSA rewards from insurers for fully insured plans, the savings for all would be even more enhanced.

    HSA eligible plans are mainly about increasing personal responsibility and changing health and healthcare purchasing behaviors. If we don't focus on behavior change, we will never have a change to control the growth of healthcare costs. It is a major opportunity to increase the focus on health rather than sickness.

    Sorry for the inconvenient truths, Peter.

  22. […] (individuals) and $4,000 (families), as opposed to the current HSA limits of $5,950 and $11,900. As Ron Bachman explained, this would greatly restrict the types of consumer-directed health plans people have access to. […]

  23. Joe O. says:

    If you look at the IRS 502 instructions for HSA’s on their website, you’ll see that they have gone ahead and made non-prescription drugs and/or medicines ineligble! Is it something they did in anticipation of the health bill’s passage and is in error, or did they just go ahead and change the rules? I’m a little frightened of the IRS as we all are and don’t want to ask. Does anyone out there know what’s going on?

  24. Joe O. says:

    I see now that IRS publication 969 says HSA’s CAN expense non-prescription drugs and/or medicine. IRS 502 must apply to only straight deductions on the 1040. Ignore my post above!

  25. Ryan Joseph says:

    I am very upset to see the the article on Health Saving Accounts (HSAs). Now I cannot take benefit of buying medicines over the counter with the HSA funds. I really dont want to be deprived of the benefit. The HSAs plan really helps in limiting the out-of-pocket exposure on individual and family health expenses. The Congress should take back the decision to ignore the cost reductions from HSA eligible plans. It will be in favor of small and medium business owners and individuals.