HSAs -- Another Wasted Subsidy for the Well-Off

No one should be surprised by the Government Acccountability Office report out yesterday showing that the six million Americans who opened Health Savings Accounts have an average household income two-and-a-half times the national average ($139,000 versus $57,000). The economics of tax breaks compels it.

In theory, HSAs were designed for people with high-deductible insurance plans to cover unanticipated but large medical expenses. But they work like Individual Retirement Accounts (IRAs). The government allows a household to deduct a dollar from income for every dollar it deposits in an HSA.

But high income families benefit much more than low income families from such schemes. Why? Because high income families pay at a higher tax rate. So, if that family with $139,000 in income is in the 31 percent tax bracket, every dollar deposited in an HSA saves it 31 cents in taxes. But if that family with $57,000 in income is in the 15 percent tax bracket, every dollar deposited in an HSA only saves it 15 cents. In that sense, it is like the home mortgage deduction, whose benefits also go disproportionately to people who have the largest mortgages and pay the highest amount of interest on their homes.

Reps. Pete Stark (D-CA) and Henry Waxman (D-CA) are pushing legislation that would require proof that withdrawals from HSAs are actually going for health care. But that wouldn't change the fact that 40 percent of people with high-deductible plans haven't opened these accounts, and won't. For people in the lower middle class or the poor who have to buy a high deductible plan because they work for a lousy employer who either doesn't provide health insurance or only offers high-deductible or high co-pay plans, how likely is it that there will be room in their budgets to also sock away a couple hundred dollars a month for a rainy day health care fund?

HSAs are another gimmick based on the illusion that consumer choice is the best way to rein in rising health care costs. Make patients have "skin in the game," and they will make wiser choices, the theory goes.

Yet as many studies have shown, consumers don't make wise choices when forced to spend their own money on health care. In the short run, they skimp on routine and preventive care, which only makes it more likely that they will develop chronic conditions. And when either chronic disease or a medical crisis occurs, HSAs are quickly exhausted and become irrelevant in determining what kind of care people choose.

HSAs are nothing but another health care plan for the well-off that undermines preventive care. The next Congress should repeal this wasteful subsidy, not tinker with its rules.