Health Savings Accounts

Publication Date: January 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Health

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Abstract:

Health Savings Accounts (HSAs) are a new way that people can pay for medical expenses not covered by insurance or other reimbursements. Eligible individuals can establish and fund these accounts when they have a qualifying high deductible health plan (at least $1,000 for single and $2,000 for family coverage) and no other health insurance, with some exceptions. The accounts have tax advantages that can be significant: contributions are deductible, withdrawals used for medical expenses are not taxed, and account earnings are tax-exempt. Unused balances may accumulate without limit. HSAs were authorized in November 2003 by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (P.L. 108-173).

Three other tax-advantaged accounts to pay for unreimbursed health care have existed for some time: Archer Medical Savings Accounts (MSAs) and two employer-offered arrangements, Health Reimbursement Accounts (HRAs) and health care Flexible Spending Accounts (FSAs). When coupled with high-deductible health insurance, these accounts are part of what some call "consumer-driven health plans." These plans have been spurred largely by employers anxious to moderate premium increases; they also have emerged in response to utilization controls of managed care and as a way to encourage effective care.

The effectiveness of consumer-driven health plans depends on the way high deductible insurance and the savings accounts are structured and interact. How high deductible insurance affects the cost and quality of care depends on the availability of information, competition among health care providers, and consumers' sensitivity to prices. How savings accounts affect these outcomes depends on contributions and accumulations and whether accounts are considered to be savings or insurance.

A burgeoning market has developed to offer HSAs and qualifying high deductible health plans. The first providers were niche insurance companies that had offered MSA plans, but now prominent insurance companies are also offering HSA products, some which may be available nationwide. HSAs have elicited widespread interest among large employers already offering HRAs or other high deductible insurance and small employers whose owners would like a readily available product that pays unreimbursed medical bills with significant tax advantages. Employers can also save employment taxes on account contributions.

There is some evidence (though no rigorous studies) that HRAs reduce health care spending, and HSAs may have similar effects. Even so, the majority of health care expenditures are for catastrophic costs, and it is not obvious how either HRAs or HSAs will affect those. HSAs might result in adverse selection among insurance plans, which could increase insurance costs for people with the highest health care needs. However, employers have strategies for dealing with this problem.

This report will be updated as more information becomes available and for legislative activity. The President's FY2006 budget included several proposals to increase the attractiveness and availability of HSAs.