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Are Health Savings Accounts a Subsidy?

Touted as important reform that would help reduce the growth of health care costs and increase the efficiency of the health care system, Congress established Heath Savings Accounts (HSAs) as a tax shelter under the IRS code in 2003.  They were part of the Medicare Prescription Drug, Improvement, and Modernization Act and developed to replace the Medical Savings Account system.  To date, millions of Americans contribute to one.  This, by any definition, is a sizeable market that should be able to produce the stated results.   Results from the past nine years tell us they fail as a sound public policy.


  • have not controlled costs.

  • have no effect on the 10% of the high risk population that accounts for 70%-80% of health care spending.

  • do not increase access to care or reduce the number of uninsured.

  • when combined with high deductible health plans, they lead to rationing of care based on ability to pay for high out-of-pocket costs.  They actually shift costs from the insurers to the patient.

  • do not create affordable health insurance premiums.

  • create another layer of administrative costs such as servicing fees paid to the financial institutions to manage the accounts which are paid by the patient and thus further reduce the money that can be spent on direct care.

  • deplete funds from the insurance risk pool and general economy since HSA enrollees without health care costs are unable to use their money. The money removed from the economy leads to increased premiums, additional fees, and cuts in coverage; this contributes to our current unsustainable cycle.

  • are of no use to lower income people who lack the ability to contribute to their accounts or purchase the high-priced insurance premiums.

  • are an unfair tax break for people with high incomes, employers, and those with ongoing health care incurred costs.

  • do not allow people choice in their own health care as the IRS determines which medical expenses are qualified for tax free reimbursement.

  • do not address portability issues; employees lose their contributions when they leave their job. HSAs are usually tied to employment.

Suffice it to say, HSA’s do not address the two fundamental problems with our current health care system: small risk pools confined to state borders, and a service delivery system that removes consumers from control over spending choices.   HSAs actually function as a subsidy for health care providers. They perpetuate the current cycle of high health care and insurance costs when providers justify their pricing to pull money from private accounts set aside for their exclusive use.  And, with access to exclusive accounts, providers do not need to compete with other industries (e.g., travel, entertainment) for consumer money.   Subsidies can’t deliver on their claim to make a product affordable, at least not permanently, because they address only the supply side and presume they understand consumer demand.  They actually distort the market as they try to create greater demand through price control incentives.  Price controls are not sustainable because demand always falls off (or was never really there) leaving the supply side to raise prices as usual and customary.  All told, the performance of HSAs does not warrant continued promotion of them as a public policy mandate or as an insurance replacement. 

The practice of establishing a subsidy via tax shelters is not exclusive to the health care industry. The same thing happened with the Coverdell Education Savings Account (ESA) program.  ESAs were justified as an incentive to help parents and students save for education expenses. Distributions remain tax-free as long as they are used for qualified education expenses (tuition and fees, room and board, books, etc.).   Yet not only have education expenses remained high, we are locked in a tuition increase battle as higher education institutions seek to pull money from private accounts set aside for their exclusive use.  We cannot save enough to accommodate for the escalating prices.  ESAs haven’t delivered on their promises either.

Maybe it is time to end altogether the practice of subsidizing “good causes.”

Click here to read Regina’s latest Liberty Brief, “The Five Step Plan to Achieve National Health Care Reform.”

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Friday, 20 October 2017
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