In their newly unveiled plan to reshape the US health care system, House Republicans propose increasing the amount of money people can put into tax-free health savings accounts , part of a broader push to make individuals more responsible for their own medical spending, and less reliant on government.
Think of it as a twist on your 401(k) retirement plan. You set up a tax-exempt investment fund, deposit your money, watch it grow, and then use the proceeds to cover all manner of health care expenses, from lab tests to prescription drugs.
Health savings accounts (HSAs) aren’t new; millions of Americans already use them. But the House plan aims to make them more generous and more common. Americans would be allowed to contribute nearly twice as much money, and they’d be encouraged to move toward high-deductible policies, using savings accounts to cover the extra out-of-pocket costs.
When you look at retirement, though, this “savings account for every American” approach doesn’t seem to have produced great results. Even now, over two decades into the 401(k) revolution, half of all families have less than $5,000 in savings.
If anything, tax-free accounts for health care seem to involve even more risks and downsides.
To begin with, health savings accounts favor high-income Americans, because they’re the only ones with money to save. Look across the entire bottom 90 percent of American households and you find that the overall savings rate is close to zero. And although that might sound like a reason why we need new savings incentives, it’s not clear why health accounts would accomplish what 401(k) plans have not.
Even if middle-income Americans did save more, our progressive income tax system still ensures that the rich get the biggest benefits. Consider this comparison. If you make $500,000 a year, then your marginal tax rate is 39.6 percent, which means you’ll save 39.6 cents of every dollar you move into a tax-free account. By contrast, a married couple making the US median of $56,000 has a much lower tax rate, so they’ll only save 15 cents for every dollar set aside.
In some ways, it’s misleading even to refer to this as a tax savings. Most working-age Americans already get their health insurance tax-free, because employer-provided plans are untaxed. So under the Republican plan to replace the Affordable Care Act (aka Obamacare), many people will merely be shifted from a relatively robust, tax-exempt, employer-provided plan into a high-deductible plan that comes with a tax-free savings account. One tax break for another, in other words.
All this doesn’t even begin to address the logistical challenges that come with HSAs, like what happens if you get sick when you’re relatively young? Or after a big market downdraft that cuts the value of your investments?
Watching your returns compound over time is supposed to be one of the major virtues of a tax-free savings account. But that takes decades. Meanwhile, the biggest financial risk in health care is that you’ll get sick when you’re young, before you have the protection of Medicare. If that happens, the out-of-pocket costs can pile up quickly, far faster than your investments can mature.
Finally, there’s this silly-sounding but genuinely important question: How many separate investment plans do we expect Americans to juggle? Already, tax-minimizing families have to manage their personal savings, their retirement accounts, and their 529 college plans. Add in health savings accounts, and it’s not always easy to figure out whether to put your extra dollars toward your children’s college, your retirement, or your health care.
Relying on experts would be one option, but it’s less dependable now that the Trump administration is trying to roll back a rule that requires financial advisers to work in their clients’ best interest.
It’s still possible that with the right incentives and supports, tax-free savings accounts could play a vital role in creating a lower-cost health care system. Making Americans use more of their own money for health expenses could make them more value-conscious, and more vigilant about wasteful health spending. Plus, there is at least one example of a country that has successfully made savings accounts a central feature of their approach: Singapore.
But the American experiment with retirement accounts suggests that the United States hasn’t yet found the right path. And with health care, the risks are even more acute.
Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts and the United States. He can be reached at email@example.com.