Health Financing Accounts Would Allow You to Control Your Own Health Care Dollars

By Dr. Roger Beauchamp

There is a more common-sense way to finance health care than merely steering people toward health savings accounts (HSAs). Instead, policymakers should empower workers with Health Financing Accounts (HFAs) that allow them to control more of their own health care dollars.

This proposal would establish an annual health care tax-benefit for every American worker, capped at $15,000 for an individual who is legally responsible only for himself or herself and $30,000 for an individual legally responsible for supporting one or more dependents. Both amounts would be adjusted annually for inflation, using the Consumer Price Index.

Employer-purchased health benefits would count first toward the applicable cap. If an employer provided no health benefit—or a benefit worth less than the applicable cap—the employer would calculate the amount remaining below the cap and redirect into the employee’s HFA an amount equal to the combined 15.3 percent employer-and-employee payroll tax that otherwise would apply to those earnings, rather than remitting that amount to the federal government as is now the case.

For example, if an employer provided no health benefit to a worker subject to the $15,000 cap, the full $15,000 would remain available for the calculation. Fifteen and three-tenths percent of $15,000 is $2,295, so the employer would deposit $2,295 into the worker’s HFA for that year rather than remit that amount as payroll tax. Assuming continuous eligibility and an unchanged real cap, those deposits would total $114,750 over a 50-year career before investment earnings. A worker qualifying for the $30,000 cap could receive twice that amount.

The proposal would extend to all workers a tax exclusion that has long favored employer-purchased health benefits, giving individuals a equal opportunity to finance their health care needs.

Americans are endowed with life, liberty, and the pursuit of happiness, as well as the freedom to make choices about their own lives. People may choose whether to smoke, exercise, misuse alcohol, or use illicit drugs. Because individuals possess this freedom, they should also bear primary responsibility for the consequences of their choices. Public policy should therefore give all citizens an equal opportunity to accept that responsibility to the best of their ability. HFAs would make equality of opportunity in health care financing a reality rather than an empty slogan.

Current Health Care Tax Treatment for U.S. Workers

The current tax code gives employers an advantage when purchasing health care benefits for employees. Employer-purchased health benefits are excluded from employees’ taxable wages. As a result, neither the employer nor the employee pays Federal Insurance Contributions Act (FICA) taxes on the value of that coverage.

A worker purchasing health care with ordinary wages, by contrast, pays payroll and income taxes before using those earnings for medical expenses. In addition, individuals may deduct unreimbursed medical expenses only to the extent those expenses exceed 7.5 percent of adjusted gross income, and only if they itemize deductions. A deduction may reduce income taxes, but it does not recover the payroll taxes already paid on those wages.

For workers below the Social Security taxable maximum, the combined employer and employee FICA rate is 15.3 percent. The favorable tax treatment of employer-purchased health coverage therefore creates a meaningful tax disparity between workers who receive health benefits through an employer and those who must finance care on their own.

Legislation is needed to grant all workers a comparable opportunity. The Health Financing Account is designed to accomplish that goal and help restore a more competitive health care market, whether a worker is self-employed, receives no employer-purchased benefit, or receives employer coverage worth less than the applicable cap.

The HFA is the foundation of what I call the Common Sense Health Care Tax Plan.

The Common Sense Health Care Tax Plan

Under the Common Sense plan, qualifying workers would have access to up to $15,000 or $30,000 annually for health care, depending on whether they are legally responsible for supporting dependents. The applicable amount could consist of tax-excluded employer-purchased health benefits, a FICA-based deposit into an HFA, tax-deductible voluntary worker contributions, or some combination of the three. The caps would be adjusted annually, using the Consumer Price Index.

Employer-purchased health benefits would count first toward the applicable cap. If an employer provided no health benefit, the full cap would remain available for calculating the HFA deposit. If the employer provided a benefit worth less than the cap, the employer would subtract the value of that benefit from the cap and calculate the HFA deposit on the difference.

The employer would then deposit into the worker’s HFA an amount equal to 15.3 percent of the amount remaining below the cap, rather than remit that amount to the federal government. For example:

• If an employer provided no health benefit to a worker subject to the $15,000 cap, the remaining amount would be $15,000 and the employer would deposit $2,295 into the worker’s HFA.
• If an employer provided a health benefit worth $8,000 to a worker subject to the $15,000 cap, the remaining amount would be $7,000 and the employer would deposit $1,071 into the worker’s HFA.
• The worker could then make additional tax-deductible contributions to fill any remaining gap between the employer benefits and the $15,000 cap, subject to the applicable annual cap. For example, a worker receiving an $8,000 employer health benefit and a $1,071 HFA deposit could contribute up to an additional $5,929. Together, those three amounts would equal the $15,000 annual cap.
• If an employer provided a health benefit worth $15,000 or more to a worker subject to the $15,000 cap, the employer would make no HFA deposit.

Extending this treatment to workers who do not currently receive employer-purchased health benefits would reduce federal payroll-tax revenue relative to current law, just as the existing exclusion for employer-purchased health benefits reduces federal revenue today. The Common Sense plan rests on the judgment that equalizing this tax treatment would give millions of workers greater control over their health care dollars and create stronger incentives to seek lower prices and better value. Greater competition, less waste, fraud, profiteering, and more cost-conscious purchasing should, over time, reduce both health care costs and the need for government subsidies. The precise size and timing of those savings would depend on how workers, employers, providers, and insurers respond to the reform.

If an employer-purchased health plan were worth more than the applicable cap, only the amount above the cap would be treated as taxable compensation. Employers would report that excess amount through their existing payroll systems.

Unlike an HSA, an HFA would not require the account holder to purchase a federally prescribed high-deductible health plan. Workers could use HFA funds for eligible health care expenses and could choose whether to purchase insurance based on their needs and circumstances.

For a genuinely competitive market to exist, insurers, physicians, hospitals, pharmacies, and other suppliers must compete for the support of the people who earn and spend the money. Competitive markets can be powerful arbiters of value, quality, and price.

In a more consumer-directed system, routine diagnostic, preventive, and primary care services could often be paid for directly at the time of service using HFA funds, and insurance could focus more heavily on catastrophic events and serious diseases.

Comparing an HSA with an HFA

Health savings accounts currently represent only a fraction of total health care spending. Patients paying directly with HSA funds can sometimes face prices above the negotiated rates available to large insurers, although prices vary by provider, service, and market.

Simply expanding HSAs would not eliminate the underlying disparity the HFA is designed to address. An HSA allows an eligible worker to save his or her own money with favorable tax treatment. The HFA would go further by extending to workers without employer-purchased health benefits an equivalent opportunity to benefit from the payroll-tax exclusion already associated with employer-purchased health care.

HFAs would place substantially more health care money under the control of the people who earned it. Greater consumer control, combined with meaningful price transparency, would strengthen patients’ ability to seek competitive prices.

How HSAs Work

• Eligibility: To contribute to an HSA, an individual generally must be enrolled in a qualifying high-deductible health plan.
• 2026 deductible requirements: The minimum deductible is $1,700 for self-only coverage and $3,400 for family coverage.
• 2026 contribution limits: Contributions are limited to $4,400 for self-only coverage and $8,750 for family coverage.
• 2026 out-of-pocket limits: The maximum out-of-pocket amount is $8,500 for self-only coverage and $17,000 for family coverage.
• Ownership: The individual owns the account, which is held by a qualified trustee or custodian.
• Rollover: Unused balances roll over from year to year.
• Taxes: Eligible contributions may be deductible or excluded from income, investment growth is tax-free, and distributions for qualified medical expenses are tax-free.
• Account use: Funds may be used for medical expenses described in Section 213(d) of the Internal Revenue Code.
• Non-qualified use: A non-qualified distribution is generally included in taxable income and, before age 65, is generally subject to an additional 20 percent tax.

How HFAs Would Work

• Annual caps: The proposal would establish an annual cap of $15,000 for an individual legally responsible only for himself or herself and $30,000 for an individual legally responsible for supporting one or more dependents. Both would be adjusted annually using the Consumer Price Index. Tax-excluded employer-purchased health benefits, HFA deposits, and tax-deductible voluntary contributions would count toward the applicable cap.
• Eligibility: Workers receiving no employer-purchased health benefit, or receiving an employer benefit worth less than the applicable cap, would be eligible for an HFA deposit. There would be no requirement to purchase a government-prescribed high-deductible insurance plan.
• FICA-based HFA deposit: The employer would subtract the value of its health benefit from the applicable annual cap and deposit into the worker’s HFA an amount equal to 15.3 percent of the remaining amount, rather than remit that amount to the federal government. If the employer provided no benefit to a worker subject to the $15,000 cap, the employer would deposit $2,295 into the HFA.
• Partial employer benefit: If an employer provided a benefit worth $8,000 to a worker subject to the $15,000 cap, the remaining amount would be $7,000. The employer would deposit $1,071 into the worker’s HFA, and the worker could then contribute up to an additional $5,929, bringing the combined annual total to $15,000.
• Benefits above the cap: The portion of an employer-purchased health benefit exceeding the applicable annual cap would be treated as taxable compensation.
• Self-employed workers: A self-employed worker could direct an amount equal to 15.3 percent of qualifying earnings up to the applicable cap into an HFA instead of remitting that amount as self-employment tax. The worker could make additional tax-deductible contributions, provided that total qualifying benefits and contributions did not exceed the applicable cap.
• Ownership: The individual would own the account. Applicable law could also permit joint ownership where appropriate.
• Rollover: Unused balances would roll over from year to year.
• Taxes: HFA deposits would provide workers without employer-purchased health benefits access to tax-excluded health care dollars, while voluntary worker contributions up to the applicable cap would be tax-deductible. Investment growth and distributions for qualified medical expenses would be tax-free.
• Account use: Funds could be used for qualified medical expenses and for eligible insurance premiums as defined by the legislation.
• Interstate insurance options: Separate reforms could permit consumers to use HFA funds to purchase qualifying coverage offered across state lines. Creating the account alone would not override existing state insurance laws.
• Non-qualified use: A non-qualified HFA withdrawal would be included in taxable income and subject to an additional 35.3 percent penalty. The proposed penalty combines the 20 percent additional tax generally applied to non-qualified HSA withdrawals with an additional 15.3 percent intended to recover the payroll-tax advantage provided through the HFA.

Benefits of the Common Sense Health Care Tax Plan

The Common Sense Health Care Tax Plan would not require employers to eliminate or reduce existing health benefits. It would, however, give workers and employers a tax-favored alternative to the current system by allowing more health care compensation to be controlled directly by workers.

Over time, some workers might choose to bargain for higher wages, different insurance coverage, or greater use of individually controlled HFAs rather than receiving the same employer-purchased health plan. That shift would be a feature of the proposal: it would move more health care purchasing power from employers to the individuals who ultimately earn the compensation.

The $15,000 figure is an annual cap governing the plan’s tax treatment for a worker without legal dependents, not an automatic $15,000 payment. The maximum employer-directed HFA deposit under that cap would be $2,295 per year because $2,295 is 15.3 percent of $15,000. If an employer provided a health benefit, the employer would calculate a smaller deposit based only on the amount remaining below the cap.

Under these assumptions, a continuously eligible worker receiving no employer-purchased health benefit could accumulate $114,750 in employer-directed deposits over a 50-year career before investment earnings. A worker qualifying for the $30,000 cap could receive twice that amount.

The plan would extend access to tax-excluded health care dollars to qualifying workers beginning with the first eligible dollar, while preserving a deduction for voluntary HFA contributions up to the applicable cap.

The plan would reduce the disparity that can encourage small businesses to limit workers’ hours or avoid offering health care benefits. It could also give employees a stronger incentive to bargain for compensation arrangements that provide more direct control over their health care dollars.

Greater consumer control and price transparency would pressure health care providers, pharmacists, and insurers to compete more directly for patients and would strengthen consumers’ ability to seek better prices. The Common Sense plan anticipates that this competition would reduce waste, excessive costs, and, over time, the need for government health care subsidies, although the magnitude and timing of those savings would depend on how the market responds.

The proposal could also help working retirees who need additional resources for health care and medications. Under the applicable cap, an eligible senior working part time could have the applicable payroll-tax amount directed into an HFA rather than remitted to the federal government.

To help restore individual liberty and a competitive market capable of restraining costs, citizens should demand that Congress give workers greater control over the health care dollars associated with their labor. Lawmakers should also permit insurers to offer plans that make sense, avoid unnecessary mandates, and fit the needs and budgets of working men and women. The Common Sense Health Care Tax Plan would move the country in that direction.

Roger Beauchamp, D.D.S., writes from Horseshoe Bay, Texas.