When Health Savings Accounts became law on January 1, millions of Americans received the chance to buy low-cost health insurance policies and save money in tax-free savings accounts. Now a move is afoot in Congress to make health insurance still more affordable by making HSA insurance premiums 100 percent tax-deductible.
“This deduction would be available to all Americans with a Health Savings Account regardless of whether the individual itemizes or not,” said Congressman Phil Crane (R-Illinois), who plans to introduce tax-deduction legislation this spring. “This legislation is an important step towards reducing the rolls of the uninsured and ensuring that more people have access to affordable health care.”
In his January State of the Union address, President George W. Bush asked Congress to pass legislation allowing individuals who buy catastrophic health care coverage as part of a Health Savings Account to deduct 100 percent of the premiums from their taxes. Under most circumstances, health insurance premiums are not deemed to be qualified medical expenses under the current HSA law. Crane said his bill would address that issue.
Congress approved HSAs late last year as part of the Medicare reform package. The HSA allows a person to buy a high-deductible health insurance policy, which can shave hundreds of dollars off monthly premiums. Eligible individuals (or their employers) may establish Health Savings Accounts to pay for routine medical expenses or expenses that would otherwise be covered by the insurance but fall within the deductible. Once the deductible is reached, the insurance coverage takes over.
If an employer establishes an HSA, employee contributions may be made on a pre-tax basis. If the employer makes a contribution to the HSA, the contribution is tax-deductible by the employer and not considered to be taxable income to the individual. The maximum pre-tax contribution allowed in 2004 is $2,600 for persons with self-only coverage and $5,150 for those with family coverage. In both cases, the contribution may not exceed the annual deductible.
The money grows tax-free and can be withdrawn tax-free for medical expenses not paid for by insurance. Funds left in the account at year-end roll over into the next year. At retirement, unused HSA funds may be withdrawn for any purpose, not just medical care, lending a financial as well as a health insurance component to the accounts.
“Because HSAs allow people to save the money remaining in their account at the end of the year, they will have an incentive to ask for the price before they get medical care, to shop around for a provider and generally become good consumers in the health care marketplace,” Crane said. “Most importantly, HSAs are an essential tool to help 43 million uninsured Americans afford health insurance. People who are currently without health insurance need health coverage, and HSAs will provide an option to people who otherwise would go without medical care.”
Private Sector Steps Up
The Washington DC-based HSA Coalition strongly backs tax-deductibility of insurance premiums for individuals, said spokesman Dan Perrin. He said the coalition’s members include several conservative policy organizations, the American Medical Association, and various business groups, including the National Federation of Independent Business (NFIB).
“We are hearing that insurers who have announced their intention to offer HSAs are being inundated with calls from consultants and large businesses that want to set up HSAs,” Perrin said. “Any employer who wants to cut health care costs dramatically should be interested in getting HSA coverage. Any individual should also be interested in HSAs. And anybody who wants to show up at the gates of Medicare with cash in his pocket should be interested in the HSA.”
The NFIB, which is offering HSAs through Fortis Health in Milwaukee, reported employers are saving as much as 60 percent on their medical costs.
Jessie Brairton, manager of legislative affairs at NFIB, said a recent member survey showed 90 percent of members support allowing individuals to deduct 100 percent of the HSA insurance premiums they pay.
“The support is overwhelming,” she said. “We plan to write a letter of support to Congressman Crane and other lead sponsors of the legislation. This is great for individuals. For our members, it’s another choice that can help them control costs.”
High-deductible policies cost far less than standard policies because routine medical expenses, which make up the majority of claims, are paid for by policyholders instead of insurance companies. This reduces administrative costs and insurance payments. Most buyers of high-deductible policies do not hit their deductible in a given year, so most policyholders save significant amounts of money, Perrin said.
If a policyholder does hit the deductible, the lower premiums largely offset the higher out-of-pocket costs, he said.
“It puts health care consumers more in control of their spending,” Perrin said. “You’re putting money into your pocket as opposed to the pocket of an insurance company. If it irritates you to pay hundreds of dollars a month for a product you don’t use much, you need to look into an HSA.”
Steve Stanek is an Illinois-based freelance writer. His email address is [email protected].