How Will Obamacare Affect Health Savings Accounts?

If you are one of the more than 22 million people [1] enrolled in a Health Savings Account (HSA) or a Health Reimbursement Arrangement or if you work for the one of every two employers who now offer one of these consumer-driven health plans, in the future you will have fewer options. The new healthcare law does not outlaw HSA-eligible plans, but it takes away HSA options and future regulations could make these plans impractical and undesirable.

Current Law

Instead of giving all of your healthcare dollars to an insurance company, the current law allows you to choose a plan with a high deductible and more limited benefits and put the premium savings in an account you own and control. Deposits to these accounts may be made with pre-tax dollars, just like employer-paid premiums, and the accounts grow tax-free. Because you get to keep the money you don’t spend, self-insuring in this way allows you to directly benefit from being a prudent consumer in the medical marketplace.

Lower Deductibles

The new law reduces the allowed deductible for small-group plans (those with fewer than 100 employees) to $2,000 for singles and $4,000 for families, beginning in 2014. This is roughly one-third the level allowed under current HSA law. This will limit your ability to save on insurance premiums by joining a higher deductible plan.[2]

Larger Penalties

If you take money out of your HSA for a nonmedical purpose, the law has already increased the penalty from 10 percent to 20 percent, and you will have to pay ordinary income taxes as well. As noted above, patients may no longer use their HSA funds to purchase over-the-counter (OTC) drugs. This is especially unfortunate since there is a trend for off-patent drugs to become less expensive OTC drugs.

Additional Risks

The Secretary of Health and Human Services has the authority to review health plan benefits on an annual basis and determine the “essential” benefits that should be included in all health plans. If the secretary determines that all plans must have a benefit that violates the regulations for HSA-eligibility, HSAs could essentially be outlawed by the stroke of a (regulatory) pen.

Other restrictions could make HSA plans impractical. For example, one proposal would require your employer to verify that every single HSA withdrawal is for medical care. This would greatly increase the paperwork cost of administering these accounts.

Another Regulatory Risk

As my book Pricless: Curing the Healthcare Crisis was going to press, the Obama administration announced a regulatory ruling that could effectively eliminate HSA plans from the market for individual insurance. The ruling concerns the minimum medical loss ratio (MLR) requirement that will penalize insurers who fail to spend 80 percent or 85 percent (depending on circumstance) of their premium dollars on healthcare. The problem: The administration wants to count third-party spending on medical care but exclude deposits made to a Health savings Account before the deductible is met. Such a regulation will make it almost impossible for HSA plans to survive in the new health insurance exchanges.[3]

Notes:

1. Paul Fronstin, “Findings from the 2010 EBRI/MGA Consumer Engagement in Healthcare Survey,” Employee Benefit Research Institute, EBRI Issue Brief No. 352, December 2010.

2. Ron Bachman, “Congress Declares War on HSAs,” National Center for Policy Analysis, Brief Analyses No. 698, March 5, 2010.

3. “Actuarial Value and Cost-Sharing Reductions Bulletin,” US Department of Health and Human Services, February 24, 2012, http://www.ncpa.org/pdfs/HHS-EHB-Actuarial-Equivalence-Bulletin-022412.pdf. Also see Mark E. Litow et al., “Impact of Medical Loss Ratio Requirements Under PPACA on High Deductible Plans / HSAs in Individual and Small Group Markets,” Milliman Inc., January 6, 2012.

[Cross-posted at Psychology Today]