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Wednesday, September 20, 2006

GAO: Health Savings Accounts Primarily Benefit High-Income Individuals

The Center for Budget and Policy Priorities notes a GAO study confirming that Health Savings Accounts primarily benefit healthy, high-income individuals. There is also evidence these accounts are being used as tax-shelters, and there are other problems as well. Overall, this is a fairly negative assessment of these accounts:

GAO Study Confirms Health Savings Accounts Primarily benefit high-income individuals, CBPP: Summary A groundbreaking new study by the Government Accountability Office (GAO) demonstrates that Health Savings Accounts (HSAs) — tax-favored savings accounts attached to high-deductible health insurance plans established under the 2003 Medicare drug law —  are heavily skewed toward affluent individuals.  The GAO findings also provide strong indications that HSAs are being used extensively as tax shelters.  Finally, the GAO data suggest that HSAs can be beneficial to healthy individuals with relatively few health care costs, but not to people who have medical conditions and incur higher costs.

Many health and tax policy analysts have warned in recent years that HSAs are likely to be used extensively as tax shelters by high-income individuals.  The Administration and other HSA proponents have rejected such concerns and argued that HSAs are not disproportionately used by high-income households. 

Until recently, though, little or no solid data have been available to assess whether HSAs are — or are not — being used disproportionately by affluent individuals.  ... Now, this has changed.  An important GAO study issued earlier this month breaks new ground, by providing data from the Internal Revenue Service on who actually is using HSAs.The IRS data cover all Americans who made HSA contributions in 2004, regardless of whether they had individual or employer-based coverage. The GAO study also contains data, from three large employers who offer both HSA-eligible plans and traditional coverage, on how their employees have sorted themselves between HSA-eligible coverage and traditional insurance.

The GAO supplemented these data by conducting focus groups ... The GAO also reviewed data on enrollment in HSA-eligible plans from several national surveys of employers. The GAO data represent the first solid, broad-based data on actual HSA use by income.  Accordingly, they are now the premier data in the field to determine whether HSAs are being disproportionately used by high-income households. 

The principal findings in the GAO report include the following.

The Income of HSA Participants

  • 51 percent of tax filers making HSA contributions in tax year 2004 (the first year HSAs were available) had adjusted gross income of $75,000 or more.  This represents a decisive skewing toward higher-income individuals, since only 18 percent of all tax filers under age 65 had incomes of $75,000 or more in 2004.

  • The average adjusted gross income of tax filers reporting HSA contributions in 2004 was $133,000, as compared to $51,000 for all tax filers under age 65 in 2004.

  • In addition to making much greater use of HSAs, higher-income individuals also make larger tax-deductible contributions to HSAs.  HSA participants who had incomes over $200,000 contributed an average of $3,010 in 2004.  This was more than double the average contribution of $1,370 for HSA participants who had incomes below $50,000.  This difference in average contribution levels further skews the tax benefits of HSAs to households that are high on the income scale.

Indications of Use of HSAs as a Tax Shelter

  • About 55 percent of tax filers reporting HSA contributions in 2004 did not withdraw any funds from their accounts and “appeared to use their HSA as a savings vehicle.”

  • HSA participants in the focus groups that the GAO conducted “reported using their HSA as a tax-advantaged savings vehicle, accumulating HSA funds for future use.”

  • The GAO reported that when individuals are given a choice between HSA plans and more traditional health insurance plans, HSA plans are attracting “higher-income individuals with the means to pay higher deductibles and the desire to accrue tax-free savings.”

HSAs and High Deductible Plans Reduce Costs for the Healthy, But Raise Them for the Less Healthy

  • The GAO analyzed the total out-of-pocket costs ... that would be incurred under the traditional coverage and high-deductible plans tied to HSAs offered by three large employers.  The GAO found that healthy enrollees who use little health care would tend to incur lower costs under the HSA-eligible plans than under the traditional plans..., while people who use more extensive health care services would tend to incur higher costs under the HSA plans.

  • This reality was reflected in the focus groups.  Most HSA-eligible plan participants in the focus groups were satisfied with their plans and said they would recommend HSA-eligible plans to healthy people.  But they would not recommend such plans, the GAO reported, “to those who use maintenance medication, a chronic condition, have children, or may not have the funds to meet the high deductible.

  • For these reasons, the GAO essentially included a warning in the report that HSAs may lead to the separation of healthy and less-healthy individuals into separate insurance arrangements. ... Health policy experts have long counseled that policymakers should seek to avoid the separation of healthier and less-healthy people into separate insurance arrangements; when less-healthy individuals are no longer pooled with healthier people, they can become too costly to insure.

The GAO also found that “contrary to the hopes of CDHP [Consumer-Directed Health Plan] proponents, few of the HSA-eligible plan enrollees who participated in our focus groups researched cost before obtaining health care services.”  The GAO noted that accordingly to CDHP proponents, such research activity is central to the cost reductions that proponents assert will be achieved by HSAs and other consumer-driven health care approaches.

We now examine various aspects of the GAO findings in more detail... [entire report]...

Are you as surprised as I am that a Bush administration policy would reduce taxes and favor high-income individuals?

    Posted by on Wednesday, September 20, 2006 at 04:54 PM in Economics, Health Care, Policy | Permalink  TrackBack (0)  Comments (4)

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