Health Savings Accounts and Other Account-Based Health Plans

September 2004
EBRI Issue Brief #273
Paperback, 20 pp.
PDF, 138 kb
Employee Benefit Research Institute, 2004

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Executive Summary

 

This Issue Brief examines accounts that can be used to pay for health care services on a tax-favored basis. Starting with health savings accounts (HSAs), the function of these accounts is described, followed by a discussion of issues related to the accounts, whether expectations for the accounts will be met, and recent evidence on their impact.HSAs are now one of a handful of accounts that individuals can use to pay for health care services on a tax-favored basis. Flexible spending accounts (FSAs) have been available since the 1970s, while Archer Medical Savings Accounts (MSAs) have been available since 1996. Some employers also offer health reimbursement arrangements (HRAs).

 An HSA is a tax-exempt trust or custodial account that an individual can use to pay for health care expenses. Contributions to the account are deductible from taxable income and distributions for qualified medical expenses are not counted in taxable income. Taxfree distributions are also allowed for certain premiums. There is no use-it-or-lose-it rule associated with HSAs, as there is with FSAs. In order to make tax-free contributions to an HSA, an individual must be covered by a health plan that has an annual deductible of not less than $1,000 for self-only coverage and $2,000 for family coverage.

 There is strong interest in HSAs among employers. One study found that 73 percent of small business owners were interested in the HSA concept. Another study found that 61 percent of employers they surveyed were likely to offer HSAs in near future. A third study found that 19 percent of surveyed employers were very likely to offer HSAs by 2006, and another 54 percent were somewhat likely to offer them.

 HSAs are controversial. Proponents of HSAs think that they will encourage individuals to become more astute health care consumers. Opponents think they are a new way to shift costs from employers to employees. They also think that HSAs will attract only the healthiest and wealthiest employees—ultimately making health insurance more expensive for others and creating “adverse selection” problems for conventional health plans.

 The introduction and use of HSAs is one piece of a larger movement toward more consumer involvement in the financing and delivery of health care. Some employers have used high-deductible account-based health plans as a way of encouraging more consumer involvement in the health benefits. Other employers have increased deductibles and co-payments. Many have added incentives for employees to use lesscostly physicians, hospitals, and prescription drugs. Taken together, these changes may mean that the way in which health care is delivered and paid for in the future could look a lot different than it does today.