What is the Republicans’ repeal and replace plan? Part 4 of 4: health savings accounts

This is the final post in a series explaining major provisions of the American Health Care Act, the House Republican plan to repeal and replace the Affordable Care Act (ACA). Since I first began writing about the plan, the committees marking it up have made changes to it in order to win both more conservative and more moderate votes in the House. For example, states would have the option to impose work requirements on Medicaid beneficiaries and receive a global block grant (rather than a per-capita block grant/per capita allotment) for children and non-disabled, non-elderly adults. A per-capita block grant, which I discussed in my second post about the plan, increases federal contributions as enrollment increases. A global block grant, however, is a flat annual payment to states regardless of changes in monthly enrollment. Further, because the CBO noted that older Americans would see the highest increases in premiums, a new amendment makes technical changes that would allow states to make supplemental subsidies.

One of the major provisions of the American Health Care Act is the strengthening of health savings accounts (HSAs). I explained what HSAs are in a previous post, so here I will focus on two things: 1) the changes in the bill to current law; and 2) the prospects of these changes for accomplishing the goals of increased coverage and decreased health care costs.

Effective January 1, 2018, the Republican plan would increase the tax-free contribution limit from $3,400 to $6,550 for an individual and $6,750 to $13,100 for a family, with increases each year indexed to medical inflation. There is no change to the catch-up contribution, which is still $1,000 for each individual over age 55 (each spouse may make a $1,000 contribution, even to the same HSA). The tax penalty for withdrawals used for non-qualified medical expenses would be reduced from 20% to 10%.

Note that contribution limits increase every year, but that historical increases are usually on the order of about $50 for both individual and family coverage. An increase of almost 100% in each category, then, represents a fundamental change in the scope of these plans.

If this blog had a theme, it would be that policies have tradeoffs. Only those in high-deductible health plans (HDHPs) are eligible to enroll in an HSA, so the two policies are meant to be coupled. Together, they have advantages over traditional plans. HSAs are portable from job to job and into and out of employment, while employment-based insurance is tied to, well, employment. And ordinarily, only those with employment-based insurance may obtain tax benefits, but HSAs allow even those individuals without a job to obtain some of those benefits by contributing tax-free dollars to their accounts.

In theory, consumers using funds from their HSA to pay down their high deductible will shop for the highest-value care. But without information on price and quality, it is difficult to determine which care has the highest value. In practice, then, high-deductible plans appeal to healthier consumers, who do not need to make many health care decisions (see here, here, and here). What looks like cost-savings, then, is actually just consumers who were lower-cost at the start. There is insufficient evidence that HSAs have reduced cost growth. With better price and quality transparency tools, HSAs might become more viable if the premium savings (and tax savings, in the individual market) were high enough to offset the high deductible.

Summary – All 4 parts

As I write this, the House vote on the American Health Care Act has been delayed. The ideological divide between Republicans and Democrats resides in the debate over the meaning and purpose of insurance. While Democrats believe that a health insurance system should transfer income from the healthy to the sick, regardless of whether individuals have already become sick, Republicans believe that individuals should not have to pay for services that they do not wish to have, or cover the cost of illnesses that others have already contracted.

But under the Republican plan, in which individuals would choose covered services à la carte instead of as a package of essential benefits, many plans might withdraw services from coverage. This scenario is not hypothetical; prior to the ACA, individual policies were not required to cover maternity coverage, mental health services, and even prescription drugs, and many did not. Suppose that one plan did, for example, cover maternity benefits, while others did not; then that plan would surely attract many pregnant women and their families, and premiums for that plan would be relatively high, especially if families could switch the following year.

While not everyone is ill, everyone is at risk for illness, and the purpose of insurance is to pool the collective risk of illness in order to make costs more predictable for any one insurer. A portion of my premium, then, might go to cover maternity care for someone in my risk pool, but in turn, their premium might go to cover a hospitalization for my skiing accident. This scenario is not socialism – it is insurance.