The Future of Health Savings Accounts in Three Approaches to Reform

by William G. (Bill) Stuart | Originally posted here

Now that Congress and the president have passed the nation's largest single spending bill ever (the American Relief Plan Act) and President Biden has proposed an additional $2 trillion in a bill that includes some infrastructure improvements and additional federal spending targeted at specific industries, the next big project in Washington DC may be healthcare reform. The three potential big changes - a public option, extension of Medicare to a below-65 population, and a government monopoly over the design, funding, and delivery of all medical care - are known.

These proposals didn't gain traction when Republicans controlled Congress and the White House, but they're a high priority for many Democrats. They'll probably surface with more momentum later this year, now that Democrats have delivered some temporary funds and changes to the law in the nongroup market.

Let's look at each proposal and its effect on Health Savings Accounts.

Public Option

Both the Biden Administration and several states are exploring this approach. Details differ among the proposed plans, but the framework is the same. The federal or state government would sponsor a plan to compete directly with private coverage in the nongroup market (and perhaps at companies with 50 or fewer employees). The plan would follow all Affordable Care Act requirements. It probably would pay Medicaid reimbursement levels (or slightly higher), which are far lower than the prices negotiated between private plans and providers. Thus, the networks would be quite limited - unless providers are forced to participate in the program if they accept Medicaid or Medicare patients.

The cost-sharing design of this plan (or these plans, if the government sponsors more than one option) would determine the role of Health Savings Accounts. If the plan meets the requirements of HSA-qualified coverage, anyone enrolled who meets all requirements to open and fund a Health Savings Account could do so. That would be great for everyone in the nongroup market, as Health Savings Accounts represent their only opportunity to put aside tax-free funds to reimburse current and future qualified medical, dental, vision, and over-the-counter items.

But it's unlikely that the federal or state governments will design a public-option plan that applied all non-preventive services to a deductible of at least $1,400 (self-only) or $2,800 (family coverage). Politicians score political points when they provide "free" services such as a handful of PCP visits, breast-milk pumps, behavioral-health services, or a number of chiropractic visits with no patient financial responsibility.

The best hope is that a state that adopts a public option designs multiple plans, one of which is HSA-qualified.

Medicare Buy-in

This initiative would be designed and operated by the federal government (not a state government), which manages and funds the Medicare program. The idea is to allow younger people - beginning at age 60, age 55, or even age 50 - to enroll in Medicare rather than an alternative such as nongroup coverage or perhaps even an employer-sponsored plan. People in this pre-65 age group pay high premiums for their nongroup coverage (even though the premiums are subsidized by younger enrollees). This population includes early retirees (including those no longer able to hold strenuous jobs), free-lancers, and self-employed professionals.

The plan has some challenges. For example, Medicare's inpatient benefits (Part A) are funded through payroll taxes. That dedicated funding source no longer covers the cost of claims annually. Instead, the annual deficit is covered by prior years' surpluses. That surplus will be exhausted within three or four years. And outpatient (Part B) and prescription-drug (Part D) benefits are heavily subsidized (roughly 75% of costs) from the general treasury. Extending Medicare to a larger population would put additional strain on the federal budget, which is out-of-balance by more than $1 trillion annually.

Under current law, anyone covered by Medicare before, at, or after age 65 is disqualified from funding a Health Savings Account. This situation won't change without a revision to federal tax law. A bill will be introduced shortly in Congress to allow people enrolled in Medicare to open and fund a Health Savings account. Introduction, though, is only the first step in a long process.

But Health Savings Accounts can still play a role. Withdrawals for qualified expenses incurred by qualified family members are always tax-free, even when the owner is no longer eligible to fund an account. Also, Medicare offers only individual - not families - coverage. In some scenarios, the early retiree's spouse might remain enrolled in self-only coverage through her employer. In that case, if she's eligible to fund a Health Savings Account, she can open and contribute to her own account (up to $3,600 in 2021, plus an additional $1,000 catch-up contribution if she's age 55 or older). She can then reimburse her own and her spouse's qualified expenses tax-free.

Single-Payer/Medicare for All

This is the most radical reform proposal. It either outlaws private insurance or relegates it to providing some level of supplemental coverage. All Americans - or, if a single-payer plan is implemented by a state, all state residents - would be covered by a single plan with a uniform set of benefits, cost-sharing, and network. The program would be financed by higher taxes on employees and companies.

The cost projections aren't modest (about $33 trillion over 10 years). Yet those costs are dramatically underestimated. Medicare reimburses providers far less than commercial plans for identical services. If commercial plans and their reimbursement levels no longer exist, Medicare reimbursements aren't sufficient to cover providers' costs - particularly rural hospitals. The federal government will have to supplement these reduced rates - in the form of either higher reimbursements or direct subsidies to certain providers - to maintain a network of providers to meet demand.

The Medicare for All proposals introduced in the last Congress cover every American with a rich benefit package and no copays, deductibles, or coinsurance. That sounds great. But with no cost at the point of service, demand increases. Care is rationed by wait times. And the result of ending patients' cost-sharing is higher reimbursements from the federal treasury.

In a Medicare for All proposal, funding a Health Savings Accounts wouldn't be an option (see discussion of Medicare Buy-in above). No one who supports Medicare for All - more than half of all Democrats in the House and one-third of Democrat senators in the last Congress - favors a plan design with much of any cost sharing or that doesn't include dental and vision care (which isn't covered by traditional Medicare).

Presumably, everyone who has funded a Health Savings Account prior to the introduction of Medicare for All could withdraw funds tax-free to pay for qualified expenses (such as dental and vision expenses not covered by an expanded Medicare program, plus over-the-counter drugs, medicine, equipment, and supplies). And there's always the option to withdraw funds for non-qualified expenses after age 65 without the 20% additional tax (although those distributions would be included in taxable income).

Prospects

When politicians are responsible for designing medical coverage, their preference is for plans that offer a rich package of benefits and little or no out-of-pocket patient financial responsibility. They tend to focus on the seen ("free" stuff) rather than the unseen (the true cost of a program, which is funded by less-visible taxes, borrowing, and inflation of the nation's money supply). That environment is inconsistent with the concept of a Health Savings Account, in which patients accept additional financial responsibility in exchange for an opportunity to shop prudently and earn a tax break on savings dedicated to healthcare spending.

But that's not an argument not to open a Health Savings Account today, nor to stop funding an open account. A country that's closely divided on economic and social issues hasn't formed a consensus around a government-designed and -funded medical system. A Medicare Buy-in program is possible, though politicians will have to make some difficult decisions around funding that program (and Medicare as a whole) before it becomes a reality.

We're likely to see some form of the least threatening (to Health Savings Account) programs, the public option, soon. Washington and Colorado are well on their way toward meaningful plans. And the flood of billions of dollars of federal funds from the American Rescue Plan Act can serve as a catalyst to introduce such plans at the state level before Congress debates an option at the federal level. But these programs can - and should - include plans that are HSA-qualified. If they're designed to compete with existing plans in the nongroup market, they'll need to include cost-sharing to be priced competitively without draining state coffers with subsidies. Plans in the nongroup market have average self-only deductibles of more than $3,000 for Silver coverage and more than $6,000 for Bronze coverage, leaving plenty of room for a plan with a minimum deductible of $1,400 (in 2021).

The Bottom Line

As with all policy initiatives, you should follow legislative developments, voice your support or concerns, and prepare contingency plans if a bill potentially disrupts your plans. But keep doing what you're doing today - especially if you're funding a Health Savings Account to pay tax-free for current and future qualified expenses.

I'm director of strategy and compliance at Benefit Strategies, LLC, an administrator of Health Savings Accounts and reimbursement accounts. You can read and subscribe to my Health Savings Account GPS blog here and read my weekly HSA Monday Mythbuster and HSA Wednesday Wisdom columns and occasional Healthcare Update column published on LinkedIn. My book, HSAs: The Tax-Perfect Retirement Account, is the definitive guide to navigating the intersection of Health Savings Accounts, retirement planning, and Medicare. It's available in paperback and e-book at Amazon.

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