Savings Accounts Key to Drug Law

In the final days and hours before Congress approved a historic overhaul of the Medicare program, when Republican leaders were scrambling to attract or hold onto the votes of the most conservative members, their most powerful argument was reduced to a three-word mantra: health savings accounts.

Originally valued at $174 billion over 10 years, these unique tax shelters never had anything to do with Medicare or prescription drugs. But they had everything to do with the survival and ultimate passage of Medicare prescription drug legislation.

In June, the separate bill creating the accounts was attached to the House’s Medicare prescription drug bill just hours before the bill passed by one vote. And while the accounts were scaled back to $7 billion over 10 years in the final Medicare bill, they remained the No. 1 draw for ideological conservatives. Former House Speaker Newt Gingrich emphasized the accounts in a closed-door Republican caucus, and current Speaker J. Dennis Hastert (R-Ill.) and Senate Majority Leader Bill Frist (R-Tenn.) mentioned them at every opportunity.

To some, the health savings accounts are cunningly versatile. To others, they are insidiously scary.

“It’s a double tax break,” said Gail Shearer, director of health policy analysis for Consumers Union. “Your money does not get taxed when you put in it; it does not get taxed when you pull it out. It’s an unprecedented tax shelter, especially for wealthy people, who are in a higher tax bracket.”

Shearer and other critics warn that the accounts will undermine the nation’s employer-based health-insurance system, leave additional low- and moderate-income workers unable to afford health insurance and further deplete the federal treasury.

For supporters such as Pete Sepp of the National Taxpayers Union, the accounts are multipurpose.

They will address “some of the rotten features of the employer-based insurance system,” reduce health-care spending and restore a more direct relationship between patients and health-care providers, Sepp said. As a bonus, he added, “reducing taxes and tax rates is a fine way to keep government from growing.”

The accounts, which will soon become available to taxpayers of all ages who have high-deductible health insurance policies, will work like this: Each year, individuals and their employers may contribute an amount equal to the deductible on their insurance policy -- up to $2,600 for an individual and $5,150 for a family. A single worker with a $2,600 deductible, for example, may invest $1,600 in a health savings account -- and reduce taxable income by the same amount. The worker’s employer may kick in another $1,000, lowering the company’s taxable income.

The worker then has $2,600 to spend on health care for the year, tax-free. And, unlike current flexible spending accounts, the worker may keep whatever is left in the account at the end of the year and continue to accrue earnings on it tax-free while making additional contributions in the new year. Money withdrawn for other uses is subject to taxation and a 10% penalty.

Health savings accounts are available to even the wealthiest taxpayers, unlike some other federal tax benefits.

“They will be attractive to the affluent and the healthy,” said Edwin Park, senior health policy analyst at the liberal Center for Budget and Policy Priorities. But he argued that premiums for conventional policies, which would be held by workers who are sicker and have higher medical expenses, could then skyrocket, leading some employers to stop offering such coverage.

“This is terrible policy on the tax, fiscal and health fronts,” he said.

But supporters believe there soon will be an explosion of high-deductible policies on the market, and they argue that some workers now unable to afford more conventional health insurance would buy the cheaper policies.

“I would imagine even more companies will hop on the bandwagon and start selling these [high-deductible] plans,” said Devon Herrick, a fellow at the National Center for Policy Analysis, a think tank that promotes the privatization of government programs. “Now there’s a 250-million person market.”

Supporters also believe that the accounts will “make patients wiser consumers” so that they stop spending money on health care they don’t need. A study of similar accounts conducted in South Africa last year found that health-care spending dropped 47%, Herrick said.

But Shearer worries that the likely proliferation of high-deductible insurance policies will leave many people unable to afford preventive and early-stage care, resulting in illnesses that cost far more to treat.

Sepp’s only worry is that Democrats will try to dilute the health savings account provisions of the Medicare bill.

“But we’ll be there,” he said, “trying to defend the tiny crumbs that were thrown to taxpayers.”