As the Administration and Congress define their vision of “repeal and replace” we are seeing a number of efforts to increase the use individual accounts as a key component of any likely Trump/RyanCare proposal. Health Savings Accounts (HSAs) figure prominently in a number of Republican proposals as a way for individuals to pay for current (pre-retirement) health care costs. For example, HSAs are key aspects of summary of the pending American Health Care Reform Act (issued by the Republican Study Committee), the Patient Freedom Act of 2017 (sponsored by Sen. Cassidy, R. La. and Sen. Collins, R. Maine), and the House Republicans’ “A Better Way” position paper.
On the surface, one can see how this could be promoted – after all, employees have already moved to an account based retirement system through the growth of 401(k) plans. HSAs have gained in popularity over the years – there are now over 20 million HSAs. And, there is an appeal to the belief that individuals will be better purchasers of health care when they are spending their own money.
However, we should be very careful about using the popularity and growth of 401(k) plans as a basis for in increasing reliance on HSAs to finance current healthcare costs. As we think about increasing the role of HSAs in financing healthcare, there are a few things to note:
• 401(k) plans are “backstopped” by Social Security. Even if I retire with $0 in my 401(k) plan, I still have some retirement income through Social Security. Maybe not a lot, but something. And, although Medicare may backstop HSAs for those over 65, there is no healthcare backstop for those under 65 with a $0 balance HSA and a large medical bill.
• I may decide to retire. But, if I have no retirement savings, I can continue to work. (Admittedly, some older Americans are forced into retirement with no employment prospects. But, for many, retirement is a choice.) But, I do not decide whether or not to get sick. In other words, Americans have some more control over retirement – but less choice over the need for healthcare. So, once again, for Americans under 65 a $0 401(k) balance is less likely to be catastrophic than a $0 balance HSA coupled with a high deductible plan and an unexpected illness.
• 401(k) balances have years to accumulate. This long-term accumulation phase allows 401(k)s to recover from fluctuations in the market, drops in my income, and the occasional hardship withdrawal. If HSAs are needed to pay current premiums or out-of-pocket medical costs, there is no accumulation phase. This already occurs to some degree – a recent study by Devenir Research estimated that $25 billion flowed into HSAs in 2016 as contributions, and $20 billion flowed back out as withdrawals. So, 80% of HSA contributions were spent in the year the contribution was made.
• For many, the money to fund an HSA is just not there. According to one recent survey, 63% of Americans do not have the financial resources to pay for an unexpected expense of $1,000. The lack of “extra” money to contribute to an HSA may account for the fact that, per the Devenir Research report, the average HSA balance is $1,850. Again, when faced with a large medical bill the consequences of $1,850 in my HSA are very different than a balance of $1,850 in my 401(k) plan.
Accounts – both for retirement and health care – can be very helpful tools. Many Americans have benefitted from 401(k) accumulations and used those accumulations to finance retirement. And Americans love to be in control of their assets. But, there are limits. As we consider the alternative to the ACA we should make sure that HSAs can really carry the weight that is shifted on them in these proposals.