Into the lexicon of politically charged rhetoric comes a new definition for Health Savings Accounts – “the mother of all tax shelters.” This tagline, created by Prof. Paul Caron of the University of Cincinnati (one of the nation’s leading tax law experts, and a fellow blogger), describes the incentives and benefits created by HSAs, which allow individuals to save as much as $10,500 tax-free annually to cover health expenses.
And the benefits are not just the deductibility of the HSA investments. There is also tax-free earnings growth, untaxed withdrawals for expenses not covered by insurance, and no time limit or requirement for drawing down the accounts. While this all sounds great, there is one rather awkward problem.
HSAs disproportionably favor the rich. The wealthy are the ones who gain the most benefit from the higher deduction and can most easily afford the combined insurance/HSA plans. According to a CPA quoted in a recent Bloomberg News article, “To them, it’s just a savings account. But for a client with diabetes, his out-of-pocket medical costs are going to be the maximum (the client’s expenses are so high that they will exceed the deductible and any costs above the deductible will be covered by insurance). There really are no savings.”
The CPA’s anecdotal finding has been supported by a recent GAO study of federal employees which found that HSA adopters tend to be wealthier than the average Federal employee due to the accounts’ aspects that “uniquely attract higher-income individuals with the means to pay higher deductibles and the desire to accrue tax-free savings.” (43% of HSA adopters had incomes above $75,000; 23% of all FEHBP enrollees had salaries at that level or above)
This may partially explain the rather modest enrollment projections for HSAs; the Bush administration estimates that only about 10% of privately insured individuals will be covered by HSA plans by 2010.
What does this mean for you?
HSAs are a great tax break (leaving aside the question of how we can afford more tax breaks despite ballooning deficits) but don’t address health care cost drivers.

What do GM, Ford, hotels in LA, grocery stores and public transit in Sacramento, public transit in Philly, and Boeing have in common?
All were faced with strikes and/or labor strife due primarily to conflicts about health care insurance, costs, and access. The strike by Sikorsky workers in Connecticut (registration required) is yet another example of health care’s growing pressure on US employers.
There’s a great quote in the NYTimes article on Sikorsky from one of Sikorsky’s flight technicians that crystallizes this issue – ” “This isn’t only about us,” said Bruce Peters, a flight technician … This is a nationwide problem with medical care.” Peters notes that any wage increases the workers have been offered will be consumed by insurance costs – the additional copays, co-insurance, and employee premium contributions contained in the company’s latest contract offer.
Peters personalizes the national disparity between wage growth and employees’ personal health care costs. Premiums for employer-sponsored health care have grown five times faster than wages since 2000.
In 2004, the average family’s insurance premiums came within an x-ray charge of $10,000. In contrast, median family income in 2004 was slightly over $43,000. Yes, you read that right – health insurance costs came to 23% of family earnings.
And yes, things have gotten worse since the sunny days of 2004; predictions are that 2006 will see the average family’s insurance costs hitting $14,500 per year.
A survey of smaller employers in California indicates that more than half will not be offering health insurance to their workers this year. This despite their optimism about growth and increased revenues in 2006.
The sky is falling, and it is crashing down around the heads of US employers, employees, taxpayers, and governments.
What to do?
Of all the groups out there, the National Coalition for Health Care Reform is making the most sense. NCHC’s goals are universal coverage; health care quality improvement; cost management; equitable financing and simplified administration.
What is notable about their work is nowhere does the coalition advocate single-payer, private insurance, or any other system. Yes, they research, study, and report on the potential impacts, positive and negative, of the several types and sources of funding. No, NCHC doesn’t take a political stance.