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CDHPs – the mother of all tax breaks

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.

2 thoughts on “CDHPs – the mother of all tax breaks”

  1. Our company has been offering an HSA plan since May 2005. I have a couple issues with the claim that it is the wealthy that gain most from HSA accounts. We had an hourly employee who suffered a catastrophic illness late last year. Her total out of pocket was the deductible amount of $2,000. Had we stayed with our prior PPO product, that employee’s out of pocket would have been $5,800. (Several $750 hospital co-pays, lots of specialty co-pays, DME and Rx co-pays). Yes, it’s a good plan for the wealthy…and also for the upper middle class who have the ability to save for future health care costs. However, it’s also good deal for those with catastrophic illness as compared to tradtional plans that ‘nickel and dime’. I also wonder if those folks with chronic illness (like diabetes) have a lower out-of-pocket with an HSA?

  2. Yes, a person who suffers a catastrophic illness can, in fact, see cost savings by being covered by the kind of policy that accompanies the HSA.
    But she also has $0.00 in the account, does she not?
    Follow her into the next year when she has a prescription drug to take because of her illness the year before. She’ll need to pay for that drug out of her own pocket until she reaches the $2000 deductible. She would also have to pay out of her own pocket for follow up visits in the 2nd calendar year until the deductible was met.
    That means that she goes at least two years without putting anything into her savings account!
    This kind of program will attract those who are either more well off, who can pay the higher deductibles of a catatrophic only plan, or those who are young and healthy and won’t miss the wellness aspects offered by traditional plans.
    Either way premiums for people who have to go the doctor or who have prescriptions will go up as the shared risk pool is left with only those who have a medical history.
    It’s the carriers and the wealthy who save money on these plans. One would almost think that was the reason HSAs were created…

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Joe Paduda is the principal of Health Strategy Associates




A national consulting firm specializing in managed care for workers’ compensation, group health and auto, and health care cost containment. We serve insurers, employers and health care providers.



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