Earlier this week, I wrote about Colorado House Bill 1025, which would repeal the Health Care Affordability Act of 2009, including the Hospital Provider Fee. The fee is generating additional revenue in Colorado to fund health insurance for low-income individuals, including those who rely on Medicaid, the Colorado Indigent Care Program, and CHP+. The bill was introduced by Rep. Janak Joshi of Colorado Springs. Rep. Joshi is a retired physician, and thus has a strong interest in health care reform issues. He devotes a couple of pages of his website to health care reform legislation, and was quick to introduce HB 1025 as soon as the 2011 legislative session got underway. While I respect his expertise and knowledge of the health care system, and the thought he’s put into his reform ideas, one of his recommendations struck me as being a bit misguided.
In his webpage detailing his recommendations for how health care reform should happen, one of his suggestions is that we should “remove the cap on tax-deductibility for Health Savings Account contributions.” For 2011, the contribution limit is $3050 for an individual and $6150 for a family. HSA contributions are deductible “above the line”, which means that a tax filer does not have to itemize deductions in order to deduct HSA contributions. And unlike IRAs, there are no income limits on HSA participation.
I have noted many times that my family is a big fan of high deductible health insurance and our HSA. We have only ever had to meet our deductible once (when Jay had knee surgeries in 2008), and generally have very little in the way of medical expenses each year. Contributing to our HSA is a good way to set aside money for future medical bills (or retirement if we don’t need the money for medical expenses) and it gives us a bit of a break on our taxes each year. While I very much believe that people should be more in tune with what health care actually costs (and HSA qualified health insurance policies theoretically set the stage for patients to comparison shop for medical services), I know that determining the actual cost of health care can be a very tricky process. And I’m also a realist about the ability of HSAs to have a significant impact on health care utilization and cost.
HSA’s primarily benefit high income individuals and families. This should be relatively obvious. If a family is struggling financially, they may opt for a high deductible health insurance policy in order to save money on premiums. But the chances that they will also be able to contribute a significant amount of money to an HSA are slim. For people who do contribute to an HSA, the tax benefits increase with income, since higher incomes are taxed at a higher rate. Not only are higher-income people more likely and able to contribute to an HSA, they also get more benefit from doing so than people with lower incomes.
A recommendation to remove the cap on HSA contributions seems like little more than an effort to increase the tax shelter opportunities for wealthy individuals. In 2008, only 8.2% of the population earning $75,000 or more was uninsured. In comparison, nearly a quarter of the population earning $50,000 or less was uninsured. Access to affordable health insurance and health care is much more of a problem for lower and middle income families than it is for those with high incomes. Families earning less than $50,000/year likely find it difficult to contribute anything at all to an HSA. Doing away with the cap on contributions wouldn’t do them any good at all.
So who would benefit if we did away with the cap on tax-deductibility for HSA contributions? People with high incomes who are looking for another place to put pre-tax dollars. People with incomes too high to allow them to contribute to IRAs could instead set aside large quantities of money in an HSA (remember, there’s no income limit for HSA participation). People who already max out their HSA contributions and still have money left over to contribute more would likely appreciate the removal of the HSA contribution cap. But those are not the people who are struggling to afford health insurance or pay for medical care. They are not the people our elected representatives should be focusing on when coming up with solutions for health care reform. Although I like our HSA and the flexibility it gives us to save for future medical expenses, I acknowledge that HSAs are not a panacea for what ails our health care system. They simply aren’t a good solution for people who cannot afford to fund them, and unfortunately a lot of the uninsured population falls into that category.