Let seniors save for health care, tax free

How to end the discrimination, without busting the budget.

Health care remains a top issue for voters, and Washington remains polarized over controversial reform ideas like ‘Trumpcare’ and ‘Medicare for All.’ But there’s one new idea that should appeal to politicians of all stripes: letting seniors save for health care, tax-free.

The Health Savings for Seniors Act (H.R.3796), a House bill authored by Ami Bera, a California Democrat, and Jason Smith, a Missouri Republican, would give America’s seniors a powerful new way to save for health care in retirement. 

Specifically, the bill would make Health Savings Accounts (HSAs) available to everyone enrolled in Medicare. Overnight, an additional 60 million Americans would be able to save for their own out-of-pocket health costs, tax-free. 

And — a nice plus — it wouldn’t bust the budget. Indeed, it would tend to reduce deficits. 

Under current law, if you’re on Medicare, you basically cannot have an HSA. The new bill would end that discrimination.  

HSAs are popular because they give patients additional resources to pay for health care, resources you own and control. It’s your property. Whether you lose your job or change jobs, your account is there for you, growing tax-free. 

In 2003, there were no HSAs. Today, there are more than 25 million nationwide, with total account balances approaching $60 billion. 

So why can’t seniors have HSAs? Because under current law, to be able to contribute to an HSA you must have ‘qualified coverage,’ which is defined as a specific kind of health insurance policy with a high deductible. Legally, Medicare does not fit that definition. So simply by enrolling in Medicare, you end your ability to save for health care tax-free. 

The Bera-Smith bill would fix that oversight by simply declaring Medicare to be HSA-qualified coverage. Elegant.

If anyone deserves access to these accounts, it’s seniors. Health care costs typically rise with age, and Medicare doesn’t cover everything (routine dental, vision, and hearing items, for example). 

Even seniors with supplemental ‘medigap’ coverage can never completely shield themselves from unexpected medical bills. The average elderly couple needs $280,000 to cover health care costs in retirement. And the typical enrollee in original, fee-for-service Medicare spends 19 percent of his or her income on out-of-pocket health costs. 

HSAs can help fill these gaps. 

How much would the bill cost? According to Adams Auld LLC, a public policy consultancy of which I’m a partner, H.R.3796 as introduced would reduce federal outlays by an estimated $12.8 billion over 10 years (2020-2029). 

Yes, reduce. While more income would escape taxation, thanks to an estimated 2.6 million new HSAs created, which would dampen federal tax receipts by around $1.2 billion, this revenue loss would be offset by an estimated $14 billion in outlay reductions. 

Roughly $2.2 billion of that savings would come from two places: 1) Medicaid (the joint federal-state health program for the poor), because seniors with new and growing HSA balances have more assets, and 2) Social Security, because working seniors with employer-funded HSAs tend to file for their benefits a bit later than those without. 

But the bulk of the projected savings, roughly $10.6 billion, would occur within Medicare, thanks to the ‘HSA effect.’

The HSA effect is the tendency of HSA account owners to be more frugal in their health care spending without harming their health. This effect is well-attested. Numerous studies, including those reviewed by RAND Corporation and the American Academy of Actuaries, have found that simply having an HSA tends to diminish personal health spending by somewhere in the range of 1 percent to 20 percent. (Adams Auld assumes 10 percent.) And happily, HSA owners tend to increase their use of preventive-care services. 

In short, HSAs help bend the health care cost curve by eliminating waste. And it stands to reason: People make more careful choices when spending their own money. 

But suppose the HSA effect is a myth? In that case, the Bera-Smith bill would still save about $2.2 billion. 

In sum, this elegant proposal has something for everyone: a tax cut for Republicans, a stronger Medicare for Democrats, lower long-term health costs for patients, and, for 60 million elderly and disabled Americans, greater peace of mind. 

And — a nice plus — it wouldn’t bust the budget. 

Dean Clancy, a former senior White House budget official, is president and founder of HSAs for All

[Originally published at the Washington Times, Sept. 25, 2019. @WashTimes. Republished at deanclancy.com.]

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