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HSA Provisions Draw Praise, Scrutiny

By Mary Agnes Carey, CQ HealthBeat Associate Editor

December 11, 2006 -- Proponents of health savings accounts are hailing an array of provisions Congress passed last week aimed at increasing enrollment in the accounts, while some analysts say the changes might do little to reduce the number of Americans without health insurance.

The new guidelines—which were included in the sweeping tax, trade, and health care legislation the Senate cleared Dec. 9—would allow both employees and employers to contribute more money to the tax-free accounts, which are used to pay health care expenses.

Health savings accounts, known as HSAs, were created in the 2003 Medicare drug law (PL 108-173). The accounts allow people who sign up for high-deductible health plans to contribute and withdraw funds to cover health care costs tax-free. Employers also may contribute money on behalf of their workers. The idea is that once patients are forced to pay more costs out-of-pocket, they will begin to comparison shop and request quality data, eventually driving down the costs of health care.

Currently, HSA contributions are limited to the smaller of the participant's deductible or $5,450 for a family and $2,700 for an individual. The new HSA rules would eliminate that restriction, with the account holder being able to contribute up to $5,450 for families and $2,850 for individuals, with that amount rising each year.

In addition, employees who are hired midyear would be able to contribute to the accounts and workers could make a one-time transfer on a tax-free basis from a flexible spending arrangement, a health reimbursement arrangement or an individual retirement account. The provisions would reduce federal revenues by $1 billion over the next decade, according to the Congressional Budget Office (CBO).

President Bush's fiscal 2007 budget proposal included several provisions aimed at increasing participation in HSAs, such as allowing money in the tax-free accounts to be used for premiums, and many Capitol Hill Republicans championed the changes as well. But opponents of HSAs, including many Democrats, say the accounts will do little to increase coverage for the uninsured and could discourage cash-strapped individuals from seeking care when they need it.

Many of the provisions included in HSA legislation (HR 6134) that the House Ways and Means Committee approved in September were folded into the tax-trade-health bill the Senate cleared early Dec. 9 before adjourning for the year. Rep. Eric Cantor, R-Va., the sponsor of HR 6134, said expanding HSA use is a priority for Republicans, who say the accounts will drive consumerism and transparency in health care and save consumers money. "They become more attractive the more people can save," he said.

James A. Klein, president of the American Benefits Council, a group that represents sponsors and administrators of retirement, health, and stock compensation plans, said the HSA changes would "help many Americans find more affordable and tax-preferred ways to pay for health care costs."

However, analysts at the left-leaning Center on Budget and Policy Priorities said the HSA provisions are aimed at allowing high-income people to use the accounts to shelter even more income from taxation.

Provisions that encourage people with HSAs to increase the amounts they spend for health care undercut claims that HSAs lower health care spending. Allowing individuals to "overfund" their HSAs by contributing up to $5,450 annually for family coverage while facing a deductible as low as $2,100 for coverage "could encourage some people to spend a portion of their excess HSA balances on health care," the Center said in a statement.

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