Trumpcare: Health Savings Account Facts Every American Should Know

President-elect Donald Trump will take the oath of office in less than two weeks, and he has already indicated that repealing Obamacare will be one of his top priorities. Details on the specifics of what will inevitably become known as Trumpcare aren't known yet, but one of the most likely scenarios will involve greater use of health savings accounts (HSAs).

HSAs already exist under current law, but they aren't nearly as widely used as they might be under the Trump administration. Below, we'll look at the basics of health savings accounts to bring you up to speed on what could become a core element of Trumpcare in 2017 and beyond.

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What are health savings accounts?

Health savings accounts are a way to set money aside to cover medical expenses. Created in 2004, HSAs were initially seen as a way of encouraging people to use less expensive, less comprehensive health-insurance policies, choosing instead to pay more of their healthcare costs out of their own pockets.

Under current law, HSAs are only allowed if you have what's called a high-deductible health plan, or HDHP. Such policies must have a minimum annual deductible of $1,300 for single coverage, or $2,600 for family coverage. That means that, with a few exceptions for routine preventive care, you have to pay the first $1,300 or $2,600 of your annual healthcare costs in 2017 before insurance coverage kicks in. Above that amount, more typical cost-sharing provisions apply, and above the maximum out-of-pocket provisions of $6,550 for single policies in 2017, or $13,100 for family policies, the insurance company picks up all covered expenses.

The immediate benefit of HSAs is that you can deduct your contributions on your tax return. As long as you have an HDHP, then you can contribute up to $3,400 in 2017 to an HSA for single coverage. The family coverage HSA contribution limit is $6,750 in 2017.

However, HSAs also have longer-term benefits. Like an IRA for retirement, HSAs allow you to earn income on a tax-deferred basis. Moreover, as long as you use HSA money for qualifying medical expenses, then withdrawals are tax free. This unique combination of tax-deductible contributions and tax-free withdrawals makes HSAs even better than IRAs.

How HSAs got politicized

In theory, the idea behind encouraging HSA use was a good one. Employers paying for comprehensive health-insurance coverage could replace those policies with HDHPs, which offered lower premiums. They could then take the savings and deposit them as employer contributions to employee HSAs. Policymakers believed that the result would be less wasteful use of healthcare resources, resulting in lower demand, and stopping the upward pressure on prices for medical services. In practice, though, there was no requirement that employers make such contributions.

Meanwhile, HSAs became most popular among high-income taxpayers. That demographic group had the most money to set aside in a tax-favored account, and it reaped the greatest savings from being able to deduct contributions from taxable income at high tax brackets. By contrast, few lower-income taxpayers had spare cash to set aside for healthcare expenses, and the tax incentives to do so were smaller.

What HSAs would look like under Trumpcare isn't entirely clear, but from the Trump campaign's website, it's apparent that HSAs would be available to a broader range of Americans. Making accounts available independent of HDHPs would dramatically increase their use.

However, some other aspects are less certain. Government contributions to HSAs, either to match participant savings or as a simple lump sum, could address some concerns about low-income taxpayer incentives. In many ways, such a system would look a lot like the voucher programs that many Republicans have suggested could be a replacement for traditional Medicare coverage for older Americans.

The biggest problem with HSAs

Opponents to health savings accounts note that their past use hasn't resulted in the changes that policymakers had initially expected. In particular, behavior among HSA participants hasn't always been favorable, with some foregoing basic care due to cost concerns and letting health conditions worsen until they became true emergencies later on that were far more costly.

To the extent that Trumpcare HSAs might retain high deductibles, there would be an inevitable divide between more healthy and less healthy populations. The President-elect's website itself notes that HSAs "should be particularly attractive to young people who are healthy and can afford high-deductible insurance plans," and that heightens fears among those with greater healthcare needs that they would be left out under Trumpcare.

Americans can expect a big debate about the future direction of healthcare when President-elect Trump takes office later this month. Knowing the role that HSAs could play will be vital in planning your own healthcare finances throughout 2017 and beyond.

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