Bush's Proposed Health Accounts Offer Benefit to Rich (Update3)

By Ryan J. Donmoyer

Feb. 24 (Bloomberg) -- President George W. Bush's proposal to expand health savings accounts, intended to help contain spiraling medical costs, may prove a tax-free boon for the nation's rich.

Both supporters and opponents of the proposal said the enhanced HSAs offer unprecedented tax advantages and may become more attractive than 401(k)s or Individual Retirement Accounts as a way for the richest and healthiest Americans to build savings.

The proposal would create ``the mother of all tax shelters,'' said Paul Caron, a professor at the University of Cincinnati College of Law.

The plan is the centerpiece of Bush's effort to reduce health-care costs and extend coverage. Bush and his allies say the HSAs will encourage consumers to shop for less-expensive care, fostering competition that will bring prices down. ``One way to help control costs is to interject market forces, and one way to do that is through health savings accounts,'' Bush said Feb. 15 during a visit to Dublin, Ohio, to promote the proposal.

Bush's 2007 budget proposes allowing Americans who buy high- deductible health insurance to save as much as $10,500 per family to cover medical expenses. The HSAs would be the only investment accounts to combine a tax deduction and a tax credit for deposits, tax-free earnings growth, and untaxed withdrawals for expenses not covered by insurance. Money remaining in the accounts can grow indefinitely.

``This is the gift that keeps on giving,'' said former Internal Revenue Service Commissioner Don Alexander, who ran the agency under Presidents Richard Nixon and Gerald Ford and is now a partner at Akin, Gump, Strauss, Hauer & Feld in Washington.

Self-Insurance

John Goodman, president of the National Center for Policy Analysis in Dallas and an advocate of HSAs, said the tax incentives are appropriate because the accounts serve two purposes. ``This isn't just a savings account,'' he said. ``It's self-insurance for health care.''

Proponents such as Goodman say expanded HSAs will allow the equal tax treatment of people who buy their own insurance and those who get insurance benefits from their employer that aren't subject to any tax. Most people who buy their own insurance pay for it with after-tax dollars.

The accounts proposal favors the wealthy because they are more likely to have the disposable income to contribute the maximum amount. It also favors the healthy because they have fewer out-of-pocket medical expenses that would deplete the account.

Steven Bankler, a certified public accountant in San Antonio who has provided accounting analysis to congressional committees, said the only clients he has for HSAs are people who intend to use them to shelter savings from taxes.

Wealthy and Healthy

``The wealthier, healthier people think it's very advantageous,'' Bankler said. ``To them, it's a savings account. But for a client with diabetes, his out-of-pocket medical costs are going to be the maximum. There is really no savings.''

The Government Accountability Office, the nonpartisan investigative arm of the U.S. Congress, said in a January report that the federal program offering HSAs to government workers as an alternative to traditional health insurance coverage is attracting primarily the healthy and the wealthy.

While enrollment in the federal plan has been modest, the GAO said ``aspects'' of the plans ``such as the greater financial exposure coupled with the potential for tax-advantaged savings -- uniquely attract higher-income individuals with the means to pay higher deductibles and the desire to accrue tax-free savings.''

Rising Spending

The tax proposal, which would cost the government $156 billion in forgone revenue over a 10-year period, is quickly becoming the most hotly debated feature of Bush's health-care agenda. Polls show that health care is the leading concern of voters worried about rising costs and reduced coverage. U.S. spending for health care may double from its present level to $4 trillion by 2015 as the population ages, according to a government study published Feb. 22.

House Minority Leader Nancy Pelosi, a California Democrat, said in an interview Feb. 14 that her party ``will fight'' any legislation expanding HSAs and a related plan to allow small businesses to band together to buy health insurance. She said the two proposals wouldn't lower health-care costs, reduce the number of uninsured or narrow the budget deficit.

Two Republican lawmakers, Sam Johnson of Texas and Eric Cantor, have proposed legislation in the House of Representatives to expand HSAs.

HSAs have been available since 2004. They currently allow families to save up to $5,450 per year. Contributions are deductible for income-tax purposes, though they are subject to payroll taxes that fund Social Security and Medicare.

Payroll Taxes

Bush's proposal aims to almost double the contribution limit, offset payroll tax liability with a 15.3 percent tax credit, and offer additional breaks for health-insurance premiums. Such premiums can only be deducted now if they exceed 7.5 percent of a taxpayer's income.

America's Health Insurance Plans, a Washington trade group for the industry, said about 3 million Americans are covered by HSAs, and 37 percent of the policies were purchased by individuals who previously had been uninsured. The administration estimates there will be 14 million accounts by 2010 under current law. If the accounts are expanded under Bush's proposal, the administration estimates 21 million accounts will be opened.

White House spokesman Trent Duffy said HSAs are only one element of a comprehensive health-care agenda that includes limiting awards in medical malpractice cases, slowing the growth of Medicare benefits, and increasing the portability of health insurance.

Low-Income Families

He said providing a tax credit would especially help uninsured low-income people fund their accounts. The administration has found that as many as 40 percent of accounts are opened by people earning less than $50,000, he said. A majority of the account holders are families with children.

``The administration never suggested that HSAs are the panacea,'' Duffy said. He dismissed criticism that widespread use of HSAs would eventually undermine traditional employer-provided health care, saying that more companies will drop coverage anyway if costs continue to rise.

The expanded health savings accounts won't increase access to insurance or lower costs, said New York University economist Jason Furman, who advised former President Bill Clinton and was economic policy director for Massachusetts Senator John Kerry's 2004 presidential campaign.

Maximum Deposit

In a report this month for the Center on Budget and Policy Priorities, a research organization in Washington that opposes the Bush proposal, Furman wrote that those with high earnings are in the best position to reap tax savings from HSAs because they are more likely to be able to afford to deposit the maximum.

A $1,000 deposit by a family making $15,000 would earn a tax subsidy of $153, he said. The same deposit by a family making $40,000 would earn a $303 subsidy, while a family that earns $180,000 would net a subsidy of $433. Deductions become more valuable as tax rates increase. If that high-income family were allowed to deposit $10,500 -- as Bush proposes -- it would get a subsidy worth $4,547.

Moreover, high-income people who already put the maximum $15,000 a year into their 401(k) retirement plans would be able to save an additional $10,500 in an HSA. And Bush has proposed no income limits on HSAs like those for contributions to individual IRAs, making them even more attractive to high-income individuals, Furman said.

401(k)s

The extra tax benefits, meanwhile, would allow a single contribution of $10,500 to grow to $25,486 over 30 years if it earns 3 percent annually, Furman concluded. The same amount deposited in a 401(k) plan would net only $16,190, largely because taxes would be owed on withdrawals.

Withdrawals from HSAs would be taxed as well if the proceeds are used for anything other than medical expenses, though at a lower effective rate than traditional retirement accounts because of the more generous upfront tax breaks. An additional penalty would be imposed for withdrawals from the accounts before the age of 65 that aren't used for medical expenses.

``It's not about health care,'' Furman said. ``No one needs to put away $10,000 a year and have it accumulate to hundreds of thousands of dollars to pay for health care.''

To contact the reporter on this story: Ryan Donmoyer in Washington at rdonmoyer@bloomberg.net

Last Updated: February 24, 2006 14:04 EST

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