NCPA - National Center for Policy Analysis


July 6, 2009

A health savings account (HSA) is a tax-advantaged account into which money is placed by an employer and or an employee to pay for ongoing medical expenses.  These accounts are married to a qualified consumer-directed health plan (CDHP) insurance policy to cover unpredictable big-ticket expenses, says Michael LaFaive, Fiscal Policy specialist with the Mackinac Center.

Most people have become familiar with the general concept: The money in the HSA is spent for routine or less costly types of care, up to the point at which the deductible is met and then the actual insurance kicks in.  For example, a 2009 federal law requires that HSA deductibles be at least $1,150 for self-coverage and $2,300 for family coverage.  There are ceilings, too.

These accounts have three benefits:

  • Money going in is untaxed by the federal government.
  • That money earns interest tax free
  • Savings can be withdrawn and used for qualified medical expenses tax free.

Savings accrue to employers because high deductible insurance premiums cost less than premiums associated with more traditional insurance, say LaFaive.  The opportunity to rein in health care costs and also provide consumers with greater health care choices has led to an explosion of growth in the use of HSAs:

  • The AHIP Center for Policy and Research estimates that the number of people using HSAs or CDHPs has grown from 1 million in early 2005 to more than 8 million by January 2009.
  • In 2008, large and small group HSA coverage leapt 35 percent and 34 percent respectively.

LaFaive and Porterfield have estimated that the state of Michigan could save:

  • $106 million in the first year by moving state civil servants into HSAs, with cumulative savings of up to $5.9 billion through 2021.
  • $451 million in the first year by rolling almost 209,000 public school full time employees into a state-administered HSA/CDHP, and cumulative savings of $26 billion through 2021.

Source: Michael D. LaFaive and James Porterfield, "Health Savings Accounts Can Save Michigan Money," Mackinac Center for Public Policy, June 30, 2009.

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