A Brief History of Health Savings Accounts

December 9, 2013

In January 2004, 250 million non-elderly Americans gained access in principle to health savings accounts (HSAs).  Since then, individuals have been able to self-insure for some of their own medical needs and manage some of their own health care dollars, says Devon Herrick, a senior fellow at the National Center for Policy Analysis (NCPA).

  • In January 1984, the NCPA published a plan to use individually-owned "medical IRAs" to solve the long-term problem of Medicare.
  • Two months later, NCPA President and CEO John C. Goodman and Richard Rahn, then chief economist for the U.S. Chamber of Commerce, outlined this plan in a Wall Street Journal article.
  • That same year Singapore introduced a mandatory "Medisave" program.

Goodman and Senior Fellow Gerald Musgrave wrote a seminal study documenting opportunities in the United States to select high-deductible health insurance and place the premium savings in a personal health account to pay for small medical expenses.

In 1990, the NCPA organized a taskforce of researchers from 40 think tanks, universities and research organizations, including the American Enterprise Institute, the Cato Institute and the Hoover Institution. The report advocated self-insurance for small medical bills through "medisave" accounts -- a concept thereafter called medical savings accounts (MSAs).

Capitol Hill responded quickly. In 1992, 12 different bills designed to create medical savings accounts received the bipartisan support of 150 congressional cosponsors, including both conservatives and liberals.

The idea of MSAs began to catch on in the private sector as well:

  • After NCPA Board member Pat Rooney tried the idea with his employees at Golden Rule Insurance, the company began selling MSA plans in the marketplace.
  • Forbes magazine publisher Steve Forbes created a variant of the idea for his employees.
  • Quaker Oats and Dominion Resources implemented their own versions.
  • The United Mine Workers tried yet another twist: The union agreed to a $1,000 annual deductible as an alternative to first-dollar coverage in return for a $1,000 annual check from management for each employee.

These early attempts to implement MSA plans were at a disadvantage under the tax law. Unlike employer-paid premiums, MSA deposits were subject to income and payroll taxes, and unspent funds could not be rolled over to accumulate and earn tax-free interest. In 1996, however, Congress created a pilot project allowing tax-free MSAs for the self-employed and small businesses.

In June 2002, encouraged  by the NCPA and the Wye Group on Health, the U.S. Treasury Department issued a Revenue Ruling clarifying that unused funds in Health Reimbursement Arrangements (HRAs) -- employer-funded accounts similar to HSAs -- could be rolled over from year to year tax free. HRAs are very flexible. Employers, for example, can alter copayments and deductibles to encourage employees to buy medications for chronic conditions or to encourage preventive care.

Health Savings Accounts is truly an idea whose time has come. More than 30 million people now control some of their own health care dollars through an HSA or a Health Reimbursement Arrangement (employer-funded accounts similar to HSAs). HSAs promise to revolutionize the American medical marketplace. However, Congress should allow insurance companies and employers more flexibility to experiment and innovate, so that the market can discover what works best.

Source: Devon Herrick, "A Brief History of Health Savings Accounts," National Center for Policy Analysis, December 9, 2013.

 

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