NCPA - National Center for Policy Analysis

How Do Health Savings Accounts Work?

December 29, 2014

Health Savings Accounts (HSAs) give health care consumers more control over their own health spending, and they're one of the reasons cited for the recent slowdown in health care costs. In fact, one estimate concludes that American families who enroll in HSA plans see a 21 percent drop in health care costs during their first year. In a new report from the American Action Forum, Brittany La Couture explains how HSAs work:

  • An HSA is an account into which individuals can contribute pretax dollars. The tax-advantaged accounts allow holders to use those funds for medical expenses, and the money rolls over from year to year.
  • The money is never taxed as long as it is used for "qualified medical expenses" (these range from dental care to LASIK surgery, prescription medications, long-term care costs and hearing aids, among others).
  • HSAs are available with high-deductible health plans (plans with an individual deductible of at least $1,250 or a family deductible of $2,500).
  • Individuals can contribute up to $3,300 annually to their HSAs, while families can contribute $6,550.

How do HSAs work under Obamacare? La Couture notes that one of the changes the law made to HSAs was the removal of over-the-counter drugs from the list of "qualified medical expenses," meaning that tax-free HSA funds cannot be used to purchase nonprescription drugs. NCPA Senior Fellow Devon Herrick recently authored a report on this issue. Herrick explained that nonprescription drugs are the cheapest and most popular way to treat medical maladies, and they reduce the number of doctor's office visits, bringing down health care costs. Under Obamacare, over-the-counter medicines can only be purchased with HSA dollars if they are prescribed by a physician, thus requiring a trip to the doctor and defeating the cost savings from using nonprescription medicine.

Source: Brittany La Couture, "Health Savings Accounts and the Affordable Care Act," American Action Forum, December 17, 2014. 


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