Make Health Savings Accounts Work for Everyone

by | Feb 16, 2024

Increase HSA contribution limits so nearly all workers could deposit 100 percent of what their employer pays toward health benefits tax‐​free into an HSA.

The most important health care right is the right to make one’s own health decisions. To restore that right, the Cato Institute is launching an initiative to make health savings accounts (HSAs) work for everyone.

How do HSAs restore health care rights? Read on…

An essential part of the right to make one’s own health decisions is the right to control one’s income. Every individual has a right to make use of their earnings according to their values. Any other principle would create inequalities between citizens and government officials who could impose their values on others. The right to control one’s earnings includes the right to choose whether, how much, and how to spend one’s money on health insurance and medical care. If you don’t control the money that purchases your health care, you don’t control your health care.

Government exists to protect these rights. Yet governments routinely violate health care rights with excessive taxes and coercive tax penalties that deprive Americans of control over their health care decisions and leave them with worse health care.

For more than 100 years, Congress has let workers avoid paying tax on income they receive in the form of employer‐​provided health insurance. The flip side of this “tax exclusion” is that if workers elect to take that same income as cash—so they can use it to choose their health insurance themselves—Congress taxes it. The effect is to threaten workers with higher taxes unless they let an employer control a large portion of their income and choose their health insurance. Intentionally or not, Congress penalizes workers for exercising their rights to control their income and to choose their health insurance.

Some call the “tax exclusion” for employer‐​sponsored health insurance a tax cut or a tax break. In fact, it operates as a tax because it uses coercion to deny workers control of roughly $1 trillion of their earnings each year.

Economists agree employers pay for health benefits by reducing employees’ wages—a lot. To finance employer‐​sponsored health insurance, employers reduce wages for workers with self‐​only coverage by an average of $6,227 and for those with family coverage by an average of $15,754. When employers purchase health insurance for their employees, they are therefore assuming control of a huge chunk of those employees’ earnings. A new Cato Institute/​YouGov poll shows U.S. adults do not grasp how much control over their earnings this tax “break” costs them.

Workers do not freely choose to let employers control that money. When employers take that money out of wages, the government no longer taxes it. This reduces the amount of tax workers must pay to the government. But if workers demand that employers let them control that $15,754, the government taxes it. On average, workers with family coverage would have to pay an average $4,300 of that money to the government in additional taxes. In effect, the U.S. tax code penalizes workers who exercise their right to control their earnings and choose their health insurance: either you let an employer control $15,754 of your earnings and those decisions, or the government will tax you an additional $4,300.

In total, this tax “break” coerces workers into letting employers control some $1 trillion of their earnings each year. That’s roughly 4 percent of GDP. It is the second‐​largest source of health spending (21 percent) after government spending (47 percent). It’s an odd tax break whose effect is to offer taxpayers the option of losing control of even more of their income than the government threatens to take.

This tax penalty does enormous harm to workers. It reduces the quality of their coverage and care. It makes the problem of pre‐​existing conditions worse by stripping coverage from sick patients when their spouse dies, when they lose their jobs, or when they divorce, move, or retire. It disrupts access to care. It makes health care and health insurance less affordable. It encourages outrageous charges, surprise medical bills, wasteful spending, and higher health premiums. It forces workers to accept and stay in jobs they hate, just for the health insurance.

Government should not bestow preferential tax treatment on any uses of income. Workers have a right to control that money and to make their own health care decisions without government penalizing them.

In 1993, the Cato Institute took a step toward eliminating those preferences and penalties when it published Patient Power: Solving America’s Healthcare Crisis, which brought the idea of health savings accounts to the national stage.

Twenty‐​five years ago, in 1996, Congress took a step toward eliminating those preferences and penalties. On a bipartisan basis, it let some workers take a portion of that income as cash without penalty through tax‐​free Archer medical savings accounts (MSAs), a precursor to health savings accounts.

In 2003, Congress took another bipartisan step toward restoring patient rights when it created tax‐​free health savings accounts. HSAs let workers control a portion of that $1 trillion and make more of their own health care decisions without government penalizing them.

Yet HSAs are not enough. They have returned to workers only 4 percent of that $1 trillion. Unnecessary restrictions prevent HSAs from restoring the health care rights of more Americans. Congress requires HSA holders to enroll in high‐​deductible health plans, which many consumers dislike. It forbids workers to take all of the money their employer pays toward health coverage (e.g., $16,000 for workers with family coverage) as a tax‐​free HSA contribution. Congress forbids workers to enjoy the full benefits of HSAs unless they have their employer’s assent and enroll in their employer’s plan; otherwise, Congress penalizes them.

In 2005, I proposed making HSAs work for everyone with three changes that would further restore workers’ rights to control their earnings and health care decisions:

  • Increase HSA contribution limits so nearly all workers could deposit 100 percent of what their employer pays toward health benefits tax‐​free into an HSA;
  • Free workers with all types of health plans or no health plan to use HSAs; and
  • Free workers to purchase health insurance from any source with tax‐​free HSA funds.

These changes would increase wages for workers with family coverage by an average $16,000 per year. They would return $1 trillion each year to the workers who earned it. Doing so would constitute the largest effective tax cut voters have ever seen. It would deliver better, more affordable, and more secure health care. And it would restore the rights of working Americans to control their health care dollars and decisions.

The time has come for Congress to restore those rights to all taxpayers. Congress needs to make health savings accounts work for everyone.

Michael F. Cannon is the Cato Institute’s director of health policy studies and the author of Recovery: A Guide to Reforming the U.S. Health Sector. Follow him @mfcannon.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

Have a comment?

Post your response in our Capitalism Community on X.

Related articles

The Single Greatest Obstacle to Health Care Quality

The Single Greatest Obstacle to Health Care Quality

When government asserts control over your health care, it creates opportunities for low‐​quality providers to lobby for subsidies and regulations that protect them from competition from high‐​quality producers.

Covid-19 Lockdowns: Four Years Ago This Week, Freedom Was Torched

Covid-19 Lockdowns: Four Years Ago This Week, Freedom Was Torched

Seemingly out of nowhere, people who the public had largely ignored, the public health bureaucrats, all united to tell the executives in charge – mayors, governors, and the president – that the only way to deal with a respiratory virus was to scrap freedom and the Bill of Rights. 

No spam. Unsubscribe anytime.

Pin It on Pinterest