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Health Savings Accounts Come Under Fire

Critics say the plans benefit the wealthy, instead of those who need help with affordability of health care.

Health savings accounts were criticized as "tax shelters" that help the wealthy at the expense of those struggling to afford insurance coverage at a Wednesday Congressional hearing.

The House Ways and Means Committee Subcommittee on Health convened the hearing in the wake of a

recent General Accountability Office report

that found average adjusted gross income for HSA participants was $139,000 -- more than double that of non-participants.

Over half of people eligible for HSAs don't participate in them, according to the report.

HSAs "start off providing assistance to those who already can afford health care coverage period," said Rep. Xavier Becerra (D-Calif.).

Becerra argued that HSAs provided "tax shelters" for the relatively small number of people who had maxed out their yearly savings in IRAs and 401(k)s, and that the program lacked sufficient oversight to guarantee that participants were spending the money on qualified health care expenses.

HSAs allow individuals with only qualified High Deductible Health Plans -- otherwise known as catastrophic coverage plans -- to save up to $2,900, tax-free, every year to pay for medical expenses. Funds not used one year roll over into an individual's account the following year.

More than 6.1 million people have HSA-eligible plans, according to the research arm of industry group America's Health Insurance Plans.

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But the number of uninsured has continued to swell even as HSAs become more popular: 47 million people were uninsured in 2006, up from 39 million in 2000, according to the most recent Census Bureau figures. The actual number of uninsured individuals is likely much higher: individuals who have insurance for only part of the year are not counted as "uninsured" by the survey.

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Proponents of HSAs argued that because the GAO had relied largely on data from the second year of the program, the report might not accurately reflect current HSA usage. They say HSAs make health care more accessible by allowing individuals and employers to buy into plans with lower premiums and would discourage people from buying unnecessary medical services.

But witnesses testified that the invisible hand didn't appropriately guide health care decisions. People who forgo preventative care because of high deductibles may ultimately consume more health care if they come down with preventable diseases.

Patients are often forced to make health care decisions when they are sick, stressed, or at times cognitively impaired.

"It's hard to expect people in those situations to respond appropriately to price signals," said Michael Chernew, Professor of Health Care Policy at Harvard Medical School. Evidence suggests that, when charged more for health care, patients cut back on appropriate treatment as much as they cut back on inappropriate treatments, he added.

Critics also voiced concern that as healthy individuals eschewed HSAs for more comprehensive coverage, premiums for comprehensive coverage would rise become less affordable to those most in need of insurance.

"The higher-cost insured population remaining in comprehensive coverage will tend to see their premiums rise as the healthy peel off into high-deductible/HSA plans," said Linda J. Blumberg, Ph.D., Principal Research Associate at the Urban Institute.

Without changes to the plan, "This dynamic will make coverage less affordable for those with the greatest medical needs," she said.

For healthy individuals who can afford to make large contributions, the benefits go beyond medical: after age 65 participants can withdraw income -- penalty-free -- and use it on non-medical expenses.

Money deposited into an HSA can be deposited pretax or claimed as an above-the-line deduction, earnings grow tax-free, and no taxes are taken out when funds are used for qualified medical expenses. Though younger people who withdraw funds for nonmedical expenses are subject to taxes and a 10% withdrawal penalty, people over 65 can use the money for other expenses, and it's taxed only as income.

Those looking to skirt the law and withdraw the money early for other uses, face very little risk of being caught: the only oversight to HSA spending is IRS audits, and fewer than 1% of taxpayers are audited every year.

"This is sounding more and more like a really good tax shelter if you happen to have a lot of money if you've maxed out on your

401(k) or IRA," said Rep. Becerra. "It sounds to me like a Ponzi scheme here."