With the expiration of the enhanced ACA premium tax credits, Americans who purchase their health insurance through the exchanges are seeing their premium costs skyrocket. These tax credits, established in 2021 and extended in 2022, expanded eligibility premium assistance to individuals whose income exceeded 400 percent of the federal poverty level and reduced the maximum household contribution at all income levels through the end of 2025. Recent analyses estimate that premiums for those Marketplace enrollees who receive such assistance will increase by an average of 114 percent, or $1,016 per person annually. To answer these eye-watering increases, Republican policymakers are considering expanding health savings accounts (HSAs), despite evidence that such a move would not meet the needs of Americans who will feel the health care affordability pinch most acutely. This blog explores the evidence surrounding HSAs and the potential impacts of policy proposals in the face of premium increases in the ACA Marketplace.
What are HSAs?
An HSA is essentially a dedicated savings account for health care expenses. Individuals can put in and withdraw money tax-free for qualified medical expenses, and even invest their HSA money. Created in 2003 in the Medicare Modernization Act, HSAs were intended to help consumers enrolled in high-deductible health plans (HDHPs), where consumers can expect to pay higher out-of-pocket costs in exchange for lower premiums. Importantly, HSA funds cannot be used to cover the cost of health insurance premiums except in specific instances of COBRA coverage, premiums while receiving unemployment compensation, Medicare premiums for those over 65, and long-term care premiums.
Who Benefits from HSAs?
Benefits from HSAs are uneven, revealing both wealth and racial disparities. A report by the Government Accountability Office (GAO) found that among individuals with HDHPs, HSAs and similar medical expense accounts were more common among and more likely to benefit consumers with higher incomes, white or Asian consumers, or those in excellent or very good health. Indeed, research has also shown that lower- and moderate-income consumers receive a smaller benefit than high-income consumers for each dollar contributed to an HSA. Additional research shows that 77 percent of the total value of HSA contributions in tax year 2023 went to individuals with incomes over $100,000.
There are also clear racial disparities in who benefits most from HSAs. Latino and Black individuals with private insurance are half as likely to have HSAs than white and Asian individuals, while HSA contributions are smaller and HSA accounts have lower balances, on average, in zip codes with disproportionate shares of Black or Latino households compared to zip codes with disproportionate white or Asian households.
HSAs are also used mostly by those who have employer-sponsored HDHPs. The GAO found that 52 percent of adults with an employer-sponsored HDHP were linked to an HSA, compared to just 14 percent of adults enrolled in a direct-purchase plan (such as through a federal or state-run marketplace). Analysts posit that this may be due to the ineligibility of most Marketplace plans being eligible for HSAs in 2023 or consumers in these marketplaces being more price sensitive and cannot afford to contribute to an HSA or afford an HDHP. Some research even suggests that HSAs may be used as tax-free investment options for wealthier individuals who have maximized contributions to other tax-advantaged accounts, like an IRA, and that this allows them to avoid entering a higher tax bracket.
Ultimately, HSAs predominantly help wealthier consumers who can afford to set money aside and receive a higher benefit for each dollar invested. It’s, therefore, unsurprising that the use of HSAs reflects broader racial wealth inequities.
Potential Impacts on ACA Enrollees
The Trump administration recently released a one-page fact sheet outlining a new health care framework; while the plan does not provide a lot of details, it points to the role of HSAs, lower-cost insurance plans, and reinstating cost-sharing reductions halted under the first Trump administration. These policy line items are similar to two of the plans proposed by Congress, with varying emphasis on HSAs and other provisions, including:
Establish “Trump Health Freedom Accounts,” HSA-style accounts where funds can be applied to premiums, unlike traditional HSAs;
Allow states to submit waivers to have the value of expiring ACA premium tax credits placed into these new accounts;
Allow these accounts to be used for any type of health insurance plan, not just HDHPs or those on the ACA marketplaces;
Allow states to apply to waive certain provisions of the ACA, including the requirement to cover certain benefits.
Although this proposal expands access to HSA-style accounts and allows funds to be applied to premiums, other provisions may weaken the ACA Marketplaces and encourage consumers to purchase cheaper plans with less coverage that open them up to more financial risk. At a time when 36 percent of U.S. households have medical debt and 21 percent had a past-due medical bill, now is not the time to incentivize consumers to opt for cheaper plans with less coverage. Because consumers will be allowed to use these tax-free funds alongside any type of health insurance plan, lower-income consumers or those with poor health literacy may be incentivized to select lower-cost plans that offer little coverage, such as short-term limited duration plans or health care sharing ministries, both of which typically offer lower premiums, less coverage, and pre-existing condition restrictions.
Consumers who remain on Marketplace plans that have consumer protections may still be harmed by opting for cheaper Bronze or Catastrophic Marketplace plans. These plans typically have the lowest premiums on the Marketplace but typically have high deductibles. These plans work well for healthy individuals, but if a consumer has an unexpected illness or medical event, they’re expected to cover these high deductibles before their coverage kicks in. Research shows that high-deductible health plans can lower health care spending overall, but at the cost of access to care, and that they greatly increase the risk of high out-of-pocket costs for consumers who are low-income or chronically ill, potentially leading to financial disaster.
Finally, by incentivizing younger, healthier, or cost-sensitive individuals to seek insurance outside of the Marketplace, this bill could lead to the total collapse of Marketplaces. As these individuals leave and the Marketplace is increasingly made up of higher-cost, sicker consumers, insurers would continue to increase premiums, causing more individuals to forgo insurance, causing a “death spiral.”
Deposit $1,000 - $1,500 into consumers’ HSAs that are tied to Bronze or Catastrophic plans on the ACA exchanges;
Extend eligibility for catastrophic plans to all individuals in 2027;
Appropriate funding for cost-sharing reduction payments for premiums in 2027.
Under this proposal, the value of the enhanced ACA premium tax credits would be converted to federal contributions to HSAs; however, it does not expand HSA eligible health care costs to include premiums. These contributions would only be available to consumers who enroll in Bronze or Catastrophic plans on the Marketplace, and eligibility for Catastrophic plans would be extended to allow more consumers to receive these funds.
While this proposal would theoretically give more individuals access to HSAs, it does not adequately address the affordability crisis caused by eliminating the premium tax credits. Although this plan encourages individuals to retain ACA-compliant Marketplace plans with consumer protections, it pushes consumers towards Bronze and Catastrophic plans that have high deductibles and less generous coverage, while ignoring the fact that most people today are enrolled in a Silver or Gold plan. Researchers also posit that some middle-income individuals could face the double-bind of no longer qualifying for a tax credit due to income requirements while also being priced out of a Bronze plan.
Interestingly, this plan seeks to reestablish cost-sharing reduction payments halted by the Trump administration in 2017. These payments were originally designed to reduce out-of-pocket expenses for those purchasing health coverage in the Marketplace and were available only for Silver plans as a way to lower the plan deductibles while keeping premiums the same. When the Trump administration ended these payments, most insurers raised the premiums on their Silver plans to compensate for the loss. Ultimately, ending these payments cost the federal government more money than if they had continued and analyses show that reversing this process could increase premiums, reduce enrollment, and deteriorate the collective risk pool of the Marketplace.
The Final Takeaway on Current HSA Proposals
None of these current proposals would come close to solving the impeding health care affordability crisis caused by eliminating the enhanced premium tax credits for ACA Marketplace enrollees. There could be some benefit for consumers in expanding access to HSAs for more Marketplace plans, increasing federal contributions, and allowing funds to be used for premiums. However, each of these plans creates perverse incentives that could harm consumers by driving them into less generous plans that could lead to higher or surprise health care bills, or, even worse, the inability to receive care when they need it.
One of the most important but least acknowledged benefits of the ACA enhanced premium tax credits was that they removed a significant portion of work and risk from consumer decision-making by requiring them to purchase ACA-compliant plans on the Marketplace that afforded a standard of consumer protection. A recent study highlighted that a quarter of all insured adults reported difficulty understanding specific terms, such as “deductible,” “coinsurance,” “prior authorization,” or “allowed amount.” Among Marketplace enrollees, about one-third (32%) found these terms difficult to understand. Incentivizing individuals to look outside of the Marketplace for lower cost plans runs the risk that consumers will opt into plans they do not understand and that do not comply with ACA consumer protections, harming both the health of the Marketplace and of consumers themselves.
Ultimately, the current policy proposals heavily rely on HSAs and expect them to punch above their weight. While HSAs can be a convenient pre-tax way for consumers to save for health care expenses, they disproportionately benefit consumers who have money to spare which increasing numbers of Americans do not. With the cost of necessities rising and the knowledge that more than a third of Americans couldn’t cover a sudden $400 expense with cash or cash equivalents, the idea that consumers could address their rising health care costs by saving in HSAs is unreasonable and not an adequate response to the affordability crisis looming over Marketplace enrollees.