Buzzword: HSAs

What does it mean? HSA is an acronym for Health Savings Accounts which were created as part of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. With an HSA, you can save tax-advantaged money for qualified medical and health expenses. To qualify for an HSA, you must first purchase a high-deductible health insurance plan—or "catastrophic" health insurance – which is less expensive than traditional, lower deductible plans. Consumers then have the option of socking away whatever they save by having a lower premium in their HSA account at an annual capped rate for future health expenses. Unused HSA balances can accumulate from year to year without any limits and the funds can be withdrawn for any purpose without a tax penalty after you reach age 65.

Why the buzz? Supporters of HSAs, including the White House, say the accounts give consumers more direct control over their medical spending than traditional health care plans, and encourage them to shop around for health care based on cost and quality. But critics worry that HSA-eligible plans may attract people who seek lower premiums, but lack the resources to contribute to an HSA, and that wealthy enrollees who may use HSAs primarily to accumulate tax-advantaged savings. A recent report by the non-partisan Government Accountability Office offers a mixed picture on the program. According to GAO, the number of people covered by HSA-eligible plans has jumped nearly 1,300% since 2004, but despite the growth HSA-eligible plan coverage still only represents just 2% of the country’s private health coverage. GAO found many HSA-eligible plan enrollees did not actually open an HSA, with most citing either the cost or a belief they did not need an account. Further, GAO found HSA enrollees generally have higher incomes.

Essential Information: Find out more about HSAs at U.S. Treasury Department HSA FAQs; Government Accountability Office Report on HSAs, May 2008; and Consumers Union HSA Web Page.

—Bob Williams, strategic resource director, Consumers Union