Tax-advantaged savings vehicles are broadly available for retirement and education, two predictable lifetime expenses. Families should have a dedicated account set aside for medical care. Healthcare expenses are expected throughout life, but unpredictable in their timing. And yet no universal tax-advantaged health accounts exist.
We propose a new type of savings account that would give consumers more control over their healthcare decisions while removing barriers that discourage people from saving for their future healthcare needs. We call these accounts Individual Health Accounts (IHAs).
Akin to a mix of HSAs and Individual Retirement Accounts, IHAs would offer more flexibility over current options and would be available to any who have at least catastrophic health insurance coverage from either a private or public source. In contrast with existing law governing HSAs, IHA owners would not need to purchase plans that carry a minimum deductible amount. This means that those with chronic conditions could still save pretax dollars for their future healthcare needs. Likewise, those enrolled in ACA plans that are not HDHP-compliant would be able to benefit.
While IHAs would not require a particular type of insurance coverage, the accounts would nevertheless maintain incentives for individuals to select lower-premium, higher-coinsurance plans. This would be accomplished by allowing people with lower premiums to contribute more to their IHAs than those with higher premiums. Specifically, an IHA’s annual contribution limits would be set at a pre-premium threshold amount minus an individual or family’s total premium contributions, inclusive of payments by both the employer and employee. As a result, individuals and families with lower-premium plans would be able to contribute more than individuals and families with higher-premium plans.
A natural target for contribution limits would equal the current median premiums paid for ESI plans. This includes both the employee and employer portions. In 2023, the estimated median premium will be approximately $8,500 for individual coverage and $25,000 for family plans. The figure below shows the maximum contributions people may make to their IHAs at various premiums levels. We consider two contribution levels. The first is set at the median (50th percentile) of premiums paid for current ESI plans. The second is set at the 75th percentile.
The tax treatment of IHAs would be similar to HSAs. Contributions would constitute an above-the-line tax deduction and any investment gains would grow tax free. Balances would be wholly owned by the individual account holder, in the same manner as HSAs are today. And like HSAs, employers would be permitted to contribute to the accounts.
There are some important differences from HSAs. IHA contributions would be subject to payroll taxes—mirroring the tax treatment of retirement savings accounts like IRAs. All else constant, this makes them less attractive than existing HSA contributions, which are exempt from payroll and income taxes. But IHAs would have several advantages over HSAs that would make the trade-off worthwhile for many Americans.
First, nonqualified withdrawals would be treated as ordinary income, but unlike HSAs, there would be no additional penalty. The current 20 percent penalty with HSAs is larger than the total payroll tax rate (a combined 15.3 percent for employer and employee taxes). This means that, while HSAs would offer more up-front tax benefits than IHAs, those tax benefits are only realized if the money goes to qualified healthcare purchases or if the account holder waits until age 65 to withdraw the funds. Over time, the difference in the post-tax value of IHA account balances for unqualified withdrawals would grow relative to HSAs.
The table below compares the post-tax values of IHAs and HSAs for a single individual who contributes the HSA-allowed maximum each year. We assume the individual pays a 22 percent income tax rate every year. For those with no OOP spending, the post-tax value of their IHA would be nearly $4,000 more over 10 years than their HSA. An individual with low OOP spending (set at half the current minimum deductible level for an HDHP plan), would have a post-tax value of $2,000 over ten years. A person with high OOP spending (set at the current minimum deductible) would essentially breakeven between an IHA and HSA.
We estimate that setting the contribution limit at the 50th percentile would reduce 10-year income tax revenue by $82 billion with taxpayers setting aside $30 billion in their IHAs in the first year. Setting the contribution limit at the 75th percentile would reduce revenue by $176 billion and lead taxpayers to set aside $66 billion in the first year. For more information, see our cost estimates.
David and Diane Steffy Fellow in American Public Policy Studies
About Lanhee J. Chen
Lanhee J. Chen, Ph.D. is the David and Diane Steffy Fellow in American Public Policy Studies at the Hoover Institution and Director of Domestic Policy Studies and Lecturer in the Public Policy Program at Stanford University. A veteran of several high-profile political campaigns and himself a candidate for statewide office in California, Chen has worked in politics, government, business, and academia. Chen was a candidate for California State Controller in 2022. He was the strongest-performing statewide Republican, earned more votes than any other Republican candidate in the country in the general election, and won endorsements from every major newspaper in the state. Chen has advised numerous major campaigns, including four presidential efforts. In 2012, he was policy director of the Romney-Ryan campaign, and served as Governor Mitt Romney’s chief policy adviser, a senior strategist on the campaign, and the person responsible for developing the campaign’s domestic and foreign policy. During the 2014 and 2018 campaign cycles, Chen served as a Senior Adviser on Policy to the National Republican Senatorial Committee (NRSC). In addition to his academic appointments, Chen is a Partner at the Brunswick Group, a global business advisory firm, and a member of the Board of Directors at El Camino Health in Northern California. He also advises and invests in early-stage companies and was an operating partner and strategic advisor at NewRoad Capital Partners, a private equity fund. From 2014 to 2018, Chen served as a presidentially-appointed and Senate-confirmed member of the Social Security Advisory Board—an independent, bipartisan panel that advises the president, Congress, and the Commissioner of Social Security on matters related to the Social Security and Supplemental Security Income programs. He also served in the George W. Bush Administration as a senior official at the U.S. Department of Health and Human Services. Chen’s writings have appeared in a variety of outlets, including The Wall Street Journal, The New York Times, and The Washington Post, and he is a regular contributor at CNN Opinion. He has also provided political analysis and commentary on every major television network. Chen was honored in 2015 as one of the POLITICO 50, a list of the “thinkers, doers, and visionaries transforming American politics.” He earned a similar honor in 2012 when he was named one of POLITICO’s “50 Politicos to Watch.” In 2017, Chen was the William E. Simon Visiting Professor in the School of Public Policy at Pepperdine University. At Stanford, he is also an affiliated faculty member of the Center on Democracy, Development and the Rule of Law (CDDRL) at the Freeman-Spogli Institute for International Studies and was Lecturer in Law at Stanford Law School. An eight-time winner of Harvard University’s Certificate of Distinction in Teaching, Chen’s scholarship has appeared or been cited in several of the nation’s top political science journals. Previously, Chen practiced law at Gibson, Dunn & Crutcher LLP and was the Winnie Neubauer Visiting Fellow in Health Policy Studies at The Heritage Foundation. Chen serves in a variety of leadership and advisory roles in nonprofit organizations. He is a Director of the Foundation for Research on Equal Opportunity (FREOPP); Co-Chair of the Policy Advisory Board for Free the Facts, a policy education organization; a member of the Board of Directors of the Winston Health Policy Fellowship; a member of the external advisory committee for the AAMC Research and Action Institute; and a member of the Council of Scholars for the Better Medicare Alliance. He is also a member of the Committee of 100, an organization of prominent Chinese Americans. Chen earned his Ph.D. and A.M. in political science from Harvard University, his J.D. cum laude from Harvard Law School, and his A.B. magna cum laude in government from Harvard College. He is a member of the State Bar of California. A native of Rowland Heights, California, he currently lives in the San Francisco Bay Area with his wife and children.
About Tom Church
Tom Church is a policy fellow at the Hoover Institution. He studies health care policy, entitlement reform, income inequality, poverty, and the federal budget. He also contributes to PolicyEd, the Hoover Institution’s initiative to educate Americans about public policy. He has researched the fiscal effects of major health care proposals. In 2015 he edited the book Inequality & Economic Policy: Essays in Memory of Gary Becker with John B. Taylor and Chris Miller. He also hosts The Libertarian podcast with Richard Epstein. Church received his master’s degree in public policy with honors from Pepperdine University, specializing in economics and international relations. He has a bachelor’s degree in mathematics and political science from the University of Michigan.
About Daniel Heil
Danny Heil is a policy fellow at the Hoover Institution whose focus is on the federal budget, tax policy, and the federal antipoverty programs. Heil’s interests include replacing failed policies with state and federal initiatives that alleviate poverty by encouraging workforce participation and human capital development. He has also written on the perils of telecommunication regulations and the economic effects of e-business. Heil served as Governor Jeb Bush’s economic policy adviser during the 2016 presidential campaign, counseling him on the federal budget, tax policy, and the federal antipoverty programs. Heil received a master’s of public policy degree with a specialization in economics and American politics from Pepperdine University.