The origin of employer-sponsored health insurance in the United States was a plan created by a group of teachers in Dallas, Texas in 1929. The insurance didn’t cover medication, physicals, or the majority of other items covered by a typical health insurance plan today. The insurance covered expenses for the participating teachers at one hospital in the area. The idea behind the plan was that these teachers, like most other professionals, would have no ability to cover their medical expenses if they had a serious condition that required treatment and hospitalization over a long period of time. They were pooling their risk, which is essentially the reason for obtaining any insurance coverage, whether it be medical, home, auto, life, etc. Subsequently, in the 1950s, federal law was established to exclude these employer-sponsored health benefits from federal taxes. This was, in essence, a way of subsidizing health insurance premiums to increase the percentage of the population that had access to affordable health insurance coverage. A noble cause by any measure.
Fast forward to today, and we now have employer-sponsored plans that come with a Health Savings Account (HSA). Contributions by an employee to an HSA are not subject to federal income tax, and contributions made by employers are also not subject to federal income tax for the employee and are deductible for the employer. Earnings within an HSA can also accumulate tax-free, which have caused some people to refer to an HSA as having triple tax benefits. Take a look at the list of medical expenses an HSA can be used to cover, and you will see that LASIK is a qualifying expense. LASIK, for the right candidate, can lead to a huge increase in quality for life. I am certainly not saying there should be less LASIK procedures. But LASIK, in almost all cases, is a luxury. It is an expensive procedure that an individual elects to go through based on their personal evaluation of the costs, risks, and benefits. Due to the tax favorability of HSAs, they have made it so that individuals are receiving a tax break when they have LASIK, if the individual has an HSA. That means current tax laws are subsidizing LASIK. Funds that could be going to life-saving procedures, to reduce health insurance premiums, or going to other government initiatives such as education or defense, are instead going to help those receiving an elective procedure.
This post isn’t politically charged and it’s not an argument against HSAs. It is a reminder that with every aspect of tax reform, we must think about both the intended and unintended consequences that may result from each provision. We should ask how it will affect behavior, what impact will it have on the economy, does it allocate limited resources in the best manner, and does it pass the common-sense test.