What are health savings accounts and will Australia ever introduce them?

Shirley Liu 13 January 2016


With Medicare an unsustainable solution for the future, introducing health savings accounts could be a viable alternative.

A health savings account (HSA) is like any other personal savings account but the money’s sole purpose is to pay for medical expenses. You own and control the money in your health savings account and the account is not taxed either. To be eligible to open an HSA, you must have a special type of health insurance called a high-deductible plan.

Why were HSAs created?

High-deductible health plans and HSAs were designed to help control medical costs in the United States. People will make wiser decisions when it comes to their health if they spend their own money.

What are some of the potential benefits of HSAs?

  • You have control. You control the amount of money you wish to dedicate for health care costs and you have a say in how it's used. You can shop around based on quality and cost.
  • You own your money. You can get your employer to make contributions to the HSA, but it's still your money, even if you leave that employer.
  • Keep your money. The rollover feature ensures that unused money just stays in the account for the next year. All HSAs are tax-free.

Are there any cons to HSAs?

  • Unpredictability. Illness is unpredictable so it may be hard to properly budget for health care expenses.
  • Quality of information. Information about cost and quality of medical care can be hard find.
  • Contributions. Some people may not be able to make contributions to an HSA since they have low-income jobs or are older and do not have as much money as younger, healthier people.
  • Pressure. Pressure to save money for your HSA might make you indecisive when seeking medical attention when you need it.
  • Taxes. If you take money out of your HSA for anything other than medical purposes, you will have to pay taxes.
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WIll Australia introduce health savings accounts?

Over the decades, there have been many arguments for and against the introduction of health savings accounts. HSAs are thought to be cost effective since people are price-sensitive and rely on fewer services that are considered unnecessary.

Several big names like The Australian Medical Association and Medicines Australia and others have proposed introducing HSAs.

In Australia, there is a rapidly growing ageing population thanks to the “baby boomers”. Many people are now transitioning to retirement, and with a shrinking pool of employed people, the bulk income of taxes is now decreasing. This puts pressure on the government to fund pensions and health care from its revenue. There are several factors that advocate the case for the introduction of HSAs:

HSAs complement public and private health insurance

HSAs could work complementary to private health insurance and help HSAs remain viable in the longer term. Health insurance has never removed all gap payments and will never do so. Health savings accounts could resolve the pressure on the health insurance system posed by the increasing burden of intergenerational transfers. They could provide a mechanism for each generation to accept more of the responsibility for their own health care.

Supplementary to superannuation

If HSAs were introduced to Australia, superannuation funds and HSAs could operate under identical taxation frameworks to the greatest extent possible. Australia’s superannuation system enjoys bipartisan political support. HSAs should attract the same level of bipartisan support.

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What are the drawbacks of introducing HSAs in Australia?

Economists have produced evidence from China and Singapore suggesting HSAs are not cost effective. In 1984, Singapore established a health savings account called Medisave. Medisave is a compulsory program aimed at covering hospital and some expensive outpatient services. Although this program was meant to be cost effective, research has found that per capita health costs have risen since the inception of Medisave. The increased use of expensive technology in private hospitals and rising provider charges have caused medical expenditure to rise in Singapore.

Some critics have argued that the introduction of HSAs will only benefit the higher-income people. They are not effective for financing the health expenses of chronically ill and lower-income people. An adoption of HSAs could shift Australia’s health system to a two-tier system based on the design of the system. On the other side of the equity argument, the HSA system could make the higher-income people more self-reliant and less dependent on Medicare. This would make the health system less regressive than it is now.

The Australian government is expected to increase expenditure from 4-7% of gross domestic product (GDP) by 2050. Medicare, as it stands, will be unsustainable without a lift in health productivity, more public debt or taxation or a combination of these. So an alternative, like an HSA, could be a competitive solution but it is not likely to be introduced in Australia at this time.

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