Health Savings Accounts (HSAs) are gradually changing the healthcare landscape. Established by the 2003 Medicare Prescription Drug, Improvement, and Modernization Act, the Treasury Department predicts there will be 25 to 30 million HSAs nationwide by 2010. Health Savings Accounts are tax shelters for funds reserved for the payment of qualified medical expenses (as defined by the IRS) under High Deductible Health Plans (HDHPs), qualifying as at least a $1,100 deductible for an individual and $2,200 for a family. As of 2007, an individual may invest up to $2,850 a year and a family $5,650 a year federally tax free into an HSA to pay their insurance deductibles. Alabama remains one of the few states that do not exempt HSAs from state income taxes, though many state health insurance providers offer HSA qualifying HDHPs. HSAs are an important component of consumer-driven healthcare, aiming to utilize consumer choice and free market competition in order to move away from traditional health insurance to reduce costs and improve quality. Third party health insurance costs such as a company’s healthcare plan for its employees have traditionally been exempt from payroll and income taxes, while cash wages used for individual healthcare savings have not been. This disparity creates a financial incentive for individuals to attain comprehensive health insurance from their employer, who foots the bill for nearly all medical expenses and insulates the consumer from the cost of healthcare at the point of service at the local doctor’s office, ER, etc. HSAs level the playing field by giving individual contributions to healthcare savings the same federal tax status as traditional third party health insurance plans. They are particularly beneficial to individuals without employer sponsored insurance coverage altogether, such as many small business employees, who are now offered the same tax treatment as those covered by third party health insurance whose wages are docked to contribute to the company health plan. Proponents cite HSAs as a way to control ever rising healthcare costs by encouraging more cost conscious behavior on the part of consumers which will in turn create more competition among healthcare providers. When individuals pay out of pocket for unreimbursed medical expenses under their deductible, they are more likely to seek lower prices than when charging all expenses to the company bill. As of last year, however, the America’s Health Insurance Plans Center for Policy Research found 90 percent of HSA holders were in preferred provider organizations and received the same negotiated discounts for their expenses as those of traditional lower deductible insurance plans. But as millions more individuals and families open HSAs annually, there may be a strong increase in the number of HSA holders without network coverage. It remains to be seen whether market forces will encourage providers to offer lower prices to these consumers as HSA advocates envision, or if they will be treated like the uninsured and charged higher prices than traditional PPOs and HMOs. Greater out of pocket payments also create changes for most healthcare providers. Payments from HSAs are through the account owner’s check, special debit card, or direct debit to account funds. Some providers fear this raises the potential of bad debts and the costs associated with collecting those debts. Billing individuals rather than insurance companies or employers carries increased risk. Conversely, solvent direct payments circumvent the more complex and time consuming reimbursement procedures of traditional comprehensive insurance plans that inflate medical costs. None of this means, however, that traditional health insurance plans are going by the wayside. Those with chronic health conditions facing high long-term costs may be unable to save enough in their HSAs to consistently cover their deductibles. Many risk-averse individuals dislike the high deductibles of HDHPs and prefer lower out of pocket costs. Critics claim HSAs are too complicated and it will remain too difficult for the average American to obtain adequate information to effectively choose among healthcare providers. The familiarity and relative simplicity of comprehensive coverage will appeal to many employees comfortable with traditional health insurance, and the shift to HSAs and direct consumer-controlled healthcare will be substantial but gradual. Aside from the appeal on the health insurance market, political outcomes will also affect the future of HSAs. The new Democratic majority in Congress will likely oppose any expansion of HSAs and Republican efforts to reconnect patient choices with patient financial responsibility. If a Democratic president is elected in 2008, Congress may even move to penalize employers for not providing comprehensive healthcare coverage plans with low cost options as part of a universal healthcare plan and limit HSAs, which are seen as a threat to the pool of traditional insurance premiums. The political future of HSAs are uncertain, but barring such outcomes, HSAs are consistently growing in the health insurance market and have the potential to usher in significant changes in healthcare practice. Clark Bowers served as a clerk in the health law section of Balch & Bingham LLP. July 2007