An HSA-Day Look at Where Health Savings Accounts Stand Today

Today is HSA Day. How far have Health Savings Accounts come, and where are they headed?

Health Savings Accounts turn age 20 in 2024. It's an important milestone. And what better date to celebrate their success than HSA Day?

HSA Day was created in 2019 by the health-accounts division of WEX as a focused day of celebration and education around Health Savings Accounts. The choice of Oct. 15 was no accident. It's exactly half a year removed from the last and the next standard due date for personal federal income tax returns. And for many Americans, it's the beginning of open enrollment - the annual period during which workers and nongroup enrollees review their benefit choices for the following year.

In celebration of HSA Day, we're publishing HSA Wednesday Wisdom a day early to provide a perspective on where the market is now, who's benefitting from Health Savings Accounts, and what changes we may see in the future. This analysis relies heavily on two analyses (see here and here) by Devenir Research, which provides investment and other services to Health Savings Account administrators and also provides the most comprehensive semi-annual reporting of industry activity.

The Role of Health Savings Accounts

One of the explanations most often cited for the high cost of medical care is the third-party payor system. In most transactions, buyers and sellers interact directly to agree on the product or service exchanged and the price. Think about your most recent trip to the grocery store, your most recent auto purchase, and your action when you pass Girl Scouts selling cookies.

In contrast, medical services include a third party. Doctors and patients may agree on a course of treatment, but the decision is usually conditioned on the approval of a third party - the insurer - who actually pays the bill. Having someone else pay the bill can distort consumer preferences, as any teenager or administrative assistant who's ever been handed a credit card and told to purchase an appropriate gift can attest.

Health Savings Accounts reduce the third-party influence. Patients alone are responsible financially for many services. Because they're spending their own funds until they satisfy the deductible (and many don't meet the deductible most years, so all their spending represents their money), they have an incentive to be more prudent when discussing treatment options. When their insurer pays all but $25 of a physical therapy visit, for example, patients may choose to use 20 visits ($500 total). When they're responsible for the full contracted price of $120 (or $2,400 for 20 visits), they may decide to use only 10 visits, supplementing them with adherence to the same exercises at home.

Whether Health Savings Accounts control spending better than the third-party system depends a lot on the patient and her willingness to apply consumer behavior principles to the purchase of medical care. Patients are very willing to do so when they pay the full cost of vision-correction surgery (an HSA-qualified expense, by the way) or cosmetic surgery not covered by medical insurance. Health Savings Accounts themselves don't automatically change behavior, but they shift more of the cost of care to patients who choose not to spend their own money more prudently than their insurer's.

Total Accounts

About 37.6 million Health Savings Accounts were reported open as of June 30, 2024. This figure grew at a compound annual rate of 12.2% during the past decade (more than tripling the 2014 figure). The total-account figure includes about 7.5 million (20% of the total) with a zero balance. The most common explanation for a zero balance is that the owner is no longer eligible to contribute due to enrollment in Medicare or loss of coverage through an HSA-qualified plan. This 20% figure doesn't vary much from year to year.

The figure doesn't tell us how many unique Health Savings Account owners there are. One person can own more than one account. I owned three at one point. A colleague who worked as an industry consultant once owned 24 Health Savings Accounts so that he could experience and evaluate each one. We can assume that most people don't own more than one account, so perhaps 30 million Americans own Health Savings Accounts, and, of those, about 24 million own active, funded accounts.

The figure also doesn't tell us how many Americans' qualified expenses can be reimbursed tax-free from a Health Savings Account. In another report, Devenir estimates that the average account can reimburse the qualified expenses of 1.6 owners and family members. Using that breakdown, about 48 million Americans' qualified expenses can be reimbursed by Health Savings Accounts with balances. (The Devenir report estimates 61.4 million Americans because it applies the 1.6 figure to total, not funded, accounts).

If the 48 million figure is accurate, it represents about 27% of all privately insured Americans. That denominator isn't perfect, since some owners are now covered by Medicare, but directionally it tells us that there remains a lot of growth potential.

Total Assets

Here's an even more positive story. Total assets have increased at a 19.3% compound annual rate during the last decade (a nearly six-fold increase from 2014). In other words, assets are growing at a far faster clip than accounts, indicating that average balances are increasing as more owners contribute more than they distribute over time.

Cash balances have grown at a 14.7% compound annual rate (nearly quadrupling in a decade).

Meantime, investments have grown 18-fold, or at a 33.5% compound annual rate. These figures show that more account owners are "playing the long game" by accumulating balances sufficient to meet minimum investment thresholds, then directing those balances into mutual funds, stocks, ETFs, bonds, and other investments to build medical equity.

As total assets have grown substantially, the proportion of cash to investments has shifted from 87%/13% in 2014 to 76%/24% in 2019 to 58%/42% today. Expect that trend toward a higher proportion of investments to increase in the future due to two factors:

1. New account growth is slowing, which means that fewer accounts with low initial balances will drag down the total-assets figure.
2. More owners are viewing their accounts as long-term vehicles with superior tax benefits as Health Savings Account administrators and, increasingly, financial planners, deliver this message.

Distribution of Assets

This impressive growth in balances and investments isn't evenly distributed, however. Historic and current data show that about half of all Health Savings Accounts have balances less than $500 in the middle and at the end of every calendar year (the Devenir measurement periods). Little more than a quarter of all accounts have balances exceeding $2,000. Only 15% exceed $5,000.

Thus, most owners use their accounts like a Health FSA: Funding them enough to cover current expenses with perhaps a few dollars to spare, rather than deploying their Health Saving Accounts as a long-term investment account with tax benefits superior to traditional retirement accounts. The trend, as noted above, is greater investments in total dollars and as a percentage of assets. It remains to be seen whether this growth in investments will be driven by higher balances in existing investment accounts or growth in the number of Health Saving Accounts with a portion of balances invested.

Location of Account Owners

Not surprisingly, the eight states with the largest number of Health Savings Accounts are among the top nine states in total population: Texas, California, Florida, North Carolina, Georgia, New York, Pennsylvania, and New York. Some of those states have low penetration as measured by the percentage of Health Savings Accounts to the population of privately insured residents (the top three are Texas at 37% penetration, California at 23%, and Florida at 32%). In three states - Utah, Minnesota, and Arizona - more than half the privately insured population own Health Savings Accounts. Lower the bar to 40% and the states of Colorado, Illinois, North Dakota, Connecticut, Washington, North Carolina, Wisconsin, Nebraska, and Georgia join the party. Among these states, only North Carolina and Georgia appeared in the list of the top nine in total accounts.

What drives adoption?

• Availability and pricing of HSA-qualified plans. Insurers who price their plans more aggressively versus other coverage create fertile soil for Health Savings Account adoption.
• Market noise. States with higher adoption rates generally feature an insurer or administrator who champions Health Savings Accounts. This effort leads more employers to offer HSA-qualified plans paired with a Health Savings Account administrator, benefits advisors more knowledgeable about the offering, and more employee education about the benefits of a Health Savings Account.
• Business breakdown by size and industry. Small businesses (50 or fewer employees) are more likely than their larger counterparts to offer plans with lower premiums and higher deductibles. Also, states with higher percentages of traditional manufacturing, retail, and service companies tend to be more price sensitive and thus more likely to choose HSA-qualified plans - than states in which high technology, higher education, and health care make up a higher percentage of the workforce.

A Tool for the Wealthy?

Health Savings Account support falls along party lines. Although Democrats were the primary drivers of Medical Savings Accounts, the 1996 forerunners of Health Savings Accounts, Democrats today new the accounts skeptically. Their criticism is that Health Savings Accounts represent a tax break for Americans wealthy enough to be able to fund them. They cite evidence such as the distribution-of-assets figures cited above to buttress their argument.

Their concerns, however, may be unfounded. More than two-thirds of Health Savings Accounts are owned in ZIP codes with a median household income of less than $100,000. This isn't a perfect measure - the accounts may be owned by the highest income households in those ZIP codes - but it's the standard measure to assess tax benefits in the absence of individual data.

The concern with the distribution-of-assets figures cited above is that they represent a snapshot. For example, consider the 50% of accounts with balances less than $500 as of the measurement date. Did those account owners contribute only a few hundred dollars because that's all that they could spare? Or did some incur $3,000 of qualified medical and dental expenses, contribute $3,200 during the year (thereby saving about $800 in taxes) because they had to pay their bills somehow, and retain $200 at the measurement date? Those two scenarios represent very different pictures of the financial benefits of a Health Savings Account.

Several of the largest Health Savings Account administrators have combed their books of business, looking for a variable that distinguishes Health Savings Account owners from Health FSA participants (Health FSAs are generally lauded by the same politicians who are critical of Health Savings Accounts). These administrators have looked at age, family size, household income, medical condition, and other factors. They've found only one variable that explains in which tax-advantaged health account a worker enrolls: Which plan does her employer offer?

What about the Future?

Health Savings Account eligibility hasn't expanded much since the accounts were launched two decades ago. The program still excludes most seniors (Medicare enrollment is disqualifying), many veterans (those who retain their TRICARE coverage are disqualified and those who receive care for most conditions at a VA facility are temporarily barred from contributing), and many Native Americans (most services delivered through the Indian Health Services lead to temporary disqualification). Among workers covered by employer-sponsored coverage with high deductibles, most aren't HSA-eligible because one or more non-preventive benefits is covered by their insurer before they satisfy their deductible.

The industry is active in trying to bring the benefits of Health Savings Accounts to more Americans through a series of initiatives:

• Permit Medicare enrollees to open and fund a Health Savings Account.
• Create more flexibility in the design of HSA-qualified plans so that insurers and employers can provide first-dollar coverage to high-value care that manages chronic conditions effectively.
• Eliminate the exclusions on veterans and Native Americans.
• Permit states to experiment with Medicaid reforms that fund Health Savings Accounts to help recipients receive care through a wider network of providers.
• Reform the nongroup market so that individual purchasers of coverage, rather than insurers, receive subsidy money. Patients, rather than insurers, could then determine the best way to deploy those funds.

The Bottom Line

Health Savings Accounts are growing. And although the rate of pure growth is slowing, Americans have accumulated $120 billion in balances to pay for future medical expenses. That number will only rise in the future, absent any new headwinds. The most important issue is whether lawmakers will offer the opportunity to more Americans to save money (via tax benefits) on their purchases of current medical services and build medical equity to meet future qualified expenses.

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HSA Wednesday Wisdom is published every other week, alternating with HSA Question of the Week. The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.

2024 Midyear Devenir HSA Research Report - Devenir

2023 Devenir & HSA Council Demographic Survey Findings - Devenir