What Will It Take to Achieve a Trillion-dollar HSA Asset Base?

What will it take to increase the Health Savings Account asset base eight-fold?

At a conference that I attended last week, a speaker at a fireside chat asked an audience of about a dozen industry insiders whether they believed that Health Savings Accounts would become a trillion-dollar industry. All hands went up.

A trillion dollars would represent huge growth - roughly eight times the $123 billion of assets in accounts at the end of 2023, and about six times the projected $169 billion in assets at the end of 2026. (Figures from the Devenir Research 2023 Year-End HSA Market Statistics & Trends Executive Summary, which you can read here).

Can Health Savings Accounts become a trillion-dollar (that's $1,000,000,000 for those of you counting at home) industry? Is that goal achievable? Desirable?

Why It Matters

In 2022, Americans spent almost $450 billion (or about $1,250 per person) in deductibles, copays, and coinsurance (about 20% more than they paid five years ago). Thus, a trillion dollars in Health Savings Accounts would pay for a little more than two years' out-of-pocket financial responsibility. But Health Savings Account owners can reimburse much more than their share of services covered by their medical plan, including dental and vision care; over-the-counter medicine, drugs, equipment, and supplies; and Medicare premiums. And the spending will increase sharply before Health Savings Account assets reach $1 trillion, so that cumulative balance will cover far less than two years' qualified expenses.

Further, the average couple retiring at age 65 this year will incur, on average, between $300,000 and $350,000 (the range is due to different methods of calculating the figure) of qualified expenses during their remaining lifetime. Retirees who don't plan adequately for these expenses in retirement may find themselves making difficult financial and medical decisions in their 80s. Funding a Health Savings Account pre-retirement is a tax-friction-free way to pay these expenses.

Getting to $1 Trillion in the Current Market

Achieving a cumulative balance of $1 trillion in Health Savings Accounts is impossible with the current trajectory.

• About 37 million accounts are open today, including nearly 30 million that are funded (Devenir, page 4). To reach $1 trillion based on accounts alone, we'd have to see an eight-fold increase in Health Savings Accounts (300 million accounts). Under current rules and projected population growth, that figure is simply unobtainable - even if every American eligible to enroll in an HSA-qualified medical plan does so, opens an account, and fund it to the current average level of roughly $3,300 (Devenir, page 5).
• Total assets are projected to grow from $123 billion at the end of 2023 to $168 billion at the end of 2026 (Devenir, page 3). At that rate of growth - roughly 10.5% annually - total assets would cross the $1 trillion threshold in 2044. But if we consider any level of inflation, those funds wouldn't begin to buy $1 trillion of medical care in 2024 dollars.

It will take changes - a combination of new legislation, employee awareness, employer actions, and trustee tools - to break the $1 trillion barrier.

Turbo-charging the Path to $1 Trillion

So, what must happen? Here are the levers that can be pulled to increase Health Savings Account assets to $1 trillion:

Enroll more Americans in HSA-qualified plans. There is an opportunity here. Although surveys show high percentages of Americans enrolled in "high-deductible plans," these surveys don't distinguish between plans that are HSA-qualified and other coverage with deductibles of $1,600/$3,200 or higher that aren't qualified. Also, about $60 million Americans are covered by Medicare - a plan whose inpatient deductible ($1,632 in 2024) is higher than the statutory minimum annual deductible for an HSA-qualified plan. If employers swapped out non-qualified high-deductible plans for HSA-qualified coverage and Congress permitted Medicare enrollees to open and fund Health Savings Accounts, the potential market would increase by more than 100 million accounts -nearly triple the current count.

Other federal government initiatives that have been proposed (and, in some cases, piloted) include offering Medicaid patients a Health Savings Account and replacing the current Affordable Care Act practice of subsidizing premiums and cost sharing by sending money to insurers with a program that gives the subsidy amounts to eligible individuals to spend on whatever combination of premiums and out-of-pocket expenses they choose. Both proposals are consumer-centric approaches to increasing spending efficiency that would offer the additional benefit of increasing aggregate Health Savings Account balances.

Increase account openings among HSA-eligible individuals. Today, it's estimated that more than one-in-five Americans who's eligible to open a Health Savings Account has done so. And that one-third or more of those who are eligible -whether or not they've opened an account - don't contribute. There is a huge opportunity here for account administrators and employers to increase awareness. Every employer should align with a Health Savings Account administrator to offer a turnkey program to employees. Participation drops dramatically when employees must find an account on their own, then provide the account and routing numbers to their employer to facilitate payroll contributions. And every company should offer a contribution to encourage employees to open a Health Savings Account (in some cases, even raising the payroll premium reduction to return that money to employees as an account contribution). It's discouraging to see reports that only 32% of Health Savings Accounts received an employer contribution in January (Devenir, page 11). The highest levels of employer deposits typically are made in January when companies make an annual, semi-annual, quarterly, or monthly contribution.

Structure employer contributions to encourage asset-building. In most cases, employer contributions should be structured to match employee pre-tax payroll deposits to encourage engagement and faster asset-building (just as most companies that sponsor a retirement plan match contributions to those accounts).

Retain balances. This strategy is on employees. But they need education. In many cases, qualified medical expenses are low - a $15.60 prescription drug, a $4.99 box of bandages, a $59 patient responsibility for a dental filling. If account owners paid these small expenses from their family budget (post-tax dollars), they would retain the funds for future big-ticket expenses.

Encourage investment. Balances held in cash grow slowly. Regardless of the rate of general inflation (and medical inflation historically runs at more than twice that figure), Health Savings Accounts interest rates don't cover the rise in prices. In other words, cash balances lose their spending power every year. The only way to retain spending power and increase balances faster than contributions is to invest most of the deposits. Yet only about three million of 37 million Health Savings Accounts have any portion of their balances invested (Devenir, page 11).

The percentage of assets in investments increased from 19% in 2018 to 38% in 2023 and is projected to grow to 42% in 2026 (Devenir, page 3). This number increases with rising balances, so the steps above will naturally lead to higher investments. But not quickly enough. Too many account owners, like participants in retirement accounts, aren't sophisticated investors and struggle to overcome inertia, fear, and ignorance. Health Savings Account trustees and custodians can play a huge role in education and providing model portfolios, investment tools, and advice from humans, and investment management service to reduce investment friction.

The average investor has an account balance of about $19,000 (only 7% of total accounts have balances of $10,000 or more) (Devenir, page 4). Which comes first: Do higher balances lead to investments? Or does investment growth at lower balances encourage owners to contribute and retain more funds to invest? Or a combination? Whatever the answer, the link between balances and investments is high.

The X-Factor: Young Account Owners

The fastest growing age group in account uptake are workers in their 30s. They have a runway of three decades or so to build their Health Savings Account balances. They are a critical piece of the growth in balances. As older Health Savings Account owners - including many of the 2% whose balances exceed $25,000 (Devenir, page 4) - retire, enroll in Medicare, can no longer fund their accounts, and spend their balances, their changing behavior will reduce aggregate balances. Younger owners will play a key role when they're engaged in their 30s, save aggressively, and begin to invest early.

The Bottom Line

To quote the title of the best-selling Marshall Goldsmith book, What Got You Here Won't Get You There. In the Health Savings Account world, the road to $1 trillion in assets can't be traveled at the same speed as it is currently. It'll require some jump starts on the part of legislators, employers, account owners, and trustees to reach those heights. But the $1 trillion summit is within reach.

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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.