Where Are the Growth Opportunities with Health Savings Accounts?
William G. (Bill) Stuart
Combining gamification and education to optimize employee benefits performance.
Health Savings Accounts represent a spectacular success. But we're just scratching the surface.
In less than two decades, the Health Savings Account market has grown to nearly 34 million accounts and about $100 billion in assets (according to Devenir Research's 2022 mid-year market survey). Let that sink in. Americans have $100 billion saved for future qualified health-related expenses that they didn't have 20 years ago.
To put that number in perspective, imagine all the total good and services produced in New Hampshire in 2021. That's how much Americans have saved tax-free for future expenses. In fact, 11 states in 2021 didn't have economic output to match the dollar amount sitting in Health Savings Accounts.
Yet much work remains to be done. Too many Americans who would benefit from a Health Savings Account and the yoked HSA-qualified medical plan don't choose this coverage. And among those who do, too few owners are using their account optimally.
What will be the drivers of continued growth? Let's look at four key levers.
ONE. More Americans Eligible
One obvious source of growth is to allow more Americans to open a Health Savings Account. Currently, millions of working seniors who are enrolled in Medicare - often, but not always, forced to do so due to the size of their employer or their receiving Social Security benefits - are ineligible to fund a Health Savings Account, even if they meet all other eligibility requirements. Also, active military personnel and retirees who have coverage through TRICARE are ineligible. And most services provided through the Veterans Health Administration (VA) and Indian Health Services (IHS) disqualify a patient from funding an account for three months.
Changes to these rules can be made only through the legislative process. They are important. And Health Savings Account proponents are working on a number of initiatives to extend eligibility. Ultimately, the fate of these efforts lies in the hands of Congress and the president.
TWO. More Adoption
Expanding eligibility will increase the account base. But so will greater adoption by people who already have access to HSA-qualified coverage.
In the nongroup market, nearly every consumer has the option to select HSA-qualified coverage. Because these plans have statutory out-of-pocket limits below all other plans, they may be an attractive option for families with expensive chronic conditions. The tax savings of paying those expenses with pre-tax dollars should be further incentive to choose this coverage, especially since Health Savings Accounts are the only opportunity that most of this population has to reimburse qualified health-related expenses tax-free (both Health FSAs and Health Reimbursement Arrangements are employer-sponsored plans).
The percentage of individuals who purchase coverage in the nongroup market who are enrolled in HSA-qualified coverage hovers in the single digits, however. This is a difficult population for account administrators to target - there is no employer with an open-enrollment communication strategy - and the results show.
In the group market, many employees offered a menu of medical plans choose coverage that's not HSA-qualified. In some cases, their decisions may be the best financial choice. But surveys show that many Americans are overinsured. In other words, they pay higher premiums to reduce their out-of-pocket financial responsibility when they incur little or no cost-sharing (deductibles, coinsurance, and copays) in a typical year. They must be better educated or incented to use decision-support tools - spreadsheet programs that show their total cost of premium and out-of-pocket responsibility based on their projected utilization - to make the best choice.
These tools exist, but they're not used extensively. When they are, workers are often skeptical of a result showing that a plan with, say, a $4,000 deductible is better coverage than one with a $1,500 deductible. Administrators must do a better job of educating employees on the total cost of coverage (their share of premium) and care (deductibles, coinsurance, and copays that they pay when they receive services).
THREE. More Savings
The average Health Savings Account balance hovers around $3,000. That's no small sum. But averages don't tell the story. For example, imagine a street whose five households earn $35,000, $40,000, $45,000, $50,000, and $330,000. The average family income is $100,000 ($500,000 total income divided by five families). But does the $100,000 average reflect the financial reality of each of those five families?
Recommended by LinkedIn
Devenir reports that about 61% of Health Savings Accounts have balances less than $1,000. That's more than 20 million of about 34 million accounts with low balances. Surely some of those 20 million account owners can - with proper education about finances in general and Health Savings Accounts in particular - increase their balances by contributing more or withdrawing less.
Thus, a key growth opportunity is to educate existing owners to employ some combination of contributing more and distributing less to build their balances. By doing so, they create an emergency medical account that they can tap in the future - whether next year or in retirement - when they're not otherwise in a position to manage a large medical bill.
A portion of Health Savings Account owners aren't be in the financial position to use their accounts as a savings vehicle. They live paycheck-to-paycheck and don't have - or don't believe they have - the financial resources to save for any future expenses. They'll derive an immediate benefit by paying their qualified expenses through their account to save between 20% and 30% in taxes. But they won't save for the future.
FOUR. More Investment
Saving for the future is an important exercise. But it's critical to focus on the spending power of that money over time. If you're saving long-term - say, for retirement or a toddler's college education - merely placing the funds in an account with simple interest won't allow the spending power of those savings to outstrip inflation (even when general price increases are low). The funds must be invested in appreciating assets to outpace inflation.
For most Americans, the best strategy is to buy a claim on the future profits of businesses. In other words, to purchase stocks or mutual funds. During the past century, even with changing consumer tastes, market crashes, and corporate scandals and bankruptcies, the stock market has generated an average return of about 9% annually.
In Devenir's survey, 2.4 million Health Savings Accounts - roughly 7% of the 33.9 million accounts in its data base - have invested balances. The number and percentage are growing steadily, which is a positive trend. But the absolute numbers remain small. About 9 million accounts - 27% of the total - have balances of $2,000 or more. Most Health Savings Account administrators require a cash balance of $1,000 or $2,000 before investing. Thus, 9 million accounts (or more, as many of the 4 million accounts with balances between $1,000 and $1,999 are eligible to invest) have balances sufficient to invest.
How does investment increase overall medical savings? Two-thirds of all Health Savings Account balances are sitting in cash accounts that earn an average percentage rate of 0.10% to 0.20% (with perhaps 1.5% for high balances in accounts with tiered interest rates). Inflation during 2021 and 2022 decreased purchasing power by nearly 14%. That's sobering.
What's more concerning is that during the past 60 years, medical inflation has run about twice as high as the rise in prices in the economy as a whole. Each year, whether inflation is high (as it has been for the past two years) or low (it reached 3.0% only once between 2008 and 2019), Health Savings Account balances sitting in cash accounts buy less care.
Those 7% of total accounts with investments have balances that represent more than one-third $34.4 billion) of total Health Savings Account assets. The average investor has a total balance - cash and investments - exceeding $16,000. You can make a chicken-or-egg argument, e.g., are balances high because they invest or do they invest because they have high balances? The answer is probably some of both. Clearly, higher balances provide owners with the resources to invest. Yet only 2.4 million accounts are invested in a universe of more than 9 million accounts with balances exceeding $2,000. Turning half of that gap into investors would increase their balances impressively over time.
The Bottom Line
Those who promote greater use of Health Savings Accounts must continue their two-prong approach, but with greater results.
First, they must continue to educate members of Congress and their legislative aides and committee staff members about how the current rules exclude millions of Americans from enjoying tax benefits and building an emergency medical fund. These efforts range from broad (allowing anyone enrolled in medical coverage that meets federal standards to open a Health Savings Account) to more targeted (eliminating the exclusion on the groups listed in ONE above).
Second, they must find more effective ways of communicating with prospective Health Savings Account owners who have access to but have chosen not to participate and existing owners who could be more strategic in building balances and investing.