New data on the deficiencies of health savings accounts

The Consumer Finance of Health Savings Accounts

By Jake Spiegel
HelloWallet, July 2015

Health Savings Accounts are a rapidly growing savings vehicle that accompanies High-Deductible Health Plans and allows the account holder to pay for qualified medical expenses tax free. Today, little is understood about how HSA account holders use their accounts. For our study, we used data collected from more than 400,000 accounts by UMB Bank, one of the largest HSA recordkeepers in the country.

From the Findings

On average, older and higher-income employees contribute over 200 percent more than younger and lower-income employees. We observed that the median account holder in the highest income quartile contributed about three times as much to their HSA as the median account holder in the lowest income quartile.

Among account holders who made a contribution to their HSA, the median contribution was almost $700, while the mean contribution was more than twice as large at $1,550. The skewed mean is largely driven by contributions from wealthier and older account holders. The mean contribution from an account holder in the top income quartile was three times the mean contribution from an account holder in the lowest income quartile.

This is a disconcerting trend, as it indicates that the tax advantages offered by HSAs are disproportionately used by older and wealthier employees.

No matter the underlying reasons for the differences in contribution behavior, tax benefits arising from HSA use are flowing disproportionately to higher-income households.

No matter the cause, one thing is clear; lower deferrals to HSAs leaves less-well-off employees with lower HSA balances, and therefore less prepared to deal with future medical expenses.

Low-income employees are at risk of having insufficient funds to cover large medical expenses. In this case, low-income employees may be forced to pay for medical expenditures out of pocket, thereby forfeiting the tax advantages associated with HSAs. Or worse, they may pay for medical expenditures with revolving credit or money withdrawn from their 401(k)s… or payday loans.

About 5 percent of account holders contributed the maximum amount allowed by the IRS to their HSAs, which was $3,250 for single coverage and $6,500 for family coverage in 2013. Many employees may be deferring insufficient amounts to their HSAs to cover medical expenses. This behavior is suboptimal from a tax-efficiency standpoint, reduces buying power for health care, and is potentially dangerous if the account holder faces large medical bills.

The sample that contributes the maximum skews wealthier and older than the portion of the sample that does not. Almost 67 percent of the households that contribute the maximum earn more than $100,000.

Only 4 percent of account holders eligible to invest their HSA balances actually chose to invest.

The small proportion of account holders who contribute the IRS maximum could be a reflection of several factors, both mathematical and behavioral. Any addition of an account for an employee to contribute to and maintain adds a level of complexity to that individual’s personal finances. HSAs compete for employees’ limited pretax dollars with defined - contribution retirement plans and, to a lesser extent, FSAs and transit benefits. Many employees simply do not have the extra money or will not commensurately cut back on discretionary spending to fully fund their HSA.

On the behavioral side, saving for health care lacks saliency. It is difficult enough to project health-care expenditures, and especially so if one has not previously incurred a large medical bill. HSAs are still a relatively new instrument, and the task of projecting one’s out- of-pocket health-care expenditures is an unfamiliar one for many employees. Without guidance for how much money an employee ought to set aside, it can be difficult to effect change and encourage individuals to save more.



By Don McCanne, MD

With the rapid increase in the prevalence of high-deductible health plans (HDHPs), many patients are finding that their out-of-pocket expenses when they need to access health are excessively burdensome, resulting in financial hardship, and often resulting in forgoing beneficial health care. Supporters of HDHPs say that health savings accounts (HSAs) are the answer - simply use your own HSA to pay for the care you need before the deductible kicks in. How well is that working?

This study confirms what we have said all along - HSAs work just fine for the healthy and wealthy, but the accounts are not adequately funded and may not even exist for individuals with lower incomes and greater health care needs.

The other feature of HSAs is that, for those who remain healthy, the account can be used as a supplementary, tax-advantaged retirement account. Apparently this concept is not driving the increase in enrollment in HSAs since 96 percent of those with accounts large enough to qualify for investing are not bothering to use the investment vehicles designed for HSAs. Besides, retirement savings should not be based on a game of chance - being lucky enough to have not faced significant illnesses.

We already have more than enough studies to show that consumer-directed health care - HDHPs with or without HSAs - impair access and affordability precisely for those with the greatest health care needs. That’s the opposite of what we need. It’s time for a single payer national health program - an improved Medicare, with first dollar coverage, that covers everyone.