HSAs at 20 Years: Have They Made a Difference?
by William G. (Bill) Stuart | Originally posted on LinkedIn for your Health Savings Academy
Have Health Savings Accounts helped ordinary Americans afford the ever-rising cost of medical care?
This past Sunday, Oct. 15, was HSA Day. If your wall calendar is like my family's, you probably didn't know. Our calendar ignores this celebration while noting World Teachers Day (Oct. 5), Health & Sports Day in Japan and Thanksgiving Day in Canada (both Oct. 9), National Boss's Day (Oct. 16), and Labour Day in New Zealand (Oct. 23).
Whether you celebrate HSA Day or not won't affect your general health or financial situation. But HSA Day, placed midway between the annual due dates of federal income taxes and at the beginning of open enrollment for tens of millions of American workers, is important. Its purpose is to shine a spotlight on the financial advantages that Health Savings Accounts offer hard-working American families. Many account administrators develop educational programs to encourage more people to open an account, nudge those who own an account to increase their contributions to build a medical emergency fund, and help those with sufficient cash balances to understand the benefits of investing a portion of their funds to retain the spending power of balances held to reimburse qualified expenses decades from now.
HSA Day is also a good time to examine the state of the Health Savings Account market (with information courtesy of Devenir Research, which publishes a semi-annual overview of the market) and where it's headed.
Health Savings Accounts by the Numbers
Number of accounts. There are 35.9 million open Health Savings Accounts. Subtract. Subtract 6.5 million that are unfunded (they could be accounts owned by people no longer eligible to contribute or the balances could be temporarily depleted) and there are more than 29 million funded Health Savings Accounts. Some people own more than one (my wife and I are covered on a family plan and own three between us, for example). We don't know how man unique account owners there are, but let's say the figure is 25 million. Those accounts cover perhaps 40 million to 50 million owners and family members whose expenses can be reimbursed tax-free. That's an impressive number, even as an estimate. It means that perhaps as many as 50 million Americans' qualified medical, dental, vision, and over-the-counter expenses, plus certain qualified insurance premiums, can be paid with pre-tax dollars.
Total balances. Account balances reached $104 billion at the end of 2022 and are expected to rise to $121.4 billion (a nearly 17% increase) by the end of 2023. To put that figure in perspective, Americans have saved more than $110 billion to reimburse tax-free future qualified expenses - whether the services and items are purchased today, next month, or decades from now. At a 27% combined tax rate (federal income and payroll taxes, plus state income taxes as applicable), these owners would have to earn more than $150 billion outside a Health Savings Account to match the purchasing power of these tax-advantaged funds.
Average balances. Averages are deceptive. In a lakeside neighborhood with five $100,000 fishing lodges and one $2.5 million mansion, for example, the average price per home is $500,000 ($3 million divided by six), though that figure hardly reflects the neighborhood accurately.
The average balance for all Health Savings Accounts as of June 30 is more than $3,200. If you remove the six million unfunded accounts, the average balance approaches $4,000 for funded Health Savings Accounts. But balances aren't evenly distributed. Nearly one-fifth (18%) have no balance, as noted above. Add the 31% of funded accounts with less than a $500 balance and nearly half of all Health Savings Accounts have balances of $500 or less. Nearly three-quarters have balances of $2,000 or less. Only 7% of accounts (about 2.5 million) have balances greater than $5,000. This last category is expected to grow as contributions exceed distributions every year. And positive returns on equity investments will increase the number of account owners with balances greater than $5,000 and boost those balances among those in this category.
Average contributions and distributions. Average contributions and distributions per funded account have remained within a tight range during the past eight years. Contributions haven't dipped below $1,549 or exceeded $1,788 during that period. Distributions have ranged from a low of $1,189 to a high of $1,324. Again, averages don't tell the full story. But as deposits exceed withdrawals each year, total balances across all Health Savings Accounts increase naturally.
Investments. Of the $104 billion in Health Savings Accounts at the end of 2022, almost $34 billion, or about one-third of total balances, were invested in mutual funds, stocks, EFTs, and other instruments. That figure represents a decline of about $600 million from the invested balance at the end of 2021. The small decrease was driven by a nearly 20% drop in the S&P 500 index, which reduced the value of investments and kept some owners from shifting from the certainty of preserving their account value with cash versus the risk of investing in down market. Investments are expected to rise by almost $10 billion, or 28%, by the end of 2023, driven by positive stock-market performance and a greater percentage of balances invested in equities rather than held in cash.
Health Savings Accounts and Their Critics
Health Savings Accounts have their supporters and their critics on Capitol Hill. Although support for the forerunner of Health Savings Accounts, a small demonstration project called Medical Savings Accounts that was included in the Health Insurance Portability and Accountability Act (HIPAA) in the mid-1990s, was driven by three Democrats in the Senate, members of Congress who champion Health Savings Accounts today are overwhelmingly Republican. They want to empower patients as consumers, and Health Savings Accounts reduce the financial cost of patients' applying consumerism to the purchase of medical care.