Wednesday, July 15, 2015
The Consumer Finance of Health Savings Accounts
By Jake Spiegel
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
This is a disconcerting trend, as it indicates that the tax advantages
offered by HSAs are disproportionately used by older and wealthier
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expenditures with revolving credit or money withdrawn from their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
Comment by Don McCanne
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
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.
at 2:47 PM