7 insights from 20 years of HSAs

In the runup to the creation of Health Savings Accounts (HSAs), consumer-directed benefits (CDBs) had just started making inroads in American health care. Many consumers and employers were looking forward to HSAs, the latest output from this growing trend. The accounts were anticipated to slow rising health care costs and encourage individuals to be more engaged with their health care choices.

It was in this environment that I founded HealthEquity, which opened its doors 20 years ago in 2002. In the years since, HSAs have become a prominent fixture in the nation’s health care system. According to the latest figures from Devenir Research, Americans now hold more than $100 billion in nearly 34 million accounts. Those savings benefit from the HSA’s unique triple tax advantage: funds are tax-free going into the account, grow tax-free in the HSA, and are not subject to taxation when spent on qualified medical expenses.

I am proud of the success of both HealthEquity and HSAs. As we celebrate this remarkable journey, I’ve been reflecting on everything we’ve learned over the past 20 years: the lessons that apply today and the insights we have on the future. Entering our second decade, I’d like to share some of those insights with you.

The HSA experiment is working

The core reason HealthEquity entered the market is as true today as ever. The opportunity to build equity in health insurance and health savings has made a great deal of difference to Americans. The $100 billion Americans have saved for health care has been accumulated with millions in tax savings.

We know these savings have helped create peace of mind for consumers in uncertain times. According to a 2021 survey from HealthEquity, 77% of those with an HSA say the account helped give them peace of mind over the past year of the COVID-19 pandemic.

HSAs have also given rise to positive consumer behaviors. People with an HSA price shop for health care products and services more often than those without an account (65% of those with an HSA versus 58% of those without an HSA). And those with an HSA also feel more confident about their savings with regard to retirement: 63% of people with an HSA say they have a good idea of how much money they’ll need to afford health care in retirement, compared with just 48% of those without an HSA.

All of these trends show us HSAs are having a positive impact on employers and individuals. They underline the value that adding or maximizing an HSA program can have on employee benefits programs.

Retirement is one of the most important uses for HSAs

HSAs were always a great fit for retirement savings, but the intervening years have truly proven its value. As inflationary pressures rise and more preparation is required to access health care in retirement, the triple tax advantage of an HSA is key.

The Employee Benefits Research Institute (EBRI) now estimates that a couple will need $296,000 for a 90% chance of funding health care needs in retirement. In the past year, health care costs have risen 4.8%, and are expected be further affected by recent inflationary pressures.

In this environment, it is worth emphasizing that HSAs have some of the most meaningful tax advantages in retirement benefits. It can be argued that these benefits even outstrip those of 401(k)s, where distributions are taxed as ordinary income.

When educating employees about HSAs during open enrollment season, employers can emphasize these HSAs as an important part of their retirement program – something especially useful to employees who are approaching retirement age.

Education levels are critical for continued success – and need to be improved

HSAs have existed for nearly 20 years, rising in number to nearly 34 million accounts as of mid-2022, according to Devenir Research. Yet many Americans still don’t understand the basics of HSAs.

In 2019, according to HRDIVE, about one-third of employees (35%) say they either know nothing about or don’t fully understand their health care coverage, and 62% feel their employer doesn’t act as a resource for their questions. Knowing this, it’s not surprising that many HSA myths continue to persist, such as:

• HSAs are only for the young, healthy, and rich. On the contrary, HSAs benefit everyone. The accounts can help people prepare for retirement, pay for treatment of chronic health conditions, and save money tax-free for health care products and services.
• HSAs are too complicated. With true educational support, including resources for asking and answering questions, HSAs can be simple to understand and – most importantly – simple to use.
• HSAs are for spending, not saving. Although many use HSAs for health care expenses in the moment, HSA funds accumulate over time, growing tax-free, making them an excellent savings tool.

Advancing HSA education is critical to the success of any benefits program, and finding a good partner is one way to ensure employees have the knowledge they need to be successful.

Driving new legislation is vital to pursing new opportunities in health benefits

One of the reasons HealthEquity was able to thrive in its early years was the passage of the Medicare Prescription Drug Improvement and Modernization Act. With the codification of HSAs, employers and individuals were able to feel confident the accounts were stable and backed by law. This also allowed the private industry to create HSA solutions that made it simple for Americans to access the new accounts.

This kind of governmental support is necessary as new challenges arrive and new solutions are needed to address them. One important example is a 2006 change in the law allowing those with an HSA to contribute up to the federal maximum – no longer requiring contributions to be at the level of your deductible or the federal maximum, whichever was lower.

At HealthEquity, we consider it part of our responsibility to work with Congress and regulatory agencies to advance these solutions through legislation and other channels. Employers also have an important role to play in keeping an eye on legislation and updating employees when necessary.

Employers can also find a health plan partner who tracks these developments and breaks down the most important takeaways for benefits team members and employees.

Support is needed for those not enrolled in an HSA-qualified plan

In 2021, more than 70% of companies that offered health benefits did not offer a plan that qualifies enrollees for an HSA. That means many Americans are without access to an HSA-qualified health plan, enrolling instead in plans like traditional PPOs or government programs like Medicare and Tricare. An increasing number of people are also enrolling in plans with narrow network coverage and no deductible, leaving them without access to an HSA and comparatively little flexibility in their health care choices.

There is an opportunity to serve this population with new benefits solutions. To bring some of the value of an HSA to these individuals, a new benefit could:

• Allow for tax-free employer contributions and account growth
• Allow individuals more funds to choose and pay for health care
• Expand savings accounts to more Americans

To achieve these goals, the industry must work with both chambers of Congress as well as members of both major political parties.

Consumers require greater price transparency in health care

One of the major advantages of HSAs – and CDBs generally – is that they encourage individuals to be more engaged with their health care choices. People with access to these benefits are more aware of the costs of health care, and (as mentioned above) are more likely to compare prices among providers.

Health care price shopping potentially reduces total health care spend and empowers consumers to be more proactive about their choices. But many still say they struggle to find accurate information on health care costs.

To solve this problem, legislation is needed to increase pricing transparency. Better enforcement of existing rules is also key – according to a compliance report from PatientRightAdvocate.org, fewer than 20% of hospitals are complying with the Centers for Medicare & Medicaid Services (CMS) rule that went into effect January 1, 2021.

Employers can also help by making pricing comparison tools available to employees and training them on how to use them. This is a particularly important step, as a 2016 survey published to the American Journal of Manage Care found that many individuals may not have been aware that any pricing tools exist.

An ecosystem of flexibility is coming to health care

Flexibility is also becoming paramount to health care success, including flexibility in channels and services.

The mobile experience, typified by telehealth services, is in increased demand following the COVID-19 pandemic. A 2021 update to a McKinsey article showed that around 40% of consumers planned to continue using telehealth services beyond the COVID-19 pandemic. Mental health apps, mail order pharmacies, and other on-the-go services are also popular.

There is also an increase of health care providers with nontraditional backgrounds, particularly among retailers. Amazon and Walmart have made tentative steps into the health care space, opening up new avenues for individuals to access care from familiar brands.

Demand for employer support in new areas, such as fertility services and student loan repayment, is also up, as evidenced by the increased interest in Lifestyle Spending Accounts (LSA). According to a recent report from Mercer, 70% of employers are considering adding an LSA to their benefits lineup – a drastic change from the 10% who currently offer one.

Read more: HSAs: An important tool to combat economic uncertainty

HSAs and other CDBs are an exceptional fit for this environment of flexibility. HSAs inherently provide flexibility, and when paired with increased availability of flexible services, make for a great consumer experience.

Looking forward to the next 20 years

Based on the past 20 years, I am confident that HSAs and other CDBs will continue to play a positive role in the American health care system. With tax savings, increased flexibility, and an ability to help prepare for the future, HSAs are uniquely suited for this moment and for the future.

Steve Neeleman, founder, Health Equity