Wednesday, July 5, 2017

Perhaps Employees Just Don't Want HSAs

I read an interesting article this morning whose focus is to tell the reader that health savings accounts (HSAs) would be more popular if people only understood them The article was based on research from Fidelity that shows that most eligible Americans (those enrolled in a high-deductible health plan (HDHP)) don't understand the benefits of HSAs. In fact, that part of that research is likely correct.

But, despite that research, I think the answer goes deeper than that.

Before digging in, let's review some of the key features of HSAs:

  • The money in your HSA can be used to pay qualified medical expenses.
  • Money in your HSA that is not used in a calendar year simply stays in the account, unlike in a Flexible Spending Account (FSA).
  • The account is yours. It goes with you if you change employers, are unemployed, retire, or just don't feel like deferring anymore.
  • You can generally defer to an HSA in a year that you participate in an HDHP.
  • There is a triple tax benefit from HSAs: money goes in tax-free, assets grow tax-free, money coming out for qualified medical expenses comes out tax-free.
So, what's the problem then? Which of those bullets do people not understand?

In my opinion, it;s more than that. I've done exhaustive -- well maybe not exhaustive -- research by just talking to people about HDHPs and HSAs. I don't ask them to rattle off the benefits of them, but I do ask them why they don't choose to use them. Here are some typical answers.
  • People don't like high-deductible health plans. When we consider that most Americans do not have enough in savings to get them through a 2-month work stoppage, they certainly don't want health insurance that may not cover them for the first one or two months of pay's worth of medical expenses.
  • When we consider that a typical employee's paycheck is already being "raided" by federal income taxes, state income taxes, FICA taxes, health benefit costs, 401(k) deferrals, and other benefit costs, there may not be enough left over for the day-to-day costs of living let alone HSA deferrals.
HDHPs and HSAs were put into place as part of a move toward health consumerism. In other words, patients will be more conscious of how they spend their dollars if the money for other than catastrophic health expenses is coming out of their accounts.

Let's think about what has happened because of this. An HDHP participant gets an annoying cold. He doesn't seek medical treatment because he is being a "smart consumer" of health services. Wait, it's not just a cold. It's bronchitis or influenza and suddenly, the costs are higher and his condition has spread as he has infected family members. That's not a good outcome.

Here's another plausible scenario. Another HDHP participant watches his daughter limp off the field during a youth soccer game. Her keen home-grown injury detection skills don't think there is anything broken, so they just decide to ice down the injury because experience has told them that the cost of a medical examination of it might be several hundred to even a thousand dollars. Oops, the injury turns out to be more serious than anyone thought. Our heroine should have taken her daughter to the doctor because now there are complications.

I'm not saying that the Fidelity research was flat out wrong. But, there's something more than people not understanding the benefits of HSAs. My conclusion is this:

People don't want to understand the benefits of HSAs. If participation in an HDHP is an entrance requirement, your average participant just doesn't care about the possible benefits of a health savings account.
The HSA experiment is now almost 15 years old. The concept of health consumerism is far older than that. Theoretically, it works. Theory and reality don't always agree.


  1. You are absolutely correct - a HSA-qualifying HDHP will not be successful if people do not save. And, you are correct that most Americans do a crappy job of saving. You are also correct that most Americans live payday to payday - almost 2/3rds indicate they would have some or great difficulty at meeting their day to day needs if their next paycheck was DELAYED 1 week. All of that said, none of that suggests the HDHP/HSA is not a superior alternative. That is, over 50% of health care expenses are incurred by less than 5% of the population. So, for the majority of Americans, a lower premium HDHP, coupled with savings in a HSAs, would be the right answer.

  2. I can solve these issues by simply funding HSAs (USAs, actually) with the first $10K of your combined income tax and 15% FICA taxes. Thusly, a person making $40K would put about $9000 into his HSA and take home nearly $35K. And the account is good for ALL medical expenses, including a gym membership, not just "qualifying". Need birth control? Viagra? Fine, pay for it, your account. Eventually, once we are transformed from a debtor nation to a saving nation, businesses can be liberated from having to pay the 7.5% contribution. Also, it's a 20% flat tax which dovetails nicely with tax reform and tax breaks for business.

  3. Good article, but the two examples above aren't very good ones--I don't think the point is that someone without an HSA should run to the doctor for every cold or soccer injury. Some better examples would point out that people with HDHPs sometimes forego preventive care even though it is covered at 100%, or that maybe someone would put off a follow-up diagnostic test or not fill a prescription due to the deductible.