The Gap between HDHP Enrollees and HSA Owners

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“They can match Health Savings Account contributions,  but most don’t adopt this approach. If they matched the first $1,000 of employee contributions rather than giving $1,000 with no restrictions, companies would encourage employees to build their account balances of the inevitable medical, dental, vision, over-the-counter, and premium expenses that they’ll incur in the future – whether next month or in retirement.”

William G. (Bill) Stuart

Director of Strategy and Compliance

August 6, 2020

Why don’t more people who are enrolled in an HSA-qualified High-Deductible Health Plan (HDHP) fund a Health Savings Account? (Note: I refer to this form of HDHP coverage as an HSA-qualified medical plan.)

That’s the question that seven researchers sought to answer in a recent article published in JAMA Network Open, a monthly open access medical journal published by the American Medical Association. Their work adds some important data points to the overall picture of how people use Health Savings Account.

Their conclusions:

  • Many people enrolled in HSA-qualified coverage haven’t opened a Health Savings Account.
  • More than half of all people who’ve opened an account haven’t contributed during the past 12 months.
  • There are different levels of Health Savings Account enrollment among people who buy in public marketplaces (ACA exchanges) and whose companies offer one, or more than one, employer-sponsored medical plan.

Let’s examine their findings; provide a road map for employers, account administrators, and insurers to increase Health Savings Account participation; and discuss a change in federal law that may increase enrollment and funding as well.

Findings

Not surprisingly, the survey found that many people enrolled in HSA-qualified medical coverage haven’t opened an account or aren’t actively funding their Health Savings Account. They’re missing a chance to save an average of 25% on every qualified medical, dental, or vision service that they buy, now or in the future. That’s a huge lost financial opportunity among people who can least afford to experience such savings.

32% of adults enrolled in an HSA-qualified plan don’t have a Health Savings Account. This number understates the shortfall, since another 58% say they don’t know whether they have one. It’s understandable that some people enrolled on these plans haven’t opened an account. They may have disqualifying coverage, such as enrollment in any Part of Medicare or access to reimbursement through their own or a spouse’s Health FSA. But these situations probably account for only a small fraction of that gap.

What’s interesting is the breakdown of this population:

  • If they bought their coverage through a public marketplace, they were less likely to have a Health Savings Account. They don’t have a workplace-based open-enrollment period to learn about benefits, they don’t have an employer to send their information to an account administrator, and no one is offering employer contributions or pre-tax payroll deductions.
  • If they work for a company, the number of plans offered influences their behavior. When employees are offered more than one plan, they’re much more likely to have opened a Health Savings Account. When employees have options, they tend to be more engaged, particularly if they have to re-enroll in coverage every year rather than default to the current plan.
  • Level of education correlates with Health Savings Account uptake. Again, this isn’t surprising. People with a greater bank of knowledge generally understand concepts like budgeting, tax savings, and deferred gratification – even if they don’t always practice what they know. But they’re more likely to understand the tax advantages of a Health Savings Account.
  • Interestingly, income and presence of self-reported chronic conditions didn’t affect whether someone opened an account. This is somewhat surprising. Income is usually correlated to some degree with education, so people with greater knowledge are more likely to earn higher incomes and thus more likely to open an account. But the knowledge-income link wasn’t present in the analysis. One would expect because many chronic conditions are correlated with higher medical spending – much of it applied to the deductible on HSA-qualified plans – plans with high deductible would be less attractive. These people often have an acute financial interest in reducing their net cost of care, but that’s not what their behavior shows.

The most commons reasons not to contribute were no anticipated services or sufficient funds to pay for out-of-pocket services. It’s interesting that 40% of those who haven’t contributed to their Health Savings Account during the last month didn’t do so because they have funds available to pay for out-of-pocket expenses. This finding is inconsistent with surveys showing that only about two in five American adults have enough money saved to cover an unexpected $1,000 bill. And although healthy people often incur few medical expenses applied to a deductible, a random incident (slipping in the bathtub or on ice, slicing a finger rather than a vegetable) or injury (tendinitis or an injured back from exercising) can create a bill of $1,000 or more.

Nearly three times as many people don’t contribute to their accounts as contribute $2,000 or more. Those are the two most common contribution amounts. About 55% of account owners contribute nothing and 20% deposit $2,000 or more. The remaining 25% who contribute deposit some amount less than $2,000. The data aren’t quite consistent with industry data showing average contributions of about $1,600 to $1,700 annually. But they do illustrate that the key to increasing the total amount that Americans save in Health Savings Accounts is to focus on the 80% who contribute $2,000 or less.

Solutions That Can Be Implemented Now

Employers and Health Savings Account administrators can offer robust education. The best way to educate employees is well before open enrollment. That way, workers can learn about the financial benefits of an account before the focus shifts to medical coverage during open enrollment. The education should position the Health Savings Account as a financial opportunity, not merely a reimbursement account like a Health FSA. Quarterly lunch-and-learn sessions throughout the year help experienced, now, and perspective account owners understand how to shop for care, how to reconcile an insurer’s explanation of benefits and a provider bill, strategies to maximize account balances, and opportunities to invest in a Health Savings Account.

Employers can offer turnkey programs. Most, but not all, companies that offer an HSA-qualified program align with a Health Savings Account administrator. Employers must not only choose a partner, but also share information with the administrator, which can then set up accounts and provide additional about Health Savings Accounts. That way, ignorance won’t be a reason that contributions are low.

Employers can establish negative elections. Many companies auto-enroll new employees in the firm’s retirement plan, often setting an initial contribution rate of 3%. Employees can opt out of this contribution, but usually don’t. They may not spot the deduction (especially today, with online electronic pay slips), they have no point of reference (since they don’t have pay checks without the deduction), and the dollar value isn’t substantial. Employers can then increase this percentage when they process pay raises. Employers have the same option to help employees boost their Health Savings Account balances. This strategy has compliance implications, so be sure to hire the right administrative partner or benefits attorney.

 Employers can contribute to employees’ accounts. Most employers do so, particularly in the first few years of the program and when they offer multiple coverage options. Nothing motivates employees to open a new financial account quite like the prospect of free money that they otherwise wouldn’t receive. There are rules around contributions, so be sure that your administrator or attorney is involved.

Employers can offer matching contributions. Most employers match a percentage of employees’ contributions to the company’s retirement savings plan to encourage employee saving. They can match Health Savings Account contributions,  but most don’t adopt this approach. If they matched the first $1,000 of employee contributions rather than giving $1,000 with no restrictions, companies would encourage employees to build their account balances of the inevitable medical, dental, vision, over-the-counter, and premium expenses that they’ll incur in the future – whether next month or in retirement. Matching contributions must comply with federal tax law, with which a good administrator or attorney can help.

Solutions That Can Be Implemented in the Future

Define HSA-qualified plans according to actuarial value. The study points out that the mean deductible on plans in the federal marketplace was more than $5,000 in 2020 – far above the statutory minimum annual deductible of $1,400 for self-only or $2,800 for family coverage for HSA-qualified plans. Yet only 7% of public marketplace plans chosen in 2020 were HSA-qualified. That’s because, despite the high deductibles, some diagnostic services and treatments – usually physician visits, prescription drugs, or certain services to manage chronic conditions – were covered below the deductible.

The public marketplace plans are placed in metallic tiers (platinum, gold, silver, bronze) based on actuarial value. This term refers to the dollar amount of total claims typically paid by the insurer. If the average total claims on a plan are $10,000 annually and the average enrollee pays $2,500 in out-of-pocket expenses, the plan has an actuarial value of 75. Defining every plan with an actuarial value of, say, 75% or lower as HSA-qualified would open the Health Savings Account opportunity to many more enrollees.

Allow benefits banks. Congress could change the tax code to allow employers to offer employees a pool of money that they can contribute to a 401(k) plan, a Health Savings Account, or both. Rather than matching the first $3,000 of 401(k) plan contributions and giving employees who are HSA-eligible $1,500, the employer could provide a pool of $4,500 that each employee could divide between the two accounts. The effect here might be as much educational as financial, as Health Savings Accounts would be positioned as financial, rather than reimbursement, accounts.

The Bottom Line

There is a lot of opportunity for employers to help their employees understand Health Savings Accounts. That knowledge would most likely spur contributions, which would provide a financial safety net for health-related expenses. Employees might still struggle to pay $1,000 to replace a water heater or pay a collision deductible after an auto accident, but they’d sleep more soundly knowing that they had at least a good down payment on an unexpected medical bill. That’s especially true if they’re already enrolled in the medical plan that allows them to fund a health Savings Account.

What We’re Reading

Trying to keep up with the changes to Health Savings Accounts since the start of the COVID-19 pandemic? Here’s a summary of the key changes that benefit account owners.

Here are three strategies that allow some high earners to shelter income from taxes. Not all strategies apply to everyone, but the Health Savings Account option is available to many.

Are you familiar with our HSA Fact Sheets, which provide detailed information about Health Savings Account compliance issues? They’re available on our Web site by clicking here. Here’s the sheet with information on Health Savings Accounts and COBRA.

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