Health Savings Accounts Are Becoming a Big Investment Business

Last Updated May 26, 2010 2:09 PM EDT

When health savings accounts (HSAs) first came along, critics said that these tax-favored accounts, which must be combined with high-deductible insurance plans, would mainly benefit the healthy and the wealthy. A new report from J.P. Morgan (JPM) says that's exactly what's going on -- and also indicates that HSAs are becoming a big business.

Nearly 10 million people now belong to consumer-directed health plans (CDHPs) that include HSAs, up from 6 million people in 2008. A quarter of large employers and 18 percent of smaller companies plan to offer CDHPs this year, and nine percent of employees are enrolled in one.

As of April, J.P. Morgan was managing about 530,000 HSAs with more than $800 million in assets. The average HSA balance was only $1,393 in the fourth quarter of 2009, up 9 percent from a year earlier. But the average HSA investment balance was $6,113, which was 36 percent higher than in the prior-year period.

That suggests two things: First, affluent people are sheltering a lot of money in their HSAs, and they saw a big return on investment as the stock market recovered last year. Second, the majority of those with HSAs don't have enough in them to invest any of it. In fact, 42 percent of HSA holders had under $500 in their accounts at the end of 2009. However, 31 percent had more than $2,000 in their HSAs, compared with 20 percent in that category a year earlier. A graph of contributions and distributions (see below) shows that, on average, people kept more in their accounts than they spent. That, plus the stock market rebound, accounts for the asset growth in HSAs.

The reason people saved some of the money earmarked for healthcare is that most people who have HSAs are healthy. The most dramatic evidence of this is the fact that only 4 percent of the amount withdrawn from HSAs last year went to hospitals and 13 percent, to doctors. The largest beneficiaries of HSA spending were pharmacies (28 percent) and grocery stores (17 percent).

One other noteworthy finding is that employees contributed an annual average of $1,653 to their HSAs. That's more than twice what their employers put in. But after the tax savings, the workers' contributions cost them a bit less than $1,200. Employers spent less on the high-deductible plans that accompany HSAs than a conventional PPO or HMO would have cost, but they might have used those savings to fund their HSA contributions.

Of course, the philosophy driving consumer-directed health plans is that when people have their own money at risk, they tend to spend less on health care. Maybe so, but I wonder how much of the money taken out of HSAs was spent on really necessary healthcare items. If it went to vision or dental care, that's one thing; but it doesn't take much imagination to justify a pair of comfortable shoes or some "heart-healthy cereal" as a healthcare expense.

In any case, the J.P. Morgan report leaves no doubt that HSAs are a growing business for banks, insurers, and other HSA administrators. If employers continue to flock to consumer-directed plans, it could be a very lucrative opportunity for financial concerns of all kinds.

Image supplied courtesy of Adam Baker at Flickr.

  • Ken Terry

    Ken Terry, a former senior editor at Medical Economics Magazine, is the author of the book Rx For Health Care Reform.