Are health savings accounts encouraging unnecessary health spending?

Health savings account impact insurance premiums: ©Zimmytws - stock.adobe.com

A New York University study highlights potential concerns about tax-favored health care accounts’ broader economic impact on health care spending. The study estimates that around 22% of individuals aged 19 to 64 years with employer-sponsored insurance currently utilize tax-advantaged health savings options, primarily through Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs). The findings were published in JAMA Network Open.

Flexible Spending Accounts, first introduced in 1978, enable employees to allocate pre-tax dollars to cover qualified medical expenses. However, the funds in FSAs must be used within the same calendar year, as they are subject to the "use-it-or-lose-it" rule. By contrast, HSAs, created in 2003, have balances that can roll over from year to year, giving employees greater control over their health care savings. However, these accounts are limited to employees enrolled in high-deductible health plans (HDHPs).

One key appeal of both FSAs and HSAs is the reduction of out-of-pocket costs by using pre-tax funds for medical services. Both types of accounts can be used to pay for eligible expenses incurred by the account holder, their spouse, or their dependents. This feature has led to increased popularity among higher-income earners. According to the analysis, more than two-thirds of families with FSAs or HSAs (75% with FSAs and 68% with HSAs) had household incomes exceeding 400% of the federal poverty level. Additionally, three out of five account holders have a bachelor’s degree or higher.

While these tax-favored accounts may seem like an efficient way to manage out-of-pocket health care costs, their broader impact on healthcare spending and tax expenditures is complex, according to the study. Proponents argue that these accounts encourage consumers to save for health care and reduce their reliance on insurance, which could, in theory, lower health care costs. However, the study points out that the actual effect may be quite different.

Researchers found that tax-favored accounts may inadvertently encourage consumers to purchase more health care services than they would otherwise. By reducing the effective rate of cost-sharing after taxes, these accounts may drive individuals to spend more on health care, which could raise overall health care expenditures and, consequently, increase insurance premiums. The FSA’s “use-it-or-lose-it” rule, in particular, incentivizes consumers to spend down their accounts by the end of the year, sometimes on unnecessary services or products like dental care or eyeglasses, simply to avoid losing the funds.

Even in the case of HSAs, where unused balances can be carried over, account holders still tend to spend most of the funds they deposit. Research shows that 85% of HSA funds are spent rather than saved or invested, suggesting that the presence of an HSA encourages more health care consumption, not less.

The study also explored the connection between tax-favored accounts and insurance premiums. It highlighted three potential scenarios in which tax expenditures associated with these accounts could be misestimated. First, tax expenditures could be underestimated if sheltering out-of-pocket spending leads to greater health care utilization, thus raising overall costs and insurance premiums. In this case, both out-of-pocket expenses and premiums would benefit from favorable tax treatment, leading to higher tax expenditures than anticipated. Second, tax expenditures could be overestimated if the availability of FSAs and HSAs encourages consumers to choose plans with higher deductibles and cost-sharing, thereby reducing premium costs. Finally, the study suggests that even if these accounts result in lower premiums, the reduction in tax-exempt premiums could be offset by the tax-favored status of out-of-pocket spending, leading to a net increase in tax expenditures.

According to the study, families with FSAs had the highest mean annual health care expenditures at nearly $16,000, followed by families with HSAs, who spent an average of over $13,000 annually. Families without any tax-favored accounts had significantly lower annual health care expenditures, at approximately $10,200. When considering out-of-pocket costs, HSA holders spent the most, with an average of $2,782 per year, likely due to the high deductibles required by their insurance plans.

Regression-adjusted models in the study further highlighted the financial impact of these accounts. Holding an FSA was associated with a 20% increase in total health care spending compared to those without tax-favored accounts. Similarly, families with HSAs faced 44% higher out-of-pocket medical expenses than those without savings accounts, though their insurer-paid expenses did not differ significantly from families without these accounts.

Although tax-favored accounts like FSAs and HSAs are popular among employees, particularly those with higher incomes, the study warns that they may not be the cost-saving tools that policymakers had hoped. Instead, these accounts appear to reduce cost-sharing incentives and increase overall health care spending, undermining efforts to control costs in the health care system. Expanding the availability of these accounts could exacerbate inefficiencies in the healthcare system, especially if they encourage more spending rather than more efficient care.