Americans Continue to Save for Future Medical Expenses

The industry's most comprehensive semi-annual report shows a growth in the number of Health Savings Accounts and their balances.

Devenir Research recently released its 2022 year-end report on the Health Savings Account market. It showed what every other Devenir survey has shown, namely that Health Savings Accounts continue to grow as more Americans enjoy tax benefits when they fund their accounts to pay for current qualified goods and services or to build medical equity to reimburse their future qualified expenses.

Number of Accounts

The number of Health Savings Accounts grew by 3 million (32.5 million to 35.5 million) during calendar year 2022. That's an increase of 9%. The compounded annual growth rate during the prior five years was 8%, so growth is accelerating slightly.

Note that this figure represents the number of accounts, not the number of unique owners. As Health Savings Accounts owners change jobs and enroll in a new employer's HSA program, the number of accounts increases unless the owner consolidates balances. And some owners retain more than one account regardless of their current employment. I, for example, maintain three Health Savings Accounts because I like unique investment features that each offers - though I am unusual. Still, it's likely that fewer than 35.5 million families have access to these tax-savings vehicles simply because they've opened more than one account over the years without consolidating.

On the other hand, many Health Savings Accounts owners have family members (spouses and tax dependents) whose qualified expenses can be reimbursed tax-free. Thus, each account, on average, delivers benefits to more than one person.

Total and Average Account Balances

Total balances continue to grow. At the end of 2022, Americans had built balances of $104 billion in their Health Savings Accounts. This figure is important for two reasons. First, these owners saved more than $25 billion in taxes when they deposited these funds into their accounts. Second, that's $104 billion that Health Savings Account owners have in a medical emergency fund to pay their unexpected (unscheduled surgery, emergency department visit, or broken tooth) or expected (maternity, care for a chronic condition, vision-correction surgery) out-of-pocket medical, dental, and vision expenses.

The average balance is $2,936, a figure derived by dividing the $104 billion in assets by the 35.5 million accounts. This figure is slightly below the all-time high of $3,015 of 2021 (when access to care was still limited by the pandemic), but still stands as the second highest figure ever. In prior years, the average balance grew by $100 to $200 annually.

If we exclude accounts with zero balances (read more below), the average balance is $3,725. Again, this figure is below the $3,798 average balance of funded accounts in 2021. But it represents the second highest figure ever.

The most accurate predictor of average balance is the year that the account opened. Accounts opened a decade ago, in 2012, for example, have an average balance of more than $5,000. Go back 15 years to accounts opened in 2007 and the average balance is more than $11,000. The early adopters - accounts opened in 2005 - have an average of more than $18,000 saved to reimburse future qualified expenses tax-free.

Balance Distribution

Averages are important. But so is the distribution of the $104 billion in account assets. Let's look at how average alone mislead.

Example: Five neighbors purchase new cars this year. Four buy pre-owned vehicles for roughly $20,000 each. The fifth buys a Genesis 2.5T E-Supercharger AWD electric vehicle for $100,000. That's a total of $180,000 spent on five vehicles, or an average of $36,000 per car. If you were selling new Toyota Highlanders (MSRP starting at just over $36,000), the average price paid by these five neighbors would lead you to believe that they're all within the target market price for the 2023 Highlander. Yet four of them paid much less for your vehicles (and bought them used, no less) and one paid a lot more. The distribution, rather than the average, paints a more accurate picture.

About 21% of Health Savings Accounts had zero balances at the end of 2022. Another 31% had balances of less than $500. In other words, more than half of all accounts don't contain sufficient funds to pay for an MRI or 12 sessions of physical therapy following an injury.

But don't conclude that half of all Health Savings Account owners derive little or no benefit from their accounts based on balances alone. The Devenir report doesn't track activity in individual accounts. It's possible that many of these account owners contributed $1,000 or $2,000 or more to their Health Saving Accounts and then withdrew most of or all their contributions to reimburse qualified expenses. While doing so, they saved between $200 and $380 in taxes for every dollar contributed. That amount of tax savings can make a difference to a family that contributes $2,000 (typically $500 or more in tax savings), even if it spends most of or all the amount contributed.

On the upper end of the distribution, 7% of all accounts have balances greater than $10,000 and 27% have balances exceeding $2,000. We'll circle back to this 27% figure in a moment.

2022 Activity

Total contributions to Health Savings Accounts were $47 billion in 2022. Distributions totaled $34.1 billion, leaving a total of $13 billion additional equity in accounts at the end of 2022. These figures are important. The $47 billion contributed generated more than $12 billion in tax savings. The $34 billion is important because, absent a Health Savings Account, these individuals would have paid their bills with post-tax dollars, which would have cost them more than $9 billion in extra pre-tax income.

Average contributions in 2022 were $1,684 and average distributions $1,220. Thus, the average account owner saved about $400 in taxes and carried over nearly $500 to spend tax-free on future qualified expenses.

Assets and Investments

Of the $104 billion in total assets at the end of 2022 (a 6% increase over the $96 billion at the end of 2021), $33.8 billion was invested. That's a decrease from the $34.4 billion invested in 2021. The difference is attributable to a stock market that lost more than 18% of its value in 2022. That decline affected Health Savings Accounts in two ways. First, the average owner with invested assets lost value. Second, the declining market discouraged potential investors from taking the plunge. It's difficult to provide a historical context because Health Savings Accounts didn't exist during the 2020 dot.com market meltdown. Account investments were in their infancy (about $200 million total) during the 2008 recession.

About 7% of account owners (roughly 2.6 million accounts) invest. You may have seen article in the popular press about how 93% of Health Savings Account owners are making a mistake by not investing. But that criticism isn't fair. Refer back to the Balance Distribution discussion above. Only about 27% of all owners have balances of $2,000 or more. These are the target investors - owners who meet or exceed their administrator's cash threshold to invest and who have enough money sitting in cash to feel comfortable covering current expenses and beginning to leverage equities to increase their balances. If we take that same 7% of investors and use a denominator of 27% with a sufficient balance to invest, suddenly investors represent nearly one-quarter of all likely candidates to invest.

Not surprisingly, investors have higher balances than non-investors. Accounts opened five years ago ($15,400 average balance), 10 years ago ($24,850), and 15 years ago ($37,300). These average balances are roughly seven times as high as non-investors.

Which comes first: the high balance or the high investment? The data don't answer this chicken-or-egg question. And are owners investing based on educational efforts by their account administrators, or are the owners investing simply more financially savvy and taking the same approach that they do with their retirement and brokerage accounts? Again, the data don't reveal the answer. All we know for sure is that the average owner who invests will generate greater spending power in her account.

The Bottom Line

By any measure, this patient - the Health Savings Account - passes its annual physical with flying colors. Millions of Americans are saving money to reimburse current and future qualified expenses, making it a little easier on family budgets to pay medical plan cost-sharing and purchase qualified dental and vision services.

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