The State of the HSA Market: Assets and Opportunities Continue to Grow

The top industry survey has just been published. What trends are defining the Health Savings Account market?

In my youth, adolescent boys awaited the annual Sports Illustrated swimsuit issue to brighten a winter day. Today, my fellow Health Savings Account fans welcome the semi-annual Devenir Research market survey with similar interest. Though the graphics aren't as, shall we say, provocative, the Devenir report paints comprehensive picture of the Health Savings Account industry.

Today, adolescent males can find far juicier content than the swimsuit issue online. But Health Savings Account fans would have trouble finding a better source of consistent information than the Devenir report. Let's look at some highlights of the 2021 end-of-year-survey:

Assets

At the end of 2021, Health Savings Accounts held $98 billion in assets. That's an increase of +19% over the $82.2 billion asset base at the end of 2020. For a pre-pandemic perspective, it's a +51% gain over the $65.9 billion figure at the end of 2019.

Percentages are important, but so are raw numbers. During the past two years, Americans have saved more than $32 billion additional dollars on a pre-tax or tax-deductible basis to reimburse tax-free future qualified expenses - whether they spend that money next week, next year, a decade hence, or in retirement. That's an impressive emergency fund to manage unexpected, or even expected, medical, dental, and vision expenses; over-the-counter drugs, medicine, equipment, and supplies; and some medical premiums.

Number of Accounts

The number of accounts grew from 30.2 million to 32.5 million year-over-year. That's a +7.6% increase. Contrast that percentage increase with the +19% gain in assets over the same period. Translation: The growth in Health Savings Account is being driven more by increasing balances than by new accounts. That hasn't always been the case, especially during earlier periods of faster growth in the number of accounts. But when new accounts make up a smaller percentage of total accounts and the average balance increases the longer an account is open, the inevitable trend is that total assets grow faster than the account base.

The increase from pre-pandemic 2019 is just under +15%. In other words, growth is slowing as assets increase. And again, raw numbers are important. The number of Health Savings Accounts increased by 2.3 million from 2020 to 2021 (and by 4.2 million from 2019 to 2021). That's up to another 2.3 million to 4.2 million families (and perhaps double that number of family members) whose qualified expenses can be reimbursed tax-free from a Health Savings Account.

An x-factor in the account figures is that Health Savings Account owners can own more than one account. Most don't. But some do. For example, they have an old account that they established through an employer and a new one with a new company. (They can consolidate balances if they wish.) Also, they may own multiple accounts to segregate balances for future qualified expenses from their current employer-based account.

Average Balances

Average balance is a deceptive figure. Imagine a survey of the average income in among the nine households closest to you. Eight families, including yours, earn about $100,000 annually. One earns $500,000 and another $1 million. That's a total of $2.3 million, or $230,000 each. But the $230,000 figure really doesn't represent the typical financial picture in the neighborhood.

Similarly, Health Savings Account average balances increased from $3,428 in 2020 to $3,798 in 2021 - an increase of +11%. That followed a +16% increase from $2,954 to $3,428 from 2019 to 2020.

But the average figure doesn't accurately reflect what's going on in the market. The balance distribution included in the Devenir report provides a more accurate picture:

• 20% of accounts had no balance at the end of 2021.
• 51% of total accounts had balances below $500.
• 62% of the total accounts had balances below $1,000.
• 74% of total accounts had balances below $2,000.
• Only14% had balances of $5,000 or more.

This breakdown is important. Most administrators or employers set a minimum cash balance of $1,000 or more before owners can begin to invest balances. That bar eliminates 62% of accounts from investing. The figure increases to 74% when you include the higher cash balances that some administrators impose as well as owners' goal of having adequate cash balances to cover a large bill without liquidating investments during a down market.

Most investors have cash balances of $5,000 or more - a figure high enough, in most cases, to cover a year's worth of deductible and miscellaneous services. That leaves only about 14% of accounts (roughly 4.6 million accounts) as potential investment accounts.

Investments

Balances invested grow from $23.8 billion in 2020 to $34.4 billion on 2021 - an impressive +44% increase. The growth rate was an even more impressive +51% between 2019 and 2020.

In terms of percentage of assets invested, the figure grew to 35% in 2021. The comparable figures of percentage of assets invested were 29% in 2020 and 24% in 2019.

More and more account owners (7% by Devenir's estimate in 2021, or 2.3 million accounts) are investing a portion of their balances in stocks, mutual funds, bonds, and other instruments. The average investor has a balance of $19,224.

The 2.3 million accounts with investment balances is an important figure, particularly given the average investor balance. Above, we noted that roughly 4.6 million accounts have balances of $5,000 or more. Simple math indicates that roughly half of accounts with balances of $5,000 or more are investing. This back-of-the-envelope calculation isn't perfect (some account owners with a $2,000 balance may be investing), but it indicates that a large percentage of those who are in a realistic position to invest are in fact doing so. That would suggest that the key to increasing investments is not employee education about the investment opportunity as much as encouraging account owners to increase contributions so that they build balances sufficient to cover immediate expenses and begin to invest.

Investments represents a growing percentage of total Health Savings Account assets. This trend bodes well for account owners, as expected returns (as measured by the average Standard & Poor 500 return of +10.5% annually since 1926) are likely to greatly exceed the 0.01% to 0.50% interest offered on cash in most Health Savings Accounts. In an era of +7% inflation, investments are the surest way to preserve spending power among account owners who are preserving their balances for future expenses.

Other Tid-Bits

Here are some other facts from the 2021 end-of-year report:

• Just over half (50.4%) of HSA owners are covered on self-only medical plans (though they can reimburse tax-free qualified expenses incurred by spouses and tax dependents). The rest are covered on family plans.
• Among employers who contribute, the average contribution is $867, representing 26% of total deposits in 2021. This figure isn't terribly helpful to employers and benefits advisors trying to determine the optimum contribution in their programs, since it doesn't distinguish between self-only and family coverage, nor whether employers are reducing their commitments over time or requiring an employee match to capture the full company contribution.
• About five of every six withdrawals are made with a debit card. Only about 7% are done through billpay. Interestingly, about 4% are still made through a checkbook associated with the account, though fewer and fewer administrators offer this option anymore.
• Average contributions have exceeded average withdrawals by an increasing amount each of the last four years. These data are consistent with the general trend of increasing account balances over time.
• On average, contributions exceed distributions by between $300 and $500 annually. This year's figures are nearly $1,600 in contributions and about $1,200 in withdrawals. Not that these figures measure activity in funded account only. Some HSAs are unfunded because owners are no longer eligible to contribute. Those accounts aren't reflected in these statistics.
• Devenir projects that the 2024 end-of-year report will show 38 million accounts (up 17%, or 5.5 million accounts) and $150 billion in assets (up +53%, or $52 billion). If these projections are accurate, they'll accelerate the trend of assets growth's outstripping the increase in the number of Health Savings Accounts.

The Bottom Line

By any measure, Health Savings Account growth remains strong. The sheer momentum caused by higher increases in the average age of accounts (as the rate of new-account openings slows) will result in higher balances in the average account, more accounts with sufficient balances to invest, and a corresponding increase in total investments.

It's an impressive story.

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