Do HSAs and FSAs Actually Save Employees Money?

Health savings accounts (HSAs) and flexible spending accounts (FSAs) could potentially lead to higher spending for both employers and their employees, according to a new study by New York University (NYU) published on Sept. 20.

Authored by Sherry Glied, dean of NYU’s Robert F. Wagner Graduate School of Public Service, and Dong Ding, an associate research scientist at NYU, the study of 17,038 families found that HSAs can increase families’ total out-of-pocket spending on healthcare by more than $500 per year. Additionally, FSAs could potentially push families’ out-of-pocket spending by about $500 per year and their health plans’ spending on care by more than $1,500 per year. (For its purposes, the study used family-level data from the Medical Expenditure Panel Survey from Jan. 1, 2011, to Dec. 31, 2019. Data was analyzed from Dec. 1, 2023, to April 30, 2024.)

What the Study Revealed

As a refresher, according to the U.S. government website HealthCare.gov:

An HSA is a type of savings account that lets participants set aside money on a pre-tax basis to pay for qualified medical expenses. By using untaxed dollars in an HSA to pay for deductibles, copayments, coinsurance and some other expenses, participants may be able to lower their out-of-pocket healthcare costs.
An FSA is an arrangement that lets participants pay for many out-of-pocket medical, dental and vision care expenses with tax-free dollars. Allowed expenses include insurance copayments and deductibles, qualified prescription drugs, insulin and medical devices. FSA accounts may also be used toward eligible dependent care expenses.

Although the study did not explore whether employees choose an HSA/FSA for a given year due to a particular medical procedure, it did find families with FSAs were more likely to utilize all types of services, which is associated with higher insurance-paid expenditures and premiums, compared to families with HSAs.

“We did not look directly at this question, but we were concerned that this kind of self-selection behavior might be driving our result,” Ding said. “In our statistical analyses of the effects of HSAs/FSAs on spending, we conducted a series of tests and show that our overall results are not driven by this kind of self-selection behavior. … This is likely strongly related to the use-it-or-lose-it rule linked to FSAs.”

On the matter of whether spending more with an HSA/FSA potentially results in better preventive care or other treatment paths, Ding noted that they didn’t explore the exact types of services people used with their accounts. However, it found that those holding HSAs and FSAs did make more office visits.

“It’s possible that some of those were for preventive care, although for much of the period we studied, preventive services were available without cost-sharing to both account holders and those without accounts,” she said, noting that the study did find HSAs and FSAs were associated with an increased use of dental and vision services but not significantly associated with in-patient spending or emergency room use.

According to Ding, their findings also suggest tax-favored HSAs — which can increase FSA or HSA spending because they primarily benefit high-income families — can reduce the equity of the healthcare system while not improving its efficiency.

The study found approximately 30% of U.S. families with employer-sponsored health insurance, disproportionately drawn from high-income groups, benefit from HSAs and FSAs. Those with FSAs spent 20% more annually on healthcare, primarily due to higher insurer-paid expenses.

Participation in FSAs is associated with higher healthcare expenditures and tax expenditures, Ding said, while HSAs are not typically associated with reduced expenditures.

“Unfortunately, there are no free lunches in the healthcare system,” the study reported. “The additional tax-favored spending generated by account holders is a benefit to them, but our results suggest that it does not increase and may reduce the efficiency of the healthcare system. Policymakers should be cautious about expanding such accounts further.”

Ding said one solution to help lower costs is a tax policy that could be better targeted to enhance insurance coverage and healthcare accessibility.

Controlling Health Expenses

With healthcare costs on the rise, contributing to an HSA or FSA can help employers and employees lighten the burden, said Sara K. Taylor, the senior director for employee spending accounts at WTW.

Investment firm Charles Schwab, in an article on its website, called out the “triple tax advantage” of such accounts, stating:

HSA contributions are federally tax-deductible, reducing participants’ taxable income. Depending on where they live, participants may also get a break on state income taxes.
Assets in an HSA can potentially grow federal tax-free.
Withdrawals for qualified out-of-pocket expenses are also tax free.

When determining how much to contribute to an HSA/FSA, most employees try very hard to estimate how much they are going to spend on out-of-pocket expenses, Taylor explained.

“When they’re enrolling or how they use their accounts during the year doesn’t suggest employees are intentionally spending more on healthcare simply because they contribute to an FSA or HSA,” she said.

Instead, employees are being deliberate in the amount they contribute to these accounts, she said.

“Often, last year’s spend is often the basis for their estimate,” Taylor said. “Are they going to spend more, less or about the same as last year?”

Taylor also noted total rewards professionals should keep in mind most employees look at HSAs and FSAs as a budgeting tool for healthcare expenses they expect to incur. Therefore, employers should consider these key questions when offering such a benefit in their rewards strategy:

How does the organization approach or balance direct compensation vs. benefits?
Why is the organization offering these types of benefits in the first place?
Many organizations offer FSAs and HSAs to attract and retain talent and many employees expect these types of accounts to be available to them. Would the employer have a competitive benefits package without an FSA and/or HSA?
How does any potential increase in spend from employees participating in these accounts impact the organization’s total overall healthcare spend?
Is the potential increase material or not? Does any cost savings from offering a high-deductible health plan (HDHP) offset the potential increase in spend for employees contributing to an HSA?

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