Financial Planning, Retirement

Rising Healthcare Costs And The HSA Advantage

6/29/18 8:00 AM

/iStock-462756183.jpgInflationary pressures in America have firmed recently. For example, the latest data from the Bureau of Labor Statistics (BLS) showed that “core” consumer prices, which exclude the volatile costs of food and energy, have risen by 2.2 percent over the past twelve months. That is the fastest pace of annual growth recorded since January 2017. One of the major drivers of consumer inflation is healthcare, but the cost of medical services has actually grown at a relatively slow rate over the past year-and-a-half.

One possible explanation is 2017’s uptick in the uninsured rate because greater coverage typically has the opposite effect on medical care inflation. Indeed, the number of Americans seeking both urgent and preventative healthcare jumped following the rollout of the Affordable Care Act, including “costlier” individuals with pre-existing conditions, and care providers naturally responded to the sudden spike in demand for services by raising prices. Even if the uninsured rate stays where it is, though, the latest pullback in price growth could be short-lived considering that historically medical costs tend to increase much faster than general consumer inflation.

In fact, the annual pace of growth in healthcare costs has already picked up slightly after falling last September to the lowest level in roughly half a century. For consumers the big takeaway from all of this should be that even though prices are still rising, the current environment is likely as good as it gets in terms of healthcare inflation. As a result, it could be smart to start making some adjustments to your long-term financial planning that account for medical prices rising at a faster rate going forward. Doing so can decrease the likelihood that an unexpected ailment or injury will wind up taking a big chunk out of your retirement savings.

Another way to prepare for potential medical outlays is to utilize a health savings account (HSA), a tax-advantaged savings vehicle that encourages setting money aside for the future. Specifically, an HSA is a tax-exempt trust or custodial account that you set up with a qualified trustee to pay or reimburse certain medical expenses you incur, according to the Internal Revenue Service. The main financial benefits of HSAs are that contributions are deductible from taxable income, contributions can grow (from interest or other capital earnings) tax free, and withdrawals are tax exempt as well as long as used for qualified medical expenses.

HSAs have only been around since 2004 but these savings vehicles are already very popular. For instance, a report released this month by Fidelity Investments showed that a quarter of workers with access to an HSA are currently using one, and that jumps to 46 percent when employers only offer HSA-eligible insurance plans. However, the vast majority of HSA owners were also found to keep their contributions in cash, with only 7.7 percent of account owners investing at least some portion of their savings. That is disappointing but not too surprising since another 46 percent of surveyed HSA account owners said that they were not aware that they can invest their contributions.

What is worse is that on average most account owners are contributing less than half of what they could be to their HSA, according to Fidelity Investments, although contributions tend to be markedly higher when employers offer a 401(k) match. Further, the report found that even after adjusting for income, people who utilize both an HSA and a defined contribution (DC) plan like a 401(k) or 403(b) typically set aside a higher portion of their paycheck for the DC plan than those who do not use a health savings account (10.5% vs. 7.7%). That difference can add up over time, as evidenced by HSA owners having an average of $119,000 more in DC savings.



Sources: U.S. DoL, FRBSL, Fidelity Investments

Post author: Charles Couch