HSAs And FSAs Were Designed to Give Consumers Control and Clarity of Their Healthcare Spending — Why Isn’t This Happening?

Congress created Health Savings Accounts and Flexible Spending Accounts to empower Americans with control over their healthcare spending. The accounts were designed to allow individuals to use pre-tax dollars to pay for their care directly, enabling them to save money in the process. And while most health care plans have incorporated FSAs and HSAs into their offerings, the majority of Americans still don’t feel comfortable with how they should be using them. The underlying issue here though is not a lack of awareness. It is a lack of utilization. 

The financial impact of this issue is clear. The Employee Benefit Research Institute found that nearly half of all FSA participants forfeited some of their FSA funds in 2023, losing an average of $422 per person. These losses represent income that consumers set aside to spend on their healthcare, but were unable to successfully access them before the system reclaimed them.  When one of our major benefits frequently leads to people losing their own money, it is a design issue and not an individual user issue.     

A large part of this problem is historical. FSAs were created in the late 1970s during an era when benefits and healthcare were employer mediated. Accessing the benefits required going through human resources departments and compliance-driven administrative systems. Then, when HSA later emerged in the early 2000s, they represented a philosophical shift toward consumer-directed healthcare with the account now belonging to the individual, and not the employer. However, the infrastructure around the benefits never evolved.  While the consumer did become the financial owner of the account, they still had to navigate the employer-era rules of previous decades to use it. 

The frustration is felt widely. As the Washington Post has reported, Americans struggle to understand which expenses qualify for the accounts, while unused dollars quietly expire (to the tune of $4.2 billion annually). And as Med City News has noted, transparency reforms in care are critical to show consumers the price of the care they are receiving. However, this transparency alone won’t create consumer confidence if the process of activating the payment remains convoluted.   

If HSAs and FSAs were functioning as originally intended, the rising out-of-pocket costs faced by most Americans would be met with increased financial fluency and agency. 

However, we have seen the opposite occur. More than half of employees in the U.S. are covered by high-deductible health plans, meaning millions of people are paying the first several thousand dollars of their healthcare costs themselves. Yet, they are forced to navigate insurer rules and administrative portals before they are able to access the money they have already set aside for their own care.

This is the stage at which the benefit structure collapses. A mechanism that is meant to empower one’s autonomy over their care, becomes a laborious process which adds friction and inhibits participation. While the FSA or HSA account is held up as some kind of financial safety net, the rules and mechanics around it instead make users feel unconfident, second-guessed or in fear of their spend being denied. The consequence of this framework is uncertainty, not empowerment. 

The market is responding in ways that reflect the increasing frustration of this construct, including the growing popularity of direct-pay options which have doubled in the past five years. This growth in direct pay isn’t an indicator that Americans want to completely abandon insurance. It is a reflection of the widening gap for many between their financial responsibility and their financial agency. When consumers are paying out-of-pocket for their care and aren’t able to easily use their own health savings, they are looking for models where the transaction is more straightforward. 

The next innovation in benefits in the U.S. won’t come from adding additional savings accounts or incentives. Instead, it will be driven by replacing legacy administrative design with a consumer-centered access model. HSAs and FSAs don’t need to be reinvented. They just need to be usable in real time and in a way that matches how all of us are already making financial decisions everywhere else in our lives.

This post appears through the MedCity Influencers program. Anyone can publish their perspective on business and innovation in healthcare on MedCity News through MedCity Influencers. Click here to find out how.