Tyler
The comparison is staggering—major corporations like Starbucks and General Motors spend more on health insurance than they do on their most essential raw materials, coffee beans and steel. This become less surprising once you consider that employers, on average, pay for 80% of their employees’ premiums—a cost which is growing at nearly double the rate of inflation. Clearly, employers are facing an urgent need to reduce their healthcare spending.
From traditional fee-for-service (FFS) to point-of-service (POS) plans, health insurance models in the U.S. have evolved, and new products continue to emerge with hopes of curbing annual healthcare expenditure growth to match the rate of inflation.
A common strategy for employers to combat rising costs—while also providing employees with the benefit of consumer choice—has been the shift toward offering high-deductible health plans (HDHPs) with a savings option (SO).
For 2025, the Internal Revenue Service (IRS) defines an HDHP as any plan with an annual deductible of at least $1,650 for an individual or $3,300 for a family. These plans aim to incentivize thoughtful consumption of health services by shifting first dollar health expenses from payer to consumer. By enrolling in these plans, individuals are expected to pay the full allowed cost (i.e., billed charges minus any insurer discounts) for most medical and pharmacy services, up to the plan deductible.
To lighten the out-of-pocket burden that HDHPs place on their enrollees, health policymakers introduced tax-advantaged savings tools, namely Health Reimbursement Accounts (HRAs) and Health Savings Accounts (HSAs). This article will focus on HSAs, which are more prevalent and widely favored over HRAs due to their contribution structure and portability.
Built to accompany HDHPs, HSAs were made a permanent feature of the U.S. tax code in 2003 via the Medicare Modernization Act (MMA). HSAs allow individuals or families to save pretax dollars for future medical expenses. These accounts differ from HRAs in that deposits can be made by employers and employees up to the annual contribution limit—set as $4,300 for individuals and $8,550 for families in 2025. This joint contribution structure gives enrollees more ownership over their savings. Unlike HRAs or other traditional healthcare savings accounts, unused funds in an HSA never expire and can rollover to new employers.
If individuals choose to deposit through an employer’s payroll process, their contributions are deductible from payroll and personal income taxes. Once placed in an HSA, funds can be invested and withdrawn on a tax-free basis, so long as the income earned is used for covered medical services. If distributions are used for non-qualified expenses, they face a regular income tax and an additional 20% penalty.
HDHPs, paired with an HSA, are designed to encourage individuals to take greater responsibility in controlling their healthcare costs, while providing a tax-advantaged solution to cover high out-of-pocket expenses. In theory, having “skin in the game” leads to individuals becoming more price-conscious and selective in the care they seek.
Examples of expected consumer behavior include selecting more appropriate treatment venues, choosing generic over brand-name prescription drugs, seeking care from higher-quality providers, and avoiding unnecessary care altogether.
These cost-conscious decisions benefit both consumers and payers, as reflected by analyses of these plans that highlight lower premiums and reduced overall spending. One such analysis, from Kaiser Family Foundation’s 2024 Employee Health Benefits Survey, revealed a notable gap in average annual premiums between HDHPs with HSAs and non-HDHP/SO plans. The average annual premiums for HSA-qualified HDHPs were $7,982 for individuals and $23,436 for families, both significantly lower than their non-HDHP/SO counterparts. Even after accounting for employer HSA contributions, HDHPs with HSAs remain more cost-effective for employers than traditional health insurance models.
Along with lower annual premiums, this coverage structure may improve spending habits. This 2010 study analyzed more than 75,000 members over three years and found that HSA enrollees spent between 5-7% less than non-HSA enrollees, with the most significant reductions occurring in the first year of enrollment. These findings suggested that HSAs encourage initial cost-conscious behavior, particularly in outpatient services and prescription drug spending.
While reduced utilization often cuts short-term costs, the study also raised concerns that some individuals may choose to forgo necessary care due to higher out-of-pocket expenses. Consumers avoiding necessary care is an obvious issue—and one that could lead to worsening health conditions and higher costs in the future.
To modify this behavior, employers could decide to offer higher contributions contingent upon receipt of preventative care actions taken by employees. Bearing the brunt of these immediate costs could prevent future hospitalizations and other costly health events.
Additionally, large employers should advocate for advancements in health policy that expand the definition of preventive care. IRS notice 2024-75, released on October 17th, 2024, expanded the list of preventive care benefits covered by an HDHP without required deductible spending to include various contraceptives, breast cancer screenings, continuous glucose monitors, and more. Notices like these reflect policymakers’ commitment to enhancing preventive care access and better long-term health outcomes. Employers should lean into this narrative and push local representatives to widen the umbrella for preventive care to encourage greater utilization of these services.
Other significant concerns exist regarding low individual utilization and contributions to HSAs. In a national survey of 1637 respondents, approximately 67.5% of adults enrolled in an HDHP did not have an HSA. Among those who did, more than half (~55.0%) had not contributed to it in the last 12 months. Individuals with lower levels of education or health insurance literacy were less likely to have made contributions. Providing clear, accessible information about the benefits and mechanisms of HSAs can empower employees to make informed decisions.
Without HSAs, the first dollar health expenses of HDHPs may be too burdensome for some consumers. A 2017 Federal Reserve Board report indicated that ~40% of adults would not be able to cover a $400 unexpected expense. Deductibles for HDHPs exceed this number by a wide margin, leaving some enrollees in danger of severe financial distress.
Employers can address these challenges by implementing strategies like initial account contributions and matching deposits. Providing financial contributions to employees’ HSAs can significantly enhance participation and alleviate the burden of high out-of-pocket costs. Similar to retirement savings plans, offering matching contributions can also motivate employees to contribute more to their HSAs.
Although education can address misconceptions and highlight the tax advantages and long-term savings potentials of HSAs, it should be noted that these motivating factors are less impactful for poorer enrollees. Those with lower incomes are often more focused on immediate expenses rather than saving money for future healthcare costs, and the tax advantages may not be as enticing for those already in a lower tax bracket. In these situations, employers should seek to emphasize the matching contributions and preventative services available to enrollees at no added cost.
HDHPs with HSAs offer a promising solution to rising healthcare costs but require proper plan management to deliver their anticipated results. Successful implementation of these plan designs requires enrollees to take full advantage of their tax-advantaged savings option. The downstream effects of thoughtful healthcare spending can have major benefits for employers. Controlling employee healthcare costs means Starbucks can focus on coffee beans, General Motors can focus on steel, and your business can focus on its core competencies.
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