HSAs and FSAs are designed to give consumers control and clarity over their healthcare spending – why isn't that happening?

Congress created health savings accounts and flexible spending accounts to give Americans control over their health care spending. The purpose of these accounts is to allow individuals to directly pay for their care using pre-tax dollars, allowing them to save money in the process. Although most health care plans have included FSAs and HSAs in their offerings, most Americans still feel uncomfortable with how to use them. But the fundamental problem here is not a lack of awareness. This is a lack of utilization.

The financial implications of this issue are clear. The Employee Benefit Research Institute found that nearly half of FSA participants lost some FSA funds in 2023, with an average loss of $422 per person. These losses represent revenue that consumers have set aside for health care but cannot successfully capture until the system reclaims it. When one of our main benefits regularly results in people losing their own money, that's a design issue, not an individual user issue.

A large part of this problem is historical. FSA was established in the late 1970s, when benefits and health care were employer-mediated. Obtaining the required benefits requires going through an HR department and a compliance-driven management system. Then, when HSAs emerged in the early 2000s, they represented a shift in philosophy toward consumer-directed health care, where the account now belonged to the individual rather than the employer. However, the infrastructure around these benefits never developed. While the consumer does become the financial owner of the account, they still must abide by the employer-era rules of previous decades in order to use the account.

There is widespread frustration. As the Washington Post reports, Americans struggle to know what spending qualifies for their accounts, while unused dollars quietly expire (about $4.2 billion annually). As Med City News points out, health care transparency reforms are critical to showing consumers the price of the care they are receiving. However, this transparency alone will not increase consumer confidence if the process of activating payments remains complex.

If HSAs and FSAs work as originally intended, the rising out-of-pocket costs faced by most Americans will be addressed with increased financial fluidity and agency.

However, we see the opposite happening. More than half of U.S. workers are covered by high-deductible health plans, meaning millions of people pay the initial thousands of dollars in medical costs out of their own pocket. Yet they are forced to navigate insurance company rules and administrative portals before they can access funds already set aside for their care.

This is the stage where the interest structure collapses. A mechanism designed to give a person autonomy over their care becomes a laborious process that increases friction and inhibits engagement. While an FSA or HSA account is considered a financial safety net of sorts, the rules and mechanisms surrounding it instead leave users feeling unsure, second-guessing, or worried about having their spending rejected. The result of this framework is uncertainty, not empowerment.

The market's reaction reflects the growing frustration with this structure, including the increasing popularity of direct payments options, which have doubled in the past five years. The increase in direct wages does not suggest that Americans want to abandon insurance altogether. This reflects the growing gap between many people’s financial responsibilities and financial institutions. When consumers pay medical bills out of pocket and don't have easy access to their health savings, they look for models with more direct transactions.

America’s next welfare innovation won’t come from adding additional savings accounts or incentives. Instead, it will be driven by replacing traditional management design with a consumer-centric access model. HSAs and FSAs don't need to be reinvented. They just need to be able to be used in real time and in a way that matches the way we all already make financial decisions elsewhere in our lives.

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