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How to invest in your health care
NEW YORK • You already can invest your retirement money and your kid's college savings on Wall Street. Next on the list: your health care.
A growing number of employees are required by companies to set up special savings accounts to cover part of their medical bills. Over time, they are also encouraged to invest a portion of it in stocks, bonds or a mutual fund, just like they do with a 401(k) or IRA.
Americans now have $18 billion in Health Savings Accounts, a type of plan that allows them to save pre-tax dollars for future medical expenses, according to the Employee Benefit Research Institute, a non-partisan group that studies worker benefits. That's up more than 40 percent from a year ago. The amount of money in HSAs is expected to double by the end of 2015, according to consulting firm Devenir.
"They have nowhere to go but up," says Paul Fronstin, a researcher at EBRI.
An HSA is similar to the better-known Flexible Spending Account. Like in an FSA, an employee puts pre-tax dollars into a special account to use toward medical expenses not covered by insurance, from dental check-ups to prescription drug co-pays.
But the similarities end there. Unlike an FSA, HSAs do not have a "use it or lose it" rule, so the money carries over year to year. A majority of companies who offer HSAs also contribute to the account, more than $1,000 a year for families, according to EBRI. HSAs are also portable. An employee can take their HSA to their next job or save the money for future use. The accounts can also provide significant tax advantages when used correctly.
For workers, HSAs offer flexibility, although they are not appropriate for everyone.
For employers the accounts can provide savings. The plans have been shown to slow the rise in health care costs, or even lower them.
For Wall Street, HSA's are another way to make money. Why? The savings in HSAs can be invested once they hit a certain threshold, typically $2,000.
Nearly all HSA accounts are used in combination with a type of health insurance known as a high-deductible health plan, or HDHP. These plans are also sometimes known as a "Consumer Driven Health Plan." As their name implies, HDHPs have high deductibles, often $1,200 or greater for a single person, or $2,400 for a family.
HDHPs provide coverage for medical emergencies, leaving the day-to-day health care costs to the employee. HSAs can be used along with a HDHP to help offset those day-to-day costs.
When used correctly, HSAs can also provide a triple tax advantage, something even a 401(k) or IRA cannot do. The money put into an HSA is not subject to federal income tax and if the money is invested, any growth is tax-free as well. Any money used toward eligible medical expenses can be tax-free too.
If your employer hasn't offered an HDHP plan yet, it's only a matter of time. By next year, 80 percent of all large employers will offer a HDHP, according to 2013 employer survey by Towers Watson. The vast majority of those HDHP plans will include an HSA, according to the survey.
"Companies are becoming more interested in offering medical benefits that put a lot of the ownership on the employee," says Elizabeth Ryan, head of Wells Fargo's Health Benefit Services.
A 2011 study by the non-partisan RAND Corporation showed that families who were enrolled in a these types of plans reduced their health care spending by 14 percent. However, families also spent less on preventative care.
"The whole idea of these account-based plans is that when people have skin in the game they'll make super-wise decisions regarding their health care spending," says Amelia Haviland, who co-authored the study and is an associate professor in statistics and health policy at Carnegie Mellon University.
Banks have embraced HSAs, and banking industry experts say the plans could become a big business for Wall Street, just as 401(k)s did. Banks earn money just by opening the accounts for employees and charging fees on the debit cards tied to them.
They also earn a fee, typically 1 percent, for managing the mutual funds where people invest HSA money. Of the $18 billion Americans have set aside in HSAs, $2.3 billion will be invested this year, according to Devenir. The amount invested five years ago was just a tenth of that, $200 million.