How to invest in your health care

[September 09, 2013]  NEW YORK (AP) -- 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 nonpartisan 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 nonpartisan 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 preventive 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.

Devenir's President and Co-Founder Erik Remjeske estimates that HSAs have generated revenue of about $200 million for the industry in the past year, including all the fees from investing to administration.

Wells Fargo has been offering HSAs since they were created 10 years ago as part of the 2003 Medicare overhaul. Wells Fargo's Ryan says the bank handles more than $1 billion in assets in HSAs, spread across 400,000 accounts. While most of Wells business is handling HSAs for employers, there is a growing business of individuals opening the plans, Ryan says.

"They may have purchased insurance on their own, and they may already be banking with Wells Fargo, so it's a natural progression because they have other financial products with us," she says.

Of the people who have an HSA, 56 percent are below the age of 45, according to a 2012 survey by JPMorgan Chase, which also offers HSA plans. Only two percent of JPMorgan's customers over 65 have an HSA.

Their overall use remains small. Industry observers say HSAs have two large hurdles to overcome: Most people find HSA-HDHP plans confusing or believe the plans don't offer enough coverage, and HSAs can only be used with high-deductible health plans, restricting their use.

If you get an HSA, it should not be used the same way as an FSA, experts say.

FSAs are designed to be used up each year. While it's OK to spend a part of your HSA, the long-term goal should be saving for future medical expenses.

Experts warn that HSAs are not a good choice for individuals who are chronically ill because those people will burn through the money, eliminating a chance to invest it.

Once the HSA reaches the $2,000 threshold, it can be invested. However, it's important to invest HSA savings more conservatively than in an IRA or 401(k), experts say. Medical expenses can come up unexpectedly and you may need the money quickly.

Unlike a FSA, HSAs carry over year to year, so any money put in is yours to keep. If you reach 65 years old and find yourself with too much money in an HSA, you can start using it for non-medical expenses. However, you'll lose the tax-free withdrawal benefit and will have to pay income tax on it.

Keep at least a portion of an HSA equal to your health care plan's deductible in cash or a money market fund, experts say. That way, if the stock market falls, at least the amount needed to cover your deductible won't be at risk.

"Know that what you're investing is part of your family's health insurance," says Carnegie Mellon's Haviland. "You don't want to gamble."

[Associated Press; By KEN SWEET]

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