Within five years, six million individuals and families will be using HSAs to put aside more than $79 billion in savings according to the latest analysis by the Bush administration.

These fiscal budget estimates are nearly ten times current reported HSA numbers and represent a significant change in healthcare.

According to industry experts, this means that HSAs are on the verge of a product breakthrough that will make them a major new banking product in the U.S. The numbers are rough, because this is the first time any calculations have been made for the tax impact of HSAs or MSAs by either the White House or Treasury Department, and there is no explanation of how they were arrived at.

Analysis done by Consumer Driven Market Report, HSAfinder.com and others with the aid of congressional staffers makes a good case for an exploding HSA marketplace.

Most of the analysis rests on the Administration’s allowance for “tax deductions” associated with HSA implementation.

For the uninitiated, “tax expenditures” are basically tax breaks, the amount of money given up by a “tax deduction.” In the case of HSAs, this is a critical number. The amount of the tax expenditure is the amount of the HSA deposits multiplied by the average marginal tax rate for HSA taxpayers. Contributions to the HSAs include those from both employers and employees. It may also include any tax-free earnings and early withdrawal penalties.

In the FY2006 budget document, the total HSA/MSA tax expenditures listed from FY 2004 to FY 2010 amount to $15.86 billion. The most important number in the official budget chart is the $620 million in HSA tax expenditures for FY 2004, since it was probably based on MSA experience and 2005-06 tax records. The tax break doubles in 2005, which makes sense given the small base for 2004, then increases fairly conservatively until 2009. For some reason, in 2010, the growth stops—probably to keep the estimate low, although it could be offset by other new legislation (“lifetime savings accounts”).

6.3 Million Accounts

Extrapolating from this number, there will be 6.3 million HSAs in 2010 after five years of growth, using the actual annual growth rates contained in the budget applied to the valid assumption that there were one million in HSAs at the end of FY2004 (September 30).

Published estimates are that there were about 600,000 HSAs at the end of the year, and a few hundred thousand MSAs left over.

You can then translate the 2004 tax expenditure for HSAs into an estimate of how many HSAs it represents. We tried it out by assuming that there were an even million. It worked. On a million HSAs for 2004 the tax expenditure of $620 million comes out to $2,790 per HSA, using an estimated average “marginal” tax rate. We won’t bore you with the reasons, but there was rigorous analysis using 11 or 12 different variables accounting for tax law variations year to year. There is a range of possible tax rates from 20 to 25%, so we used 22.5%. The conclusion is that there were $2.79 billion in HSA/MSA “deposits” in FY2004 for one million HSAs, with an average deposit of $2,790. In later years we added an arbitrary 10% each year to account for re-invested earnings, annual deductible adjustments, and probably a higher level of contribution as HSAs become more familiar to the market. Without this it remains at $2,790 for all seven years.

The bottom line: total deposits into HSAs in their first years on the market from FY2004 through 2010 will be $78.9 billion. Even by the conservative numbers in the budget, HSAs will attract $4 billion per year in bank deposits available to finance medical care.