Banking on HSAs: A new gold rush?

There's a gold rush in the financial industry. Banks, mutual funds and other money institutions are the forty-niners. Health savings accounts are their Sutter's Mill.

Even though HSAs are but a speck of dust in a rushing green river that sustains the financial industry, the projected growth of tax-free accounts into a possible $75 billion in only four years -- from $1 billion today -- has many financiers believing the speck signals gold in them thar hills. If the banks, credit unions, investment firms and even health plans opening up HSA banking and investment businesses are betting correctly, HSA debit cards will soon go from an anomaly to a frequent sight in physicians' offices.

On some level, bankers are in political agreement with HSA proponents. They argue that the combination of a high-deductible health plan with tax-free contributions to a savings or investment account is an effective way to give patients more choice and better management of medical expenses while also controlling health care costs.

"We feel that the health care industry has got to make some changes" in its financing system, said Richard Beck, senior vice president and corporate sales manager at Star Financial Bank, a Fort Wayne, Ind.-based regional bank that entered the HSA market in January 2005. That's exactly one year after HSAs were open for business under the Medicare Prescription Drug Improvement and Modernization Act. (The AMA fought for the inclusion of HSAs in the bill, and its House of Delegates in June 2004 passed a resolution encouraging employers to offer HSAs to their employees.)

But the gold rush is driven by gold, not politics.

"The last time financial institutions were presented with an opportunity like this was the introduction of the [individual retirement account] in 1974," reads "Seizing the HSA Opportunity," a report released in September 2005 by the Chicago-based consultants Diamond Cluster International. "IRAs now hold in excess of $3 trillion in assets, and we believe HSA assets will grow faster than IRA assets did when IRAs were first introduced."

Adds David Harris, who is leading PriceWaterhouseCoopers' medical banking initiative: "It's not often that a new product comes out for banks. Banking is not like the computer industry."

Although right now only 100 to 150 banks offer HSA account services, more institutions by the day are announcing their entry into the market. Small banks looking for a market niche were first, but behemoths such as Bank of America and Wachovia are either entering the market or are taking a serious look at it. Fidelity, the giant mutual-fund company, recently announced that in 2007 it will establish funds specifically for HSA money.

I want my HSA

In an HSA, patients are allowed to contribute a maximum of $2,700 per individual or $5,400 per family, pre-tax, into a savings account, with employers also allowed to contribute. President Bush is advocating that those limits be raised.

Any amount not spent is carried over into the next year. And the next year. And so on. Individuals can put money into whatever HSA plan they choose.

Diamond Cluster's $75 billion estimate assumes that 10% of privately covered lives are enrolled in HSAs, a total of 15 million to 25 million consumers.

Why are Diamond Cluster and others so confident in the growth of HSAs? "Because consumers are calling, saying, 'Do you have an HSA?' " Harris said.

Businesses large and small are struggling with health care insurance premiums that have steadily increased by double-digit percentages annually over the last half-decade or so. But bankers say it's the smaller businesses, including physician practices, that have been more aggressive about asking how they can get an HSA set up.

"They hate Anthem and United as much as doctors do," said Brian Jacobs, MD, a Fishers, Ind., solo internist. Dr. Jacobs has started an Anderson, Ind.-based business, Healthmatch, that links HSA banking and health plan services in packages to sell to small- and medium-sized businesses.

Employers have discovered there's cost savings to be had in HSAs. A Mercer Human Resources Consulting survey of 88 employers who offered HSAs or other consumer-driven health plans in 2004 found they paid 17% less in premiums compared with PPO coverage -- $5,233 per employee versus $6,095.

According to a Kaiser Family Foundation survey, 27% of employers that did not offer an HSA plan expected to do so in 2006. America's Health Insurance Plans, the association of the health insurance industry, reported in January that 3 million health plan members held HSA-eligible health plans, triple the total from only 10 months ago.

Beck said Star Financial, Dr. Jacobs' banking partner in Healthmatch, couldn't roll out its HSA fast enough. When HSAs were approved, "we had clients coming to us saying, 'Are you going to do this?' " The bank began setting up a system, but "by mid-2004 we had pressure from clients to roll it out," he said. "But it wasn't until January 2005 we felt confident we had our ducks in order."

Discovering gold

For another idea why financial institutions are rushing enthusiastically into handling health savings accounts, consider the State Bank of Howards Grove, the HSA banking industry's equivalent to James Wilson Marshall, the discoverer of gold at Sutter's Mill in California.

The two-branch bank, tiny even for its hometown of Sheboygan, Wis., jumped early onto the consumer-driven health care train after its CEO attended an industry workshop on the subject -- one most seminar attendees abandoned in favor of lunch. The bank's executives, never intending to outdo the bigger banks in more traditional services, figured this might be an opportunity to make their own niche. So in 1997, the State Bank of Howards Grove became a test site for medical savings accounts, which under federal legislation allowed a limited number of self-employed or small business-employed Americans to put money for health care aside, tax-free, in an account linked to a high-deductible health plan.

The bank continued to believe in consumer-directed health care even when others didn't, acquiring the MSA business of bigger banks. When Congress took the enrollment limits off the now-renamed health savings accounts, and allowed more money to be put into them, the State Bank of Howards Grove already had a system in place, while other banks were just starting to figure out whether this was a good idea.

By September 2004, when Connecticut-based Webster Financial paid $26 million to acquire the state bank's parent, Eastern Wisconsin Bancshares, the State Bank of Howards Grove had $141 million in balances -- $95 million of them in HSAs, making it the nation's largest HSA bank. It had attracted such clients as the Government Employees Hospital Assn. and Mutual of Omaha. In fact, the bank set up a separate company. The appropriately named HSA Bank, as of late last year, had grown to around $230 million in balances, representing 140,000 individual accounts, Webster reports.

Webster spun off the two Sheboygan branches -- it bought the bank just for the HSA business.

"We have many physicians who have accounts with us," said HSA Bank President Kirk Hoewisch. "They like the concept. Physicians like the fact that consumers can now shop on quality and price. It seems to be preferable to the HMO option."

Spinning gold into more gold

Diamond Cluster estimates that, based on its $75 billion projection, HSA accounts could generate more than $450 million annually in account set-up and management fees, $800 million in asset management fees and more than $1 billion in transaction fees.

Adding other account fees, "financial institutions have the potential to capture $3.5 billion in revenues driven by account and asset management fees," according to Diamond Cluster's report. Hence, this is why health plans such as UnitedHealth Group and the BlueCross BlueShield Assn. have set up their own banks.

Those numbers could change as more competition enters the HSA field. Information Strategies, a marketing firm targeting small businesses and operator of HSAFinder.com, an HSA information site, reported that the average set-up fee for an HSA had declined to $25 in January from $48 in 2005. SussexBank in New Jersey, in a Jan. 23 news release announcing its HSA division, said its accounts would carry no set-up, monthly or annual fees.

But even if fees go down, banks still expect HSA accountholders to generate income. Star Financial, for example, has only 500 accounts with $900,000 in deposits. But in the bank's view, that's a batch of new potential customers for checking accounts, home loans or car loans. Or there are existing customers who won't leave the bank in search of an HSA, meaning that's less money Star Financial has to spend to woo new customers.

The bigger money, though, comes for banks when customers don't spend their HSA money. As with any asset, banks can use the money in HSAs to underwrite loans or other business. Or, a bank can steer the account into a mutual fund or other investment and make money managing that account.

"We can use the money to make more money," said Nav Ranajee, vice president of health care strategy for LaSalle Bank in Chicago. He is leading the bank's consumer-directed health project, which plans in the next few months to start a large marketing push for its own HSAs.

PriceWaterhouseCoopers' Harris points out that banks aren't hoping that their customers avoid care. But he says it could be financially advantageous for consumers to use HSA money to build their investments, rather than spend a few dollars here and there from their HSAs on office visits.

The banks already in the HSA business say starting it up is not as easy as grabbing a pan and heading for the river. There are restrictions on the accounts, special tax filings for the banks, disclosures to customers for every distribution and contribution, setting up Web sites and automatic dispersals of money ... the list goes on. "Essentially, [the regulation] is like an IRA," Beck said.

And the system isn't nearly as complicated as banks would like it to be. Like many physicians, banks would like to see doctors and plans be willing to publish their fees so the banks can get involved in automatic adjudication, meaning that instead of the physician going back to bill the patient, everything is paid for and settled up front. (That could get banks more into the payment processing part of the HSA business, another potential revenue stream.)

Dr. Jacobs' Healthmatch doesn't want just to sell HSAs to businesses; it also wants to get physicians to post their payment information, and even allow patients to rate doctors on a 1-to-10-point scale. That's the kind of information HSA advocates say is necessary for the accounts to work as intended.

"There has to be transparency on the front end, but I see no short-term fix for that," Ranajee said. "We can give [the system] tools, but we can't change the very nature of how health care operates."

Still, even just providing the tools is incentive enough for banks to jump into the HSA gold rush. After all, while miners panned for gold, the people who rushed to California to sell pickaxes and other equipment made out quite well.