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Health Savings Accounts Attract Wall St.
By Eric Dash, New York Times
January 27, 2006
When it comes to medical benefits, millions of Americans already have a health insurer. Soon, many will also have a debit card and a bank tied to their medical plan.
Banks, credit unions and money management firms are now quietly positioning themselves to become central players in the business of health care, offering 401(k)-type accounts to cover future medical expenses.
Bank of America, J. P. Morgan Chase, Fidelity Investments and hundreds of others are hoping to capitalize on the latest wrinkle in medical care paid by consumers: health savings accounts, which have been around since 2003 but are moving to the fore of the national agenda in anticipation of the State of the Union address on Tuesday.
These supercharged checking accounts, which must be linked to a high-deductible health insurance plan, allow consumers to invest their own money for current and future medical expenses and have it grow tax-free.
They are the centerpiece of President Bush's plans on health care, just as private accounts were offered as a Social Security fix.
Currently, only about three million Americans have signed up for the high-deductible insurance policy required for such accounts, up from slightly more than one million last March, according to findings released yesterday by America's Health Insurance Plans, an industry group. It is not clear how many of those people have actually opened a linked account. Still, the number is expected to rise sharply over the next five years.
By 2010, more than 15 million Americans, or about 10 percent of all those insured, will have a health savings account, according to an estimate by DiamondCluster International, a management consulting firm.
The average individual's account balance, it projects, will grow from $1,500 today to about $3,500 in 2010. Even if people pull out some or all of their money to pay their medical bills, the ballooning balances may mean that $75 billion or so in new money to manage will soon be at stake.
Banks and others are drawn by the promise of lucrative fees they can generate by offering consumers mutual funds and other investment vehicles as their account balances grow. Most also charge $50 to $75 to set up a health savings account, and they collect perhaps $40 or more each year in maintenance charges and service fees.
Not since the creation of the individual retirement account in the mid-1970's has such a potentially huge mountain of money landed in the lap of the financial services industry.
"Billions of dollars that used to be written in the form of checks with insurance companies' names on them would instead go to credit unions, banks, and long-term investment houses," said Dan Perrin, the publisher of H.S.A. Insider and executive director of the H.S.A. Coalition, a lobbying group backed by 70 small-business and medical industry groups as well as the American Bankers Association. "You know America: you see a financial opportunity and it sets off a gold rush."
Two years ago, not a single major bank offered a health savings account. Only seven small banks had any sort of plan. Today, more than 300 financial services companies, including big banks, are taking deposits or will be soon. About 150 more are on the way. Some of the country's biggest health insurance providers have started their own banks.
To be sure, health savings accounts will make up only a small fraction of earnings at a financial giant like Citigroup. But at a time when deposit growth has slowed and higher interest rates have hurt profits, they represent a steady stream of new income that is increasingly hard to find. Banks are betting that what the administration calls consumer-directed health care catches on.
Supporters say that the discipline and marketing might of financial services giants could spur the adoption of consumer-directed care. Critics argue that the banking industry's involvement only bolsters their case: the accounts are more about wealth than health.
"We already have a large number of retirement savings vehicles in the United States," said Jonathan Gruber, an economist and Treasury Department official in the Clinton administration. "It is not clear why we need yet another tax break for savings for rich guys."
Corporations, of course, want relief from soaring health care costs, and have been steadily shifting more of the burden to their employees. Small businesses were among the first to offer health savings accounts to their employees. But over the last year or so, a number of big companies - from Guidant to Wal-Mart Stores - have started signing up.
Health savings accounts are akin to the private accounts that were proposed to help overhaul Social Security. Much of Wall Street liked private retirement accounts, but their support was guarded because they feared a potential negative reaction.
Banking lobbyists have met with White House officials at least three times over the last year to discuss the rules governing health savings vehicles. But until recently, most have been shy about their interest in such plans. Now, they have established a lobbying group, the H.S.A. Council, and are spending millions of dollars to roll the plans out.
The idea behind the accounts is simple: forced to pay out of pocket for medical care, Americans workers will spend health care dollars more wisely. The way it works is more complex. Americans under the age of 65 with a high-deductible health care plan can contribute tax-free to the new 401(k)-like account as much as $2,700 this year for individuals and $5,450 for families, or the amount of their deductible if it is less. Unlike health reimbursement plans, which were controlled by the employer, health savings accounts belong to employees even if they change jobs.
The money can be used to pay for medical, dental and vision expenses as well as a portion of qualified premiums for long-term-care insurance.
The rest can be invested in stocks, bonds and mutual funds - and grow tax-free. That money would be available to pay for a broad range of health care expenses in the future, and would remain untaxed as long as it was spent on health care. At any time after age 65, money can be withdrawn for any reason without penalty, but the entire amount taken out would be taxed.
For wealthier people, the tax break could provide a generous incentive to build a nest egg for future health care; poorer people with smaller annual contributions could wind up spending all the money they put away during the year.
Geoff Dougall's accounting firm in Beaverton, Ore., is among the thousands of employers that have switched from a conventional health insurance plan to offering health savings account.
"We are very much talking about it as a savings vehicle," said Mr. Dougall, who is giving each of his employees $2,500 this year to cover the deductibles of their health insurance policies.
The savings accounts, in effect, give financial institutions a vital, but behind-the-scenes role in shaping the nation's health care system.
Banks hope to use their close ties with their customers to enter the health insurance market. For now, they collaborate with insurance providers as much as they compete. Health savings accounts must be opened in conjunction with a high-deductible health insurance plan. After choosing an insurance policy, the consumer must pick a bank.
Even though the health plan and savings account are separate products, big banks and insurance companies pitch them together as an "integrated solution" and split the fees. Health insurers keep the premiums; banks retain the investment management fees and the debit card transaction fees. The two split the money earned for opening and maintaining the accounts.
Health insurers, said David Josephs, J. P. Morgan's vice president for health care business development, "are good at explaining benefits."
"They are good at eligibility. They are good at enrollment. Managing risk. Contracting with doctors and hospitals. Banks are good at managing transactions. Managing deposits. Making investments."
"As you look at consumer-directed health care," he added, "it really requires both of those skill sets."
Even without the lucrative investment management fees, bank executives like Daniel Kelly, manager of H.S.A. services at U.S. Bancorp, say health savings accounts are attractive. Banks make money each time a customer swipes his debit card at a doctor's office. Payment processing alone could generate some $2.3 billion over the next five years, the DiamondCluster study estimates.
Some big medical plans have already entered the health saving account arena by starting their own bank.
Four years ago, United Healthcare started Exante Financial Services, a Utah-based bank that allowed it to become the first company to offer its customers the high-deductible health insurance policies as well as savings accounts. In December, the Blue Cross Blue Shield Association said it was planning to charter a similar institution, Blue Healthcare Bank, an online bank.
Executives at both companies say they are not being lured into the banking business by the prospects of wealth management; nor do they plan to offer traditional banking services and loans.
Instead, they say having both products under one roof will allow them to provide better customer service, like more smoothly processing transactions at doctors' offices or quickly resolving billing disputes.
"This has nothing to do with an assets-under-management play," said John M. Prince, chief executive of Exante Financial Services. "There will be huge falloff in people who are trying to play that role. Eighty percent of the money are assets that go right in and go right out."
Just a few years ago, the idea that the titans of health care and banking would be battling for business would have been nearly impossible to imagine.
Even after the Bush administration began pushing for the creation of health savings accounts with the Medicare Modernization Act of 2003, the banking industry mainly stayed on the sidelines. The American Banking Association lent its name to the H.S.A. Coalition lobbying group but did not contribute any money.
Industry lobbyists viewed the idea as a health care issue; they raised questions about its prospects of passing as the 2004 presidential race heated up. Banking executives did not see the profit potential after an experiment with Medical Savings Accounts, aimed at small businesses, failed.
"Put it this way, the impact of this law did not really become clear to them until after it passed," said Mr. Perrin, the H.S.A. Coalition director. Once they understood how the accounts worked, however, the big banks realized the next I.R.A. had landed at their feet.
Now, some financial institutions are urging the Bush administration and Congress to raise the tax-deductible contribution limit to encourage consumers to put more money in their accounts - a proposal that President Bush is expected to endorse in his State of the Union speech.
Banks are already champing at the bit. "We happen to be in the camp that the H.S.A. is a second retirement account to be used for medical expenses," said Nancy Todor, an executive who will oversee health savings accounts when Citigroup introduces them this year.
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