Jumping into HSAs: Financial institutions expect flood of HSA accounts over the next few yearsKaren LeeEmployee Benefit News • February 2005Banks, having tackled insurance sales, now are diving headlong into the new frontier of health savings accounts.Since HSAs were introduced in December 2003 as part of the omnibus Medicare reform bill, a number of financial institutions - including giants such as JPMorgan, Mellon, Wells Fargo and U.S. Bancorp - have announced partnerships with insurance carriers and debit card manufacturers to offer their own versions of the product.It is difficult to say just how many have added HSAs to their product portfolios, but many local and regional financial companies, as well as the large corporations, have begun marketing them, and the number is growing all the time.HSAs clearly are a burgeoning market, and banks and financial institutions have been eager to take advantage of what is not just a repository for medical funds, but an investment vehicle that some believe could become a 401(k)-like phenomenon. Indeed, the Treasury Department urged banks and credit unions last fall to partner with health insurers and begin offering HSAs, emphasizing how easy it is to provide what officials called "a great new deposit account.""We see a heck of an opportunity as companies are forced to reduce their medical expenses," says Chris Dosland, senior product development manager for Fifth Third Bank of Cincinnati, which launched its HSA business late last fall. "My mailbox fills up on a daily basis with queries. People are scrambling to find HSA providers, and agents are being asked by employers to talk about them. There is significant interest in the business community."A 401(k) phenomenon?Of course, Dosland acknowledges that while there has been significant interest, it has not yet translated into significant enrollment. Many employers currently are staying on the sidelines and monitoring the success of those adventurous enough to offer HSAs to their employees for the 2005 plan year. Although the number of employees enrolled in consumer-directed health plans jumped tremendously in 2004 - almost twice the enrollment of 2003, according to some studies - most of those programs used health reimbursement arrangements instead of HSAs.But most observers and financial professionals expect a flood of enrollees for the 2006 plan year, so the excitement over HSAs will not abate anytime soon. Carl Mercurio, editor of the industry newsletter HSA Market News, notes that while it is still too early to tell whether HSAs will have mainstream cachet, "everybody's getting into this because they think it's going to be a big deal."I think almost everybody will have some kind of HSA product. If this takes off the way 401(k)s have ... a lot of banks and investment institutions will get in."In fact, as of late last year, three more major institutions - Bank of America, Comerica and Wachovia - were reputed to be at least considering making the products available. What is more, Brad Engel, Mellon's national health and welfare product leader, notes that the number of enrollees in the company's HSA measured in the thousands as of the first of the year, compared to hundreds last year.Mellon is expanding its HSA business in other ways as well, by bringing on some 30 new partners, including insurers, third party administrators and health care debit card companies, during the first quarter of this year."We do a great deal of work with health insurers," says Engel. "This supports our role as a financial services organization and a consultant in the health care industry."Katy Henrickson, a senior analyst for Forrester Research's health care and life sciences team who has been following HSA developments, points out that banks' motivations usually are a little more elemental: They want to bring in more assets and more potential customers."If you get consumers who have more of a tendency to go online [to monitor health transactions], you can sell them online services," Henrickson explains, mentioning that those institutions with keen interests in HSAs usually are those who emphasize transactions and technology.Partnering with health plansHSAs, which are offered only in conjunction with high-deductible health plans, are made possible through partnerships between health insurance carriers that enroll employees and administer the plans, and financial institutions that manage the accounts.In its informational pamphlet, Wells Fargo describes the HSA as "a cross between a health flexible spending account, an IRA and a 401(k)." Indeed, there are a number of traits HSAs share with retirement plans, including the provision of a multitude of investment options tailored to investors' styles.Such partnerships are necessary in large part because it is difficult, if not impossible, for banks to track and document expenditures and determine what is covered by the HSA, says Michael White, president of the bank insurance consulting firm Michael White Associates.Some financial institutions, he continues, would rather buy into the HSA market than create a product themselves. Executives at Connecticut's Webster Financial Corp., for instance, announced last fall their intention to buy Eastern Wisconsin Bancshares, the holding company for HSA Bank, for $26 million. The deal, which should be completed by the end of March, would make Webster one of the nation's largest custodians and administrators of HSAs."It's a new product, and people haven't worked out how to fit the pieces together and make money," White says.A gray areaSome observers are wary about what they see as a gray area between the needs of health care and investments. Barry Rosenfeld, assistant vice president of Gallagher Benefit Services division Apex Management Group, expresses concern that account holders, thinking of their HSA money as investments that need to accumulate, will not spend it on the services for which those funds are meant - health care."That's not necessarily a good thing," he says. "It seems like there is a possibility of conflicting goals between those of financial institutions and those of the people who need to spend that money on health care."However, most financial executives explain that education is an important component of the HSA programs. Daniel Kelly, senior vice president of HSA products for U.S. Bancorp's institutional trust and custody division, recognizes that consumers are experiencing a steep learning curve on the accounts. U.S. Bancorp staff have been instructed to teach customers exactly what the accounts are for and the tax implications if, for instance, an accountholder uses the money for the purchase of a plasma television instead of the payment of medical bills.Other financial institutions are piggybacking on health insurers' education efforts, as Mellon has done, or are offering choices between a self-administered brokerage account and a 401(k)-type model where the account owner can pick a suite of mutual funds for automatic investment, as Fifth Third Bank has done.Most bankers are confident that many consumers have developed a sense of when and how to use their health care accounts, and more will do so in the future. Yes, there is no question HSAs are investment vehicles, but bank executives and others believe people do know what the money is for."If people save while they're healthy and use the funds toward their medical expenses when they're retired, they can pull the money out without tax penalties," Dosland says. "If used properly, HSAs are still there for medical expenses. I think it's a great thing to pay for medical costs non-tax." - K.L.
