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Thursday, May 17, 2012
Feature: March 2007
Banking on HSAs
A revolutionary form of coverage could be very good for the financial services industry
Story by Ed Simonsen
As medical expenses continue to rise and insurance premiums mirror those increases, employers, entrepreneurs and individuals not covered by company benefit plans are looking for insurance alternatives. And annual premium hikes of up to 25 percent are forcing many to reduce their managed-care coverage and even to drop out of the system altogether.
The latest data released by the U.S. Census Bureau puts the number of uninsured Americans at a record 46.6 million in 2005, up 5.4 million from 2001. The number today may be closer to 48 million. Congress, with the help of insurance professionals, has been working toward a solution to this problem, and its latest proposals may be good for underinsured Americans, good for insurance carriers, and very good for America’s banking industry.
Previous attempts to control the cost of care and insurance in the form of health-maintenance organizations,
preferred-provider organizations, medical spending accounts and flexible spending accounts addressed certain problems over the years, but created others as well. All the while, costs associated with healthcare continued to rise.
But now, Congress has endorsed a plan to relieve some of the financial pain in America’s critically ill healthcare system through the pairing of high-deductible health plans offered by insurance companies and health savings accounts administered by financial institutions.
“HMOs and other managed-healthcare
plans have been well-entrenched for years, especially in California,” says Kevin Dunn, president of banker benefits for the California Bankers Association.
“But premiums have increased to a point that HDHPs are now attractive to employers who wish to offer reasonably priced health coverage to their employees,” Dunn continues. “With an HDHP, an employee can make contributions to an HSA and receive significant tax benefits. Employers can even choose to help fund employee deductibles with savings from the lower premiums. Making these HSAs available to businesses and individuals is another way for banks to achieve their goals of embracing the financial requirements of their customers and increasing assets under management.”
Health savings accounts were created by the Medicare Prescription Drug Improvement and Modernization Act of 2003. They were designed to be paired with high-deductible health plans, which can offer lower premiums by providing catastrophic insurance benefits only after a relatively large deductible has been met.
Subscribers choose the deductible size that suits their needs. Anyone with a qualified HDHP can open an HSA at a bank or credit union and make tax-free contributions to the account to be used for out-of-pocket expenses at any time in the future.
Any adult under the age of 65 and covered only by an HDHP with a deductible of at least $1,100 (or $2,200 for a family) and an annual cap on out-of-pocket expenses of $5,500 (or $11,000 for a family) may establish and contribute to an HSA.
Contributions can be made by an individual or a family either directly to their own account or through their employer’s cafeteria plan, a type of flexible spending account. Employers can also make tax-free contributions to employees’ accounts. In 2007, taxpayers may contribute an amount up to their HDHP deductible, but no more than $2,850 for singles and $5,650 for families. Individuals 55 years and older can add an extra “catch-up” contribution of $800 this year as well.
HSA funds can be withdrawn, tax-free, at any time to pay for qualified medical expenses, or saved and invested to accumulate tax-free interest or returns. Unlike flexible spending accounts, the funds are never lost if they go unused in the year contributed, but continually roll over for use in following years.
New legislation also allows a one-time transfer of funds from an existing flexible spending or individual retirement account into a health savings account. (HSAs are not intended to replace IRAs, and contributing to one does not disallow participation in the other.) As with flexible spending accounts and IRAs, withdrawing funds from HSAs for reasons other than qualified medical expenses results in tax consequences and a 10 percent penalty. The penalty doesn’t apply after age 65.
This could be an attractive option for those who are healthy and do not need regular medications or medical treatments. The strategy, however, has not yet attracted the attention of a substantial number of employers and workers. According to a Harris poll taken in November, only 5 percent of individuals with employer-sponsored health coverage planned to be enrolled in an HDHP and an HSA in 2007. This may be due to the public’s familiarity with HMO and PPO plans and to the relatively complex account set-up procedure of HSAs.
“Making HSAs available to businesses is another way for banks
to increase assets.”
— Kevin Dunn, president of banker benefits, California Bankers Association
But the U.S. Department of the Treasury projects that by 2010, the number of HSA policies in America will grow to 21 million, covering 40 million to 45 million people, and that proposed legislation to increase flexibility in funding these accounts could elevate those numbers by as much as 50 percent.
Even though the number of HSA holders is still relatively small, analysts estimate that this group has already invested billions of dollars, according to data collected from more than 60 financial firms, including Wells Fargo, JPMorgan Chase and the Principal Financial Group.
When the Treasury Department’s projections are factored in, this new group of savers looks like a ground-floor opportunity to the financial services industry. Diamond Management & Technology Consultants, based in Chicago, estimates that by 2010, HSAs will generate $800 million in management fees and $1.2 billion in transaction fees annually, with $75 billion in assets managed.
A number of large national banks moved quickly to offer health savings accounts after they were signed into law. Wells Fargo began offering the accounts in mid-2004. “This was a top-of-mind issue for companies because of the legislative agenda and the cost of healthcare at the time,” says Jose Becquer, executive vice president and group head of Wells Fargo Health benefit services. “People want choices and control. HSAs represent an alternative not being offered in other vehicles today, an opportunity with tax incentives to save for health and long-term-care expenses.”
Wells Fargo has seen steady growth since it began offering HSAs, with account balances averaging in the $1,300 to $1,500 range. “We’re approaching 100,000 accounts and are about to reach $100 million of assets under management. HSAs are growing five times faster than IRAs,” says Becquer.
Bank of America was not part of the initial wave of banks to make health savings accounts available, but it began offering employer-based accounts in August 2005 and retail consumer accounts in June of last year. As it listened to market demands, the bank heard increasing numbers of customers asking for healthcare-related solutions.
“We deal mostly with employer groups, but we see increasing interest from individuals as they become more comfortable with the product,” says Justin Raniszeski, senior vice president of consumer direct healthcare products for the bank.
“This is an immature market,” he continues. “We plan to conduct a detailed demographic study this year, but we expect HSAs to be a popular product, especially among small businesses that have been hard hit by year-to-year premium increases. They are not a silver bullet, but they do offer a compelling argument for many people, and the number of accounts is steadily increasing.”
This compelling argument is not lost on the smaller regional and community banks that serve many neighborhoods in the Sacramento area. “We don’t offer health savings accounts now, but we’re following healthcare issues closely,” says Tom Meuser, chairman and CEO of El Dorado Savings, a community bank with 33 locations and $1.4 billion under management.
“We see a long-term life to HSAs, and the tipping point for us is not far off.”
— Greg Patton, president, American River Bank
“Our management team is continuously looking at what our branch managers are hearing from customers,” Meuser says. “We pay attention to what they ask for and are very sensitive to anyone leaving us because of services we do not offer. Customer interest in HSAs is picking up, but we don’t see it taking off yet.”
This evaluation is echoed by Greg Patton, president of American River Bank, part of American River Bankshares, a $600 million institution with 12 locations in Sacramento, Placer, Sonoma and Amador counties. “These types of accounts have not yet reached the community-bank level. The larger banks, in alliances with carriers writing the healthcare plans, have captured the market. Though we don’t offer HSAs today, we are on the cusp. We see a long-term life to them for banks, and the tipping point for us is not far off,” says Patton.
These alliances between banks and insurance carriers have been a major mechanism for spreading the word about the HSA option. Blue Shield of California offers a variety of high-deductible plans for employer groups of all sizes, right down to companies of two employees, and then directs subscribers to Wells Fargo for their health savings accounts.
The number of these partnerships between insurers and banks is increasing, and some institutions have multiple partners. Wells Fargo has agreements with over 40 carriers nationwide. This strategy is proving effective as insurers and banks attempt to educate consumers and take some of the complexity out of the process, a major obstacle to converting consumers from managed-care plans.
Consumers are also learning about and acquiring health savings accounts from a third participant group in this evolving marketplace. Firms such as Sterling HSA, in Oakland, act as administrators and provide accounts for their clients using banks to manage the funds contributed.
“Sterling HSA sets up the account, issues a debit card for qualified medical expense payments, reviews and archives receipts and explanation-of-benefits statements, and provides documentation for the client and the IRS,” says Darrell Perkins, director of sales for Northern California. “HSAs have not come into the mainstream yet, and it is difficult to say when that will happen. Perhaps in 2008 or 2009. But in five or 10 years, everyone will have a sense of the basics, just like we have today about IRAs and 401ks.”
Sterling HSA and other administration firms are talking with community banks in the Capital Region. “The California Bankers Association is negotiating with administrators and banks to form an aggregation that will spread costs across multiple banks,” says Kevin Dunn of the California Bankers Association. With help from HSA-administration firms, smaller banks will be able to offer custodial accounts as their customers begin to request them, and in this way compete with larger national banks.
Last year, Placer Sierra Bank announced its plans to launch an HSA program as part of a rebranding initiative to bring all five of its member banks under the Placer Sierra name, which manages assets of almost $2.8 billion.
In January, Wells Fargo publicized its intention to acquire Placer Sierra Bank’s 52 locations. Though there will be changes once the community bank becomes part of the larger interstate operation, health savings accounts will still be offered.
“We decided to make health savings accounts available because they provide us opportunities to get to know our customers better, to cross-sell to them and to keep them coming back,” says Randy Reynoso, president and COO.
It’s been said that high-deductible health plans and health savings accounts are not the answer to America’s healthcare crisis because low-income Americans don’t have the resources to fund the accounts. One argument claims the poor will be less likely to seek medical care without a managed-care insurance plan. The banking industry acknowledges that the strategy is not for everyone, but its leaders do believe it is part of the healthcare solution.
Dunn cites a United Health Care study that examined its members’ activities over the last three years. “They found that HDHP subscribers sought preventive care 5 percent more often than did PPO subscribers. Of those needing acute care, HDHP subscribers had 22 percent fewer hospital and 14 percent fewer emergency room admits — with no adverse health outcomes.
“Those requiring chronic care experienced 8 percent fewer hospital and 12 percent fewer emergency room admits, also without adverse health outcomes,” Dunn continues. “During this period, the HDHP cost per member decreased more than 3 percent, while the PPO cost per member increased more than 8 percent.”
Survey numbers can be interpreted in many ways. Still, many hold that managed care has fostered “learned helplessness,” encouraged unnecessary services and
increased the cost of healthcare. If HDHPs and HSAs provide incentives for a large number of consumers to make more discerning healthcare choices, care quality may go up and its cost may come down.
In any case, incentives to open HSAs will be offered as competitors position themselves to win consumers’ healthcare-insurance dollars. Even today, account set-up charges and monthly fees are often reduced or eliminated when various balance levels are maintained. Interest rates also vary with the size of accounts.
Wells Fargo began offering a number of mutual funds tied to its HSAs in 2006. Bank of America began to offer mutual funds this year, and through a health-themed rewards card program, also offers points for purchases made at health clubs, natural-food stores and exercise-equipment retailers.
Debit cards that only permit qualified medical purchases give account holders visibility and control while making record-keeping easy. Accounts are also becoming portable, allowing holders to change jobs or insurance carriers while keeping their HSA. More creative incentives are likely on the way, so HDHP/HSA consumers should shop around.
In 2005, two large companies near Umpqua Bank’s Canyonville, Ore., headquarters came asking for HSA programs for their employees. From this beginning, HSA checking was rolled out to all Umpqua customers served by its 131 locations, half of which are in Northern California.
The bank, which manages $7 billion in assets, is not allied with any insurance carrier at this time and administers its own HSA program, but there is a sense that many changes could be ahead in the marketplace.
“This is a young program, but it speaks to a hot topic,” says Lani Hayward, director of creative strategies. “Aging baby boomers are looking for retirement-savings options, and banks are looking for non-traditional products to offer. A revolution is coming. If you’re a bank that doesn’t offer HSAs now, you will soon.”
