This story appesrs in the October 2009 issue of Cards&Payments.

Debit cards tied to tax-deferred health savings accounts in the U.S. likely will hit record numbers again this year as more consumers opt for less-expensive alternatives to skyrocketing health-insurance costs. Banks offering HSAs report significant increases this year in accounts, total deposits and HSA debit card transactions in a market analysts say exceeds $4 billion.

But some six years after their expansion through the Medicare Modernization Act of 2003, a proposed legislative overhaul of the national health care system is casting a shadow over the future of HSAs, somewhat tempering participating banks' enthusiasm for the booming niche.

Banks offering HSAs say so far they have not seen a slowdown of account growth and HSA debit card use directly related to the swirling debate about health care reform. But the long-term outlook for HSAs is not certain.

"HSA banks are proceeding with business as usual, but many are taking a cautious approach to future planning until they know exactly how health care reform may affect them," says Red Gillen, a senior analyst with Celent, a U.S.-based consultancy.

So far, no major health care-reform proposal directly threatens HSAs, Gillen says.

But significant changes to the nation's existing health-insurance models could disrupt products such as HSAs, flexible spending accounts and health reimbursement arrangements, and the tax rules surrounding each. All three types of tax-deferred health care accounts, which often have bank-issued debit cards or multifunction payment cards attached to them, could be affected by any major changes in health-insurance models and tax rules, Gillen says.

So far, HSA momentum has not waned. "Watching consumer usage of HSA debit cards and talking to our issuers, we have not seen any slowdown this year tied to health care reform," Stacy Pourfallah, Visa senior business leader for health care products, tells Cards&Payments. But she would not speculate on how health care reform might affect HSAs if health insurance and tax rules change.

Issuance of HSA debit cards, which represent only a fraction of all debit card transactions, is growing steadily. "This year we are seeing double-digit growth rates on HSA accounts and card usage through our network," Laura Kelly, senior vice president, global debit and prepaid product solutions at MasterCard Worldwide, tells Cards&Payments.

HSAs are tax-deferred accounts available to consumers younger than 65 enrolled in high-deductible health-insurance plans, either as individuals or as employees. Qualified plans have a minimum individual deductible of $1,150 (or $2,300 for a family) and generally offer lower monthly premiums than do other health-insurance plans.

Most HSAs include a debit card accountholders use to pay for most of their medical expenses (excluding health-insurance premiums). Accountholders and employers may contribute total pretax income up to $3,000 annually for individuals and $5,950 for families (see sidebar story). Accountholders can roll over funds unused during the year to the next year, potentially creating a supplemental retirement account. Accountholders up to age 65 face paying penalties if they use funds for anything other than health care expenses.

Most analysts agree it is too early in the health care-reform debate to speculate about the effect a government overhaul could have for existing HSAs. Broad congressional debate on various approaches to health care reform could continue through this fall and possibly into next year before new laws are enacted, observers say.

Possible Scenarios
One possible scenario that could hurt HSA growth would be a national health care plan mandating lower-deductible health insurance for all, suggests Ralph Bernstein, senior vice president and business leader for health care payment solutions at U.S. Bancorp. Bernstein serves on the American Bankers Association's HSA council, which works to educate lawmakers about HSAs.

"Nothing has been decided yet, and we are optimistic that HSAs will be preserved in the final reform," he says. "But if a piece of legislation passes that says everyone must be covered at a relatively low deductible level for the majority of their health-insurance coverage, there might not be a role for today's HSAs."

And although HSAs showed solid overall growth during the past two years, consumer HSA awareness remains hazy, and adoption has been slower than some expected. These challenges have driven some banks out of the HSA business.

American Express Co. exited the HSA market last year, citing high costs and low interest from consumers. And Blue Healthcare Bank, which the nation's Blue Cross and Blue Shield Association health-insurance plans introduced in 2007, is up for sale, reportedly because of the market's uncertain future. Some 33 Blue-branded insurance companies own a stake in the bank, which serves 14 Blue-branded plans across the U.S. through 6,300 HSAs.

But many issuers that made a significant commitment to HSAs have declared them to be successful. Indeed, HSAs have been among the fastest-growing retail-banking products in the U.S. over the past two years, analysts say. Some 8 million Americans this year are covered under high-deductible health insurance plans tied to HSAs, analysts estimate. Celent projects that if present trends continue, by 2012 approximately 12.5 million U.S. consumers will be covered by HSA high-deductible insurance plans.

Financial firms held close to $4.2 billion in HSA assets at the beginning of this year, up 32% from $3.2 billion a year earlier, according to the results of an annual survey Washington, D.C.-based Atlantic Information Services Inc.'s monthly newsletter Inside Consumer-Directed Care released last March. Those offering HSAs include several top 25 banks and a variety of HSA-specialist banks (see chart).

Industry executives remain cautiously optimistic about the future of HSAs.

"We're watching the progress of legislation very carefully, and we're making sure we haven't hard-wired our (HSA) product in such a way that we can't react quickly if anything changes," Bernstein says, noting U.S. Bank has not experienced any noticeable slowdown in HSA growth this year caused by health care-reform discussions. "We're seeing strong growth this year, particularly from small and medium-size employers that have figured out HSAs are a good way to offer their employees more-affordable health care."

Growth Continues
Chad L. Wilkins, CEO of UnitedHealth Group's OptumHealth Financial Services' OptumHealth Bank (formerly Exante Financial Services), which specializes in HSAs, says HSA deposits have been growing at a steady 35% annually for the last few years, and there has been no measurable interference from health care-reform debate.

"We entered the market in 2004 primarily offering HSAs in conjunction with health-insurance plans, and in 2007 we began working with employers to help them simplify their health-insurance offerings with HSAs. That combination has really boosted our growth this year," Wilkins says.

JPMorgan Chase & Co. also is experiencing HSA growth "in the 40% range" this year, says David Josephs, managing director of Chase's J.P. Morgan Treasury Services' consumer-directed health care. "We are looking at a very strong enrollment season this year," he says, noting Chase has invested heavily in marketing HSAs through its retail bank and through employer channels. "In the last few years, we have really improved the science of communicating how HSAs work."

As employers enter the traditional benefit-enrollment season this month, Gillen speculates HSAs will absorb more market share because of recession-driven demand for lower-cost health-insurance coverage. "Consumers and businesses looking for lower-cost ways of handling health care coverage this year are taking advantage of HSAs without worrying about the future," he says.

Adding to the uncertainty of health care reform's effect on HSA growth is that profitability models for banks offering HSAs remain in flux. As the nascent market expands and providers gradually spread out the costs of setting up and administering accounts over a larger universe of users, relative costs and revenues keep changing, complicating the analytical picture for issuers, Gillen says.

Revenue Potential
Banks derive HSA revenue from a combination of interest earned on account deposits, administrative and other fees, and interchange fees from debit card transactions tapping HSAs. Although debit cards account for only about 12% of banks' total HSA revenues this year (up from 11% last year), according to Celent, their share is growing.

In its semiannual HSA benchmarking study involving 14 HSA banks completed in January, Celent found that some 70% of all HSAs were less than 2 years old and that average account balances rose 13% this year, to $1,561 from $1,383 last year. Banks' average annual revenue earned per account was $73, up 14% from $64 a year earlier. That increase was caused more by rising balances in HSAs and banks' more-frequent interest rate spread adjustments than to higher transaction-fee revenue, Gillen speculates. A variety of miscellaneous fees, including those from returned items and using checks, comprised 9% of HSA revenues in January of this year.

Costs are also rising. HSA providers' average annual maintenance cost per account rose 4% in January, to $49 from $47 in December 2007, largely because of enhanced marketing and customer service amidst growing competition, Celent's study found.

Most institutions offering HSAs charge a per-account administrative fee of about $2.50 to $3 per month, the study found. As the market matures, HSA administrative fees are falling incrementally, Gillen says. Some banks eventually may eliminate fees altogether or package them with other products based on accountholder spending activity, he says.

As HSAs mature, the total number of debit transactions associated with them is rising. Debit cards are issued with nearly all HSAs, and although many providers furnish users with checks to disburse HSA funds, Celent found in its benchmarking study that debit cards account for about 66% of HSA expenditures.

"As fees decline, HSA debit card fee revenue is likely to gradually represent a bigger chunk of revenues," Gillen says.

One of the stumbling blocks to HSAs' greater profits and efficiency is that some 20% of account spending takes place via checks. Physicians and hospitals often mail bills after the medical service, which most often results in check-based payment, Gillen notes.

Thanks to a cross-industry group that worked together last year to automatically identify qualified health care debit card purchases at checkout in major retailers and pharmacies ("Health Care Debit Rx," February 2008), HSA users have less paperwork to worry about for their tax records. But a few stubborn obstacles remain, such as some smaller pharmacies and specialized retail channels that do not accept Visa and MasterCard HSA debit cards. Costco, a major pharmacy outlet, accepts only American Express Co. payments cards, Gillen notes.

And not all HSAs are growing. In January, 18% of top HSA providers' total HSAs had languished for 12 months without any contributions, up from 10% in July 2008, Celent's study found. Gillen speculates one reason could be the recession, which has dampened accountholders' ability to fund accounts. Another reason could be attrition, as accountholders switch to other health care coverage and abandon accounts.

Overall, however, HSAs are relatively stable. HSA annual account-closure rates are about 8%, Celent found, compared with the 20% average in annual checking-account closures.

At least one key aspect of HSAs has not panned out as some banks envisioned. The investment aspect of HSAs has taken a back seat this year, analysts and HSA account providers say, partly because of the decline in the stock market.

Most providers enable accountholders to sweep a portion of their total HSA balance into an investment account (usually above a minimum balance of about $1,500). Sometimes investment accounts carry a higher administrative fee. In January, fewer than 2% of all HSAs were designated as investment accounts, while investment balances declined to 5% of total balances compared with 7.5% in July 2008.

Chase has not seen a significant drop-off in interest this year among HSA accountholders. "We see that people who want to invest their HSA funds tend to wait until they have accumulated about $3,500 in their HSA accounts. ... Interest has been steady," says Josephs.

Doorway To Health Care
Legislative changes aside, many banks and payments companies view the HSA market as a strong testing ground for future business development, analysts say. U.S. health care payments-estimated at $2.2 trillion annually-is rich with other opportunities to shift costly paper-based transactions to cards and other electronic-payment channels, says Kunal Pandya, a senior analyst with Aite Group, a U.S.-based consultancy.

"Many financial institutions and payment networks see HSAs as a first step into the health care payments arena, no matter how exactly legislation reshapes things," he says.

Although it is impossible to predict the outcome of pending legislation, many issuers are proceeding with existing HSA business plans through this year, capitalizing on continued growth in HSAs and deposits. HSA providers are keeping a close eye on legislative developments and remain poised to adapt to changes and opportunities in the vast and fast-changing health care payments industry. CP


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