KiplingerForecasts.com
Banks, Insurers and Benefit Firms Vie for HSA Cash
By
Matthew Mogul
Jan. 9, 2006
Traditionally, banks bank,
insurers insure and benefit managers manage worker benefits. But
those distinctions have become increasingly blurred, thanks
partly to a 1999 law that relaxed Depression-era restrictions on
financial institutions. Today, the fields are wide open as banks
sell insurance and insurers take in deposits and offer checking
accounts.
The current race for dominance
over a new financial product—Health Savings Accounts (HSAs)—is
another instance in which the three industries
are chasing the same lucrative purse: billions of
dollars in future assets and fees.
For employers and workers, the
competition means more options and lower costs. Currently, most
HSAs carry higher start-up, transaction and management fees than
traditional checking or savings accounts. That will end soon
enough. Employers should shop around for the sweetest packages
by pricing what their bank, insurer or benefit manager is
offering in interest rates, fees, customer service and education
for clients.
Another crucial question is how
the money will be invested, and this issue is drawing in many
mutual fund companies and brokerages. Because HSAs are new, they
hold relatively little money, most of which is stored in savings
or money market accounts that are safe, but don't earn much
interest. That will change as the accounts get bigger over the
years. The law creating HSAs allows the same array of options
available for retirement accounts so workers will have to decide
how to balance the risk and the return they want for their HSAs.
About 25% of employers will offer
HSAs this year in conjunction with low-premium, high-deductible
health plans. That's up from just 4% two years ago, when HSAs
debuted. Companies like the low cost of HSAs, while workers are
drawn to the federal tax advantages: The money goes in tax free,
stays in tax free and is withdrawn tax free as long as it's used
to cover medical expenses. Another plus is that workers can take
their HSA with them when they change jobs, and unlike flexible
spending accounts, unused funds in an HSA can be rolled over
from year to year indefinitely. The number of HSAs will likely
grow from about 1 million accounts today to between 15 million
and 25 million by 2010. Assets under management will balloon to
$65 billion or more.
Health insurers are in the best
position to win the tussle for HSA business, at least at the
outset. They have the know-how, the brand and the established
employer relationships to woo the money their way. They're now
starting their own banks to handle the funds.
Benefit managers run a close
second. They already operate benefit networks that include
everything from 401(k)s to workers' compensation policies.
Last, but not least, are banks.
For now, because they lack experience in health care, they'll
play a supporting role, teaming up with insurers, benefit
managers and third-party administrators to offer financial
options for HSAs, such as debit cards that can be used to
withdraw health care-related funds.
That means everyone will get a
piece of the action. "Insurers have a leg up, but in the end,
there will be enough room for everyone, whether they're
investment firms, insurance companies or banks," says Carmen
Effron, founder and president of the C F Effron Co., a bank
insurance consulting firm in Connecticut.
Effron envisions a time when the
key players will both compete and cooperate. Take the Blue Cross
Blue Shield Association, for example, whose members hold 40% of
all HSA accounts. The group plans to open a bank this year to
try and keep those HSA dollars in-house. But, it won't force
health providers in its vast network to channel those funds to
its Blue Healthcare Bank.
Even more options will soon be on
tap for HSA accounts. Fidelity Investments will offer its family
of mutual funds as an option for a new HSA that will take effect
in 2007. Fidelity, which already offers consumer-driven health
programs similar to HSAs and defined-contribution retirement
plans, stands to do well.
Alenka Grealish, manager of
banking practices at Celent, a financial services technology
research and consulting firm, says that even though many banks
are relegated to the sidelines now, they'll be major players
when accounts begin to grow.
"Don't count out banks. Just as
people or companies may feel uncomfortable going to a bank for a
health care plan, they will feel equally uncomfortable banking
with their health insurer," Grealish said. "People like their
money to be with names they know, so I see big, [brand-name]
banks with lots of scale to be a big part of this market."
Researcher/Reporter: Laura
Steele
All contents © 2005 The Kiplinger Washington Editor
