The next big thing?
They could be the ‘new big thing’ in the US savings industry. And like the individual retirement accounts, the new Health Savings Accounts (HSAs) imply putting aside tax free money and investing it in stocks and bonds. Although the sums are smaller, the potential is not: there could be $75bn (€63.1bn) in new money by 2010, says management consulting firm DiamondCluster International. Between March 2005 and 2006, the number of people who have signed up for the high-deductible insurance policy required for such HSAs has grown from one to three million, according to industry group America’s Health Insurance Plans. This could rise to 15m in the next five years, while the average account balance could grow from $1,500 to $3,500 in 2010. That is enough to make Wall Street salivate.
HSAs, introduced in 2003 with the Medicare reform, have been given a huge boost from President George Bush’s 2006 in his State of the Union address. His idea is that HSAs will give more choice to consumers, better care to people who do not work for large companies and who change jobs often, as well as lowering healthcare costs. But his proposals are likely to become a very hot topic in Congress. The ranking Democrat on the Senate Health Committee, Edward Kennedy, has already declared: “It’s basically a fraud for average working families in this country. We’re going to do everything we possibly can to defeat it.”
HSAs must be opened together with a high deductible health plan (HDHP), which is a health insurance plan with low premiums but high minimum deductible (what the insured must pay before the policy kicks in). The money saved with low premiums and any balance remaining at the end of the year (that is money not spent in deductibles thanks to good health) is piled up into the savings account and can be invested in any product already approved for IRAs, such as annuities, stocks, mutual funds, bonds. The savings accumulated can be used to pay for a broad range of healthcare expenses in the future, and would remain untaxed as long as they are spent on health care. After 65, money can be withdrawn for any reason without penalty, but the entire amount taken out would be taxed.
An important HSAs feature is portability: unlike other health plans controlled by the employer, they belong to employees even if they change jobs and are inherited by survivors like an IRA or 401(k) plan.
“The HSAs are particularly attractive to healthy Americans betting that they won’t get hit with significant medical expenses any time soon,” comments Drew Altman, president and CEO of the Kaiser Family Foundation, a health research group. “This is an option that can be a real good deal for many, many millions of people, but it’s not for everybody, least of all people who are chronically ill and low-income.” But Al Hubbard, the Bush’s National Economic director, disagrees that HSAs are only for the rich and the well: “As it turns out, of the three million people who have taken up HSAs, 37% were previously uninsured, and 40% earned less than $50,000 a year. Obviously, HSAs are very attractive to people on the lower side of the income scale.’’
Certainly they are very attractive to banks, credit unions and money management firms: Bank of America, J P Morgan Chase and Fidelity Investments are among those offering or planning to offer HSAs. The latter may represent a steady stream of new income just when deposit growth has slowed and higher interest rates have hurt profits. Today most financial institutions charge $50-75 to open an HSA, plus $40 or more per year to maintain it and the fees on the investment products linked to the account. Besides, banks link debit cards to the HSA and make money each time a customer swipes his card at a doctor’s office. Payment processing alone could generate some $2.3bn over the next five years, according to DiamondCluster.
In another move, some big medical plans have started to create their own bank. UnitedHealth Group, the largest provider of savings plans (of the 24m people insured under its various types of policies, 654,000 have HSAs), has created Exante Financial Services, a Utah-based bank. Last December, the Blue Cross Blue Shield Association announced an online bank, Blue Healthcare Bank. But Exante’s John Prince warns that their goal is not to become a player in the asset management industry. He says UnitedHealth Group’s purpose is to provide better customer service with both insurance policies and savings accounts under one roof.