More than 600 banks and other financial institutions were offering Health Savings Account custodial opportunities to individuals and companies as of January 1, 2006, according to an analysis by Information Strategies, Inc. (ISI).
The survey of back office service providers, bank marketing executives and others with knowledge of this sector's offerings clearly put the number of custodians, large institutions, community, and savings banks well past 600.
These figures are more than twice the estimates by most industry pundits and put a severe dent in claims of poor interest by HSA distracters.
This bright outlook for HSAs can be coupled with the recent announcement by AHIP, the insurance provider association, which reported that there were more than three million Americans utilizing High Deductible Health Plans by the end of 2005.
HSAs are made up of two parts— a high deductible healthcare insurance policy coupled with a tax-deferred custodial account.
Service providers and others contacted by ISI said that at least 600 banks had taken HSA custodial accounts by the end of 2005.
These providers also said tax forms covering the 2005 period indicated strong growth in total savings.2006 Projections Soar
JoAnn Laing, President of ISI, said the company’s forward projections put the number of HSA insured at the end of 2006 at 8.7 million with custodial accounts totaling 3.6 million and assets under management tripling to $5.1 billion.
At the same time, initial results from ISI's 2005 year-end survey show a significant jump in HSA accounts with more than 1.1 million reported from the 100+ respondent banks. Total funds under management at the end of 2005 were estimated by ISI at $1.2 billion. Another trend highlighted was that average balances reported by banks soared to more than $1,100.
In addition, except for one bank, all surveyed banks expect enrollments to double or triple in 2006.
What is strikingly significant is the rise in investment opportunities associated with HSA custodial accounts. Seemingly responding to depositor requests, the number of banks offering investment options went from 9% in August to 79% in December.
There is some evidence in the ISI surveys to indicate that 63% of respondents viewed the HSA account as a savings and tax savings vehicle rather than a spending account. Many report preferring to pay their medicals bills with post-tax dollars and leave the funds untouched.
Industry analysts believe that some of this savings imperative is designed to protect the account holder in the case of a major medical catastrophe. However, amongst the early adapters the primary reason given was for tax advantage savings.
This user preference for savings will add to the funds under management.Marketing Decisions Need To Be Made
Banks offering or about to offer HSAs are torn between their desire to maintain the deposits within the institution while at the same time provide clients with an investment option that moves these funds outside. Many are providing clients with the ability to “sweep” the account into an investment or money market account once a certain pre-determined “ready cash” amount has been reached.
Service providers indicated that almost all platforms they provided now included an investment option.
Despite surveys showing that users prefer paying by check, banks are striving hard to encourage depositors to utilize debit or credit cards over check payment.
The industry goal is to create a seamless transaction whereby the patient will pay for adjudicated medical services at the point of delivery, with the transaction being facilitated by the financial institution.
Described by one pundit as “the holy grail of healthcare finance,” a seamless transaction process will reduce about 25% of current healthcare paperwork activity and costs.Some Obstacles Remain
The major obstacle facing banks and insurance providers is the massive re-education program necessary to convince consumers to accept and use this approach.
ISI’s survey of 6,000+ HSA Users surfaced a marked reluctance on their part to pay for service immediately and to use a debit card versus a checking account. A significant majority, 61%, said they prefer to use checks for payments.
Clearly, a debit card tied to the HSA account does not fit well with this approach.
Another trend developing is offering credit lines attached to the HSA account. The biggest player in this field is expected to be American Express which plans to debut a card in the New York area this month and go national later in the year.
At the same time, banks are offering many business clients the ability to create portals for employee management of their insurance as well as custodial accounts. This integrated program, involving a debit card, is seen by many sector observers as the preferred delivery system for HSA custodial accounts.Users Must Change
However, along with the change in the way healthcare services are paid, HSA Users are also being asked to modify their own preferences.
Given the number of such systems being offered or prepping for debut later in the year, this is probably the most preferred approach among bigger banking institutions.
On the community bank and credit union side, many are dipping their toes into the water with very controlled, simplified products often utilizing an existing checking platform.
With 52% of all HSA Users saying they went to their local bank to open an account, this industry sector is projected by ISI to have 30% of the market by 2010.