Manhattan immunologist Arthur Englard understands the intricacies of health insurance, both as a provider and as a consumer. For years he made hefty payments to a conventional insurance plan -- about $22,000 in 2003 -- to secure health coverage with a low deductible for himself, his wife and their four children as well as for an employee. “I was in a good plan, but they upped my insurance premiums every year,” says the doctor. “Except for when my wife was in childbirth or when the kids had colds, we never used it. Then my insurance broker said, ‘Let’s try this new thing.’”
For 2004 the broker proposed dropping Englard’s coverage in favor of a tax-advantaged health savings account sponsored by Horizon Blue Cross Blue Shield of New Jersey in alliance with J.P. Morgan Chase & Co. “I have a high deductible,” the physician says, “but all in I’m spending less than half as much on health care insurance as I did before. It works out well for me.”
Created in 2003 as part of the Medicare Modernization Act, the health savings account, which combines health insurance with a tax-advantaged savings account, has yet to catch on. Since HSAs were introduced in January 2004, only 430,000 people have opened them, reports America’s Health Insurance Plans, a trade association of 1,300 health insurers.
But some Fortune 500 companies now include HSAs in their health benefit plans -- American Financial Group, IBM Corp., Intel Corp. and Textron are among the early adopters -- and consultants report that a significant number of their corporate clients plan to introduce the accounts this year and next. The growth, they say, could be dramatic.
HSAs are a powerful invention,” says Jay Savan, head of the health and welfare plan practice at consulting firm Towers Perrin. “There is no better tax protection and accumulation device than a health savings account: Contributions, investment growth and spending on health care are all tax-advantaged.” He predicts that by 2007 about 24 million Americans will have the accounts.
Nevertheless, traditional 401(k) providers are nowhere to be found -- yet -- in this ostensibly promising market. Fidelity Investments, Merrill Lynch & Co., T. Rowe Price Associates and Vanguard Group are all evaluating health savings accounts’ prospects, but none has rolled out a product. Retirement plan providers say they need a better sense of the potential size of the market and the costs of administering the accounts before they can assess how to price the services.
The key question confronting financial services firms: Will the bulk of the assets in HSAs be saved or spent on medical care? If the money is spent, then the HSA will function like a bank checking account or a flexible spending account; if it is saved, the HSA will function like a mini-401(k).
HSAs are a hybrid product,” notes Brad Kimler, vice president of the health and welfare consulting practice at Fidelity Investments. Though silent on Fidelity’s own plans for the accounts, Kimler predicts that HSAs will follow different economic models from 401(k)s. “A lot needs to be worked out around whether the people who use HSAs will be savers or spenders, and then we need to work out how to price the product,” he says.
The hesitation is understandable given how the accounts work: A person who opts for a high deductible on health insurance coverage -- at least $1,000 for an individual and $2,000 for a family -- may put an amount equal to that deductible into an HSA, up to $2,650 per individual and $5,250 per family. This contribution is exempt from federal income tax, and the HSA holder can draw on the funds at any time (without paying taxes on them) to cover health care bills. What’s more, any money left over in the account grows tax-free year after year as if it were in an IRA or a 401(k). HSAs face the same restrictions as IRAs on the types of investments they can make.
Until HSA holders turn 65, they can spend the accumulated funds only on health care; if they withdraw funds for other purposes, they must pay income tax and a 10 percent penalty. After 65 the money can used for any purpose, although the holder must pay income taxes on funds spent on anything other than health care.
Employers may offer their workers HSAs, and the accounts are portable from job to job. Individuals who are otherwise uninsured can also set them up, much like IRAs.
Although companies and 401(k) providers are just starting to sign on, many leading health care insurers are marketing the accounts to employers: Aetna, most of the Blue Cross organizations, Cigna Corp. and Humana are among the insurers in the market. “In every sector and geography, HSAs are available or will be soon,” says Ray Herschman, a national practice leader for consumer-driven health care at Mercer Human Resource Consulting. “Health insurers realize that if they don’t have an HSA plan, they’re at risk” of losing business.
Insurers have formed alliances with financial services firms to offer HSAs. Among the partnerships: Anthem Blue Cross and Blue Shield and J.P. Morgan Chase, PacifiCare Health Systems and Wells Fargo & Co. and UnitedHealth Group and its in-house bank, Exante. The insurers provide high-deductible coverage, and the financial services firms provide a framework for collecting premium payments and withdrawing funds for health care spending as well as an investment account for the assets that remain in the HSA. Currently, if employers want to offer a so-called seamless health savings account -- one that offers investment options, deducts insurance premiums and makes payments to providers at the point of service -- they have to buy a bundled product that includes the financial institution allied with their insurer.
The complications of administering HSAs are clearly a concern for traditional 401(k) providers. Fidelity’s Kimler says that health savings accounts will need to levy separate maintenance charges in addition to management fees on invested savings. “The revenues from asset management won’t be enough,” he contends. Insurers typically pay financial providers a monthly fee of about $3 per account; in some cases, they pay the providers an additional fee for enrolling employees.
THERE ARE NO MARKET FORCES INVOLVED WITH health care,” President George W. Bush has said. “That’s one of the reasons I’m a strong believer in health savings accounts.” The Bush administration pushed Congress to include HSAs in the Medicare bill, arguing that the accounts will encourage consumers to ration medical spending to build up savings. In this sense, HSAs are very much a part of the president’s goal of fostering a so-called ownership society.
When Congress authorized the creation of the accounts, it hoped to make a dent, however small, in U.S. health care spending, which totaled $1.7 trillion in 2003, an amount equivalent to 12 percent of GDP. This represented a 7.7 percent increase over the previous year, the sixth year-over-year rise of more than 6 percent, according to a summary of government statistics by the journal Health Affairs.
Because health savings accounts give people a clear financial incentive to minimize their health care spending -- that’s the only way they will have money left over to invest tax-free -- they should, in principle at least, help rein in health care expenditures. Says Martha Priddy Patterson, director of employee benefits policy analysis for Deloitte Consulting, “The whole thought is that when the employees have some skin in the game through their own money in HSAs, they will get attuned to the real cost of health care and spend more wisely.”
On the other hand, if people skimp on regular health care to stoke their accounts, they could end up requiring expensive medical treatment, increasing the nation’s health care spending. Right now HSAs are a medical as well as a fiscal experiment.
But they undeniably hold promise. This year Cincinnati-based American Financial began offering an HSA option along with the conventional low-deductible, high-premium health coverage it provides to its 5,000 U.S workers. “Previously, we had only a rich, low-deductible plan, which was expensive for our employees from a premium perspective,” says Anne Watson, vice president of investor relations. “Medical expenses were just skyrocketing, and we thought it was time to give our employees a choice on what kind of health care they want.”
As of mid-February about 7 percent of American Financial’s employees had signed up for HSAs. For a single person, the premium cost of the health savings accounts is about 80 percent lower than for the old plan, while the deductible is three times higher.
American Financial picks up the tab for half an employee’s premiums but makes no contribution to the savings account. The company recommends a bank to manage the accounts, but employees make their own investment choices, as they would with an IRA.
The early players in the HSA game have had to contend from the start with the accounts’ split personality. Initially, reports John Prince, the J.P. Morgan Chase senior vice president in charge of health care, the bank contemplated using the 401(k) investment platform of its retirement plan services division to handle HSAs. But after some research it reckoned that 80 percent of its HSAs would be transactional (that is, low balance) and that only 20 percent would tilt toward meaningful investment. As a result, J.P. Morgan opted to use its electronic payments platform. The bank now maintains relationships with nine insurers; it handles employee enrollment, collects premiums and settles payments to health care providers, many of which are initiated by employees with a debit or credit card.
What’s challenging about the HSA is that while the participants might think initially that they will be just investors, things can happen to make them need the money tomorrow and become transactional customers,” Prince says. “You need to offer one Web portal, one system, to allow them to move between the transaction and investment nature seamlessly.”
But before moving into this new market, most money managers are waiting to see how it evolves. “At the moment, we’re just not seeing enough demand for HSAs,” reports David Hueser, marketing manager for tax-deferred products at T. Rowe Price.
It will be a while before the average account balance gets to be of interest to firms primarily on the investment side,” notes Brad Engel, national product leader of Mellon Financial Corp.'s health and welfare group. But he believes that assets in a health savings account will be sticky, because people do not cavalierly change their health insurance arrangements. That’s a key reason that Mellon Financial decided to become an early HSA provider. “The firms that have gotten in early will own these accounts,” he says.
Today the leaders of the 401(k) industry are skeptical of the potential of the HSA market, but they’ll get over it,” says Mercer’s Herschman. “Once a handful of asset managers make an early move, the rest of the players will follow suit. It’ll be a defensive measure, and you can count on it happening.”
