Roughly a year after Congress made medical savings accounts more attractive to small businesses, five banks dominate the market.
Wells Fargo & Co., Mellon Bank Corp., Northern Trust Co., Fifth Third Bancorp, and Home Federal Savings Bank of Napa, Idaho, are going after the management fees and new deposits the product offers.
"MSAs are where 401(k) plans were 10 years ago," said Sandra Lorbert, senior vice president of Fifth Third Investment Advisers in Cincinnati. "We expect a booming business in the future."
Congress made MSAs more attractive in August 1996 by setting up a pilot program exempting contributions to the accounts from federal taxes. Estimates at the time predicted that as many as 525,000 accounts would be opened by the end of this year.
But today 23 banks offer medical savings accounts to small businesses and the self-employed. This handful of institutions, led by the top five, have opened roughly 85,000 accounts, according to industry estimates.
But that's still the bulk of the 100,000 accounts that have been set up since the pilot began Jan. 1, according to Greg Scandlon, publisher of the Patient Power Report, a publication that tracks the MSA industry. Brokerage firms have captured the 15% of the market not controlled by banks.
Most banks have been reluctant to enter the business. Of 112 banks that participated in a recent American Bankers Association survey, only 12.5% said they plan to offer medical savings accounts.
Fifty institutions, or 44.6%, said they will not offer the product because demand is low and the bank is uncertain about the program's rules.
That's fine with officials at the major MSA players, who said they want to become market leaders before competitors warm up to the accounts.
"We've found a good mix of customers, with about 20% of MSA holders being previously uninsured," said Arthur A. Jablonski, vice president of worldwide operations at Northern Trust. "They have made insurance affordable for the self-employed, just as Congress intended."
MSAs parallel individual retirement accounts. Withdrawals may be made tax- and penalty-free to pay for medical expenses. After age 65, owners may withdraw funds for any purpose.
Health-related professions are a favorite target for MSA providers, because doctors are frequently self-employed or work in practices with fewer than 50 employees, a requirement for account eligibility.
Small businesses that offer high-deductible health insurance plans may contribute to employees' MSAs. The contributions are exempt from corporate income, Social Security, and Medicare taxes as well as employee withholding.
People who open MSAs may add to their accounts each year to cover routine medical expenses and must buy relatively inexpensive catastrophic insurance policies with high deductibles to cover serious illnesses. Deductibles run as high as $2,500 for single people and $4,500 for families.
Under the program, a maximum of 750,000 accounts may be established through the year 2000. Another pilot that begins next year will allow Medicare payments to be placed into 390,000 additional accounts for senior citizens.
Dennis Stover, a vice president at Mellon Bank, said customers must be better educated about their health-care options before those numbers are reached.
"The real question is whether you want to change how you insure yourself, not whether to open an MSA," he said.
For banks, medical savings accounts could provide stable sources of management fees and new deposits. Certainly that's what Fifth Third is counting on.
Currently the bank charges setup fees ranging from $10 to $15 and a monthly $2.50 administration fee for its accounts.
Though Fifth Third's MSA holders are using the accounts for routine medical expenses, Ms. Lorbert said, she expects that customers will eventually learn to let the accounts grow, tapping them only as a last resort.
"In the long run, we think MSAs will be used more as another retirement savings vehicle rather than for actual medical expenses," she said. "People will want to maintain their tax-deferred returns."
Mr. Jablonski at Northern Trust agreed. "The healthy, wealthy, and wise will look at these accounts as another wealth-building vehicle," he said.
He rejected, however, complaints of many congressional Democrats that medical savings accounts will become tax dodges that saddle the poor with higher insurance premiums as the healthy and rich drop standard insurance coverage.
With customers still uncertain about the new products, banks breaking into the business are keeping marketing costs low by setting up joint ventures with insurance companies and trade associations.
Northern Trust, in fact, leaves all the new customer recruiting to Lawrenceville, Ill.-based Golden Rule Insurance Co., a major provider of high-deductible policies.
For the time being, Northern Trust offers a no-fee interest-bearing medical savings account, with a rate currently around 5%. "We wanted to start off fairly simple," Mr. Jablonski said. "As we see spending patterns and account levels over the next year, we will make other options available."
For example, the bank plans to allow customers to invest MSA money in the bank's stable of proprietary mutual funds. Both Fifth Third and Mellon already allow all account holders to invest in mutual funds.
At Fifth Third, eight funds are available including the bank's four proprietary Fountain Square Funds. Mellon makes its proprietary funds available as well as other families offered through its Dreyfus Corp. subsidiary.
In October, Mellon agreed to sell medical savings accounts to the American Dental Association's 140,000 members and has signed up other regional professional groups. Wells Fargo has a similar program with the National Federation of Independent Businesses, which has 600,000 members.
Similarly, Fifth Third in September started offering the accounts to the 15,000 members of the Ohio State Medical Association.
Mr. Scandlon of Patient Power Report said he expects MSAs to multiply rapidly now that these types of marketing arrangements are being established.
"These deals underscore that this is a new industry not just a new product," he said. "Relationships are being formed that have never existed before."
