Health savings accounts are viewed as a promising asset-gathering opportunity for financial institutions, but some say stiff competition and other considerations are limiting profitability.
MasterCard's TowerGroup research subsidiary recently predicted that nearly 2 million HSAs would be opened by yearend, and that the total could exceed 6 million by 2010. The Needham, Mass., firm predicted that HSA assets under management will swell to between $10 billion and $26 billion by 2010.
A related product, the flexible spending account, is growing faster, TowerGroup said. The firm expects 23 million of them by 2010.
The HSA Bank division of Webster Bank in Waterbury, Conn., has amassed 162,000 HSA accounts and about $210 million of deposits. Nathaniel C. Brinn, the division's chief executive, said the accounts do not generate fat margins. "It's profitable for us, but it's a low-margin business," Mr. Brinn said.
HSA Bank uses a sort of clearing approach to the business, working with outside providers to offer a seamless package.
HSA Bank works with insurance carriers, administrators, specialty software platforms, card providers, insurance agents, and consultants, he said. Running such a business includes lots of investment in things like a call center and phone staff knowledgeable about not only health insurance but also tax-law changes, he said.
"If someone is not going to really make a major investment in the business, it is probably not going to be a profitable business for a lot of banks," he said.
HSA Bank has $190 million of its health savings account assets in bank accounts and $20 million in linked brokerage accounts provided through Fiserv, Mr. Brinn said.
Tower said financial institutions can take advantage of the consumer payments part of such accounts, specifically the trend toward using payment cards.
But third-party vendors, processors, and health-care providers are "aggressively exploring these same opportunities," the research firm warned. Health-care providers and the consumer payments industry may end up cooperating or competing for health-care account business, it said.
And though the market for health savings accounts is growing, it will "ultimately be restricted for asset managers," Tower said. The number of such accounts and the total contributions to each will be limited, said Peter Delano, a senior analyst in the investment management research service at Tower.
The requirement that account holders have a high-deductible health insurance plan largely limits the product to the young, healthy, and not too wealthy, Mr. Delano said. Furthermore, the current annual contribution limit is $2,650 for an individual or $5,250 for a family.
The money can go into a deposit account or into investments such as mutual funds. And balances can be reduced, by withdrawals to pay health-care costs not covered by insurance.
(Flexible spending accounts, on the other hand, hold no potential for investment managers, since their balances must be used within one year, cannot be rolled over, and are not portable.)
Investment managers may be best off handling the money management part of the product and leaving the administration to others, TowerGroup said.
