Nearly three months after putting its Blue Healthcare Bank operation on the block, the Blue Cross Blue Shield Association was still looking for takers in December.
Maybe it's a sign the struggling institution has little to offer a buyer. At the end of September, the specialty consumer-directed healthcare bank's deposit base had fallen to $24 million, far below the 2010 target of $500 million bank president Robert Gross set shortly after the bank opened in 2007. "To sell the bank itself, it's not worth a whole lot," says Celent senior analyst Red Gillen.
It may also indicate dim prospects for any new entry in the nascent market of health savings accounts. Just six years after the 2003 Medicare Modernization Act formally created the HSA, the industry has become well entrenched with a few dominant custodial players that used early-mover advantages, as well as partnerships with health plans and servicers, to dominate the field. Out of nearly 600 banks offering HSAs, only nine custodial players have topped 100,000 accounts under management, according to HSA market consultant Information Strategies Inc. Among them are HSA-account service leaders ACS in affiliation with Bank of New York Mellon; UnitedHealthcare-owned OptumHealth; UMB Financial, which includes a partnership with Humana; and JPMorgan Chase & Co., with its custodial ties to Aetna and Cigna.
The alignment of plans tethered to processing, enrollment, sales, marketing and support services is one employers and group insurance sales brokers seem to prefer, said Gillen, and presents a formidable incumbent advantage against ambitious market upstarts like Blue Healthcare - or even long-established players like Fifth Third Bancorp, which launched HSAs in 2004 and recently began expanding insurer relationships.
"There are definite barriers to entry for some of the entities that wish to get into the market today," said Gregg Larson, the senior vice president of HSA Solutions for Dallas-based ACS, which with BNY Mellon held the highest number (667,000) of the estimated 9 million HSA accounts under custody in 2009.
While Blue Healthcare's late start was a prime factor, it's more immediate problems was gaining business from Blue Cross affiliates, Gillen says. Blue Healthcare Bank reportedly earned the business of less than half of the 39 Blue Cross affiliates. "Members...already had custodians in place," said Gillen.
Launched in 2003, the $1.7-billion asset OptumHealth can seamlessly market HSAs alongside its high-deductible health plans since UnitedHealth lacks Blue Cross' federated structure. "We sell HSAs directly to banks and brokers, or...directly to employers," said Chad Wilkins, CEO of OptumHealth, which has $817 million of deposits and 485,000 accounts.
The insurance brokerage channel is the lifeblood for HSA account growth, and according to Gillen, that's another segment the successful early movers in the business lined up in their camp.
While the jumbo- and large-market HSA accounts business may be difficult to penetrate, many banks can look to small-business HSA sales through their commercial and wholesale services. An Aon Consulting survey in November shows the more employers overall - 56 percent - plan to offer HSAs in 2010, up from 49 percent last year.
Although HSA volumes are low, overall these deposits are in demand by banks: they have one-third the cost of demand deposit accounts (since they are acquired en masse in employer group sales), have lower attrition rates and are ripe prospects for cross-selling.
So the gradual growth curve may be enough for many banks starting out with HSAs, but Gillen warns that they'll also be dealing with growing price compression from competition. "The only way to make money is through economies of scale," says Gillen. "Six years after the start of the market, it's going to be an uphill battle."