The proliferation of health savings accounts met expectations last year, and analysts say the product is building momentum for long-term growth.
The accounts, which allow workers to save for medical expenses tax-free, began to appear in 2004 as a means to pay for high-deductible insurance plans. By the end of last year there were 3.6 million of the accounts with $5.1 billion of deposits, according to an estimate from Information Strategies Inc., a Palisades Park, N.J., firm that tracks the product. A year earlier it had predicted those numbers for the end of 2006.
The number of accounts more than tripled last year, according to Information Strategies.
Most analysts expect strong growth in the product this year.
Information Strategies predicts that there will be 8 million health savings accounts with $13.6 billion of deposits by the end of this year.
One reason the accounts appear primed for growth has to do with changes in their structure. The Tax Relief and Health Care Act of 2006, which President Bush signed into law last month, allows a one-time rollover to HSAs from flexible spending accounts, health reimbursement accounts, and individual retirement accounts. Also, savers no longer need to limit their contributions to the annual deductible cost of the corresponding health plan.
In addition, individuals who open an account after the term of their health plan begins can still deposit the total annual amount allowed in the account. This year the contribution cap for individuals rose 5.6%, to $2,850, and the cap for families rose 3.7%, to $5,650.
Dennis Triplett, the president of the health care services unit of UMB Financial Corp. in Kansas City, Mo., said the fact that employers supported the new law is encouraging, because it means there is market demand for HSAs.
"I think the landscape will be more competitive in 2007 and even more so in 2008," he said. "There will be a pull effect on financial institutions from their commercial clients who want to offer these sorts of products."
HSAs can be less expensive than traditional health insurance plans for employers, he said.
The accounts have gained favor at prominent companies such as Wal-Mart Stores Inc., which is introducing them this year. However, JoAnn Laing, the president of Information Strategies, said that providers of HSAs largely shifted their attention last year from big employers toward small and midsize ones.
Despite this optimism, important questions remain about the future of HSAs.
Nancy Atkinson, a senior analyst with the Boston research firm Aite Group LLC, said that the rate of individuals opening HSAs was slower than she had expected last year. Still, she said important groundwork for the products' proliferation was laid.
"It was an education year," she said. "It helped affirm that offering high-deductible health plans with health savings accounts can lead to lower costs for employers."
According to Vimo Inc., a Mountain View, Calif., firm that provides research on the health care industry, fewer than a third of the consumers eligible to open an HSA have done so.
Ms. Atkinson said there is some concern that the new Democratic Congress may alter the environment for HSAs. For instance, she said legislators might decide to shift record keeping from consumers to banks.
"That would complicate dramatically them opening these accounts," she said.
Another question, according to Ms. Atkinson, is how insurance companies that offer conventional plans will react to the growth of high-deductible versions. The conundrum is that if employers and workers begin to trade conventional health insurance for HSAs, banks, as the account custodians, would end up with money that used to go to the insurers, she said.
"That's why some insurance companies are starting to form banks," Ms. Atkinson said.
Small financial institutions already are well represented among health savings account custodians. According to Information Strategies, the 1,200 custodial institutions include about 500 community banks and 400 credit unions.
"We are surprised at the number of credit unions and community banks jumping into this," Ms. Laing said. "It's clear that HSAs are very much a local-footprint product."
