HSAs: Debit's New Cash Cow

  Health savings accounts hold immense promise for the card companies to grab a major slice of the health care pie and significantly increase debit volume. But there are risks.
  After more than a decade of struggling to capture a substantial share of the hundreds of billions of dollars consumers spend annually out of pocket on health care, the payment card industry finds itself in a position to cash in big.
  Responding to rising health care costs, more companies are shifting a greater portion of their health-insurance costs to their employees. To help ease the growing financial burden being placed on consumers, Congress in 2003 approved the creation of tax-deferred health savings accounts, or HSAs, which are tied to high-deductible health plans.
  Driving the massive jump in health care costs nationally is a combination of an aging population requiring more frequent health care, and improved medical technology, procedures and drugs. The Centers for Medicaid & Medicare Services, a Washington, D.C.-based federal agency that administers Medicare and Medicaid, predicts consumer out-of-pocket health care expenses will total $261.8 billion in 2005, up 6.5% from an estimated $245.9 billion in 2004.
  "Health care providers are being pressured by their clients to offer the best and most economical products," says Ted Dargan, MasterCard International vice president. "With health care costs rising by double-digit rates, it would not be surprising to see more emphasis put on HSAs by businesses."
  The number of HSA cards in force today is relatively small. But the number is expected to swell dramatically as companies sort out the benefits and cost savings from HSAs and begin including them as part of their health-plan options. According to Forrester Research, the number of HSAs will grow from about 391,000 today to 6.3 million in 2008. Moreover, $6 billion will flow through HSAs in 2008, up from $282 million today, Forrester says.
  If projections hold true and more employers embrace HSAs, companies can expect 10% to 15% of their employees to opt in during the next few years, says Craig Tuley, vice president and HSA product manager at Cincinnati-based Fifth Third Bank. Fifth Third began supporting HSAs in January and by April had opened about 2,000 accounts.
  As HSAs grow, debit cards will be the lead product used to mine this lucrative new source of volume and interchange revenue. Indeed, HSA cards are certain to become a mainstay of many debit card issuers' portfolios, observers say.
  "HSAs are going to be another offering that financial institutions need to retain customers," says Scott Reaser, a senior consultant at Linthicum, Md.-based First Annapolis Consulting. "All that is needed to offer an HSA account are deposit and account access capabilities, and debit cards make the most sense for the access device."
  HSA funds only can be used for paying out-of-pocket health care expenses until the high-deductible health care coverage kicks in. Consumers can contribute up to $2,650 for an individual HSA and $5,250 per family per calendar year. Health plans qualifying for HSA status must have a deductible of at least $1,000 for an individual and $2,000 for a family. Contributions will be indexed annually to adjust for inflation.
  Improper spending from an HSA can result in significant penalties. For example, if the money is used for nonmedical expenses, cardholders under the age of 65 can be subject to a 10% tax penalty on the amount of the expenditure.
  When the Internal Revenue Service in 2003 ruled that consumers, and not insurers or plan administrators, are responsible for ensuring account funds are used only for qualified purchases, the doors opened for HSAs to flourish, experts say. Indeed, the notion of such a product has set the minds of debit card executives spinning with thoughts of creating a lucrative new breed of debit card that will deliver a wealth of interchange revenue.
  So far, such major banks as Bank of America, J.P. Morgan Chase & Co., Fifth Third Bancorp, Mellon Bank and Wells Fargo & Co. have been among the early adopters to launch HSA accounts that use Visa or MasterCard-branded debit cards as access vehicles.
  Many of these companies are working behind the scenes with such managed care providers as United Health Care, WellPoint, Cigna, and Blue Cross and Blue Shield. Another major player is Evolution Benefits Inc., which provides to third-party health-plan administrators the Benny Card, a debit card for accessing HSAs.
  On the processing side, Elan Financial Service, Fifth Third, Fiserv Inc., GenPass Inc., Total System Services Inc. (TSYS) and Metavante Corp. are among the early supporters of HSA programs.
  In May, Metavante reached an agreement to acquire Med-i-Bank Inc. (MBI), a provider of electronic payments technology for HSAs and other health-spending accounts, for $145 million. MBI, which competes with Evolution Benefits, provides HSA support to 200 third-party administrators and health-plan providers that service more than 15,500 employers. MBI is expected to complement Metavante's HSA program, which includes account set-up, program administration, processing, regulatory reporting and record keeping.
  HSAs, which consumers also can access using checks, are expected to deliver to issuers the added bonus of account maintenance fees. Moreover, because consumers can place unused funds at the end of each year into long-term investments, such as individual retirement accounts, financial institutions can supplement HSA card fees and interchange revenue with fees for investment services.
  The premise behind HSAs is that if consumers have a direct stake in how their health care dollars are spent, they will be more prone to scrutinize what procedures they purchase. "The belief is that if someone has ownership of their health plan, they will be more apt to spend it prudently to get better health care," says Jeffery Munn, senior consultant, consumer-driven health care, at Lincolnshire, Ill.-based Hewitt Associates LLC.
  A recent Hewitt survey found that less than 3% of respondents had elected to enroll in an HSA through early 2005. "We are seeing a lot of interest in these accounts among the Fortune 500 companies, and starting in 2007 we expect companies to have a much better idea of how effectively these accounts work," says Munn.
  Fee Issues
  It is at that point, contends Steve Hooper, Mellon's director of HSA product management, that issuers can expect to sign large numbers of employees, rather than a few at a time. Mellon, which says it has issued tens of thousands of HSA debit cards since making the decision to issue them during the first quarter of 2004, charges either the insurance carrier or the employer offering the insurance plan a $10 account set-up fee and a monthly $2 account maintenance fee, which rises to $3.50 if the account balance falls below $1,000. Some employers will pass those costs on to their employees.
  Set-up and maintenance fees are used to cover the operating costs associated with the program. The cards are marketed through more than 40 insurance carriers with which Mellon is affiliated.
  Fifth Third charges $2 per check for the second and subsequent checks used to access the HSA. The fee's purpose is to encourage debit card use so the bank earns interchange.
  "Issuers are still figuring out for what services they can charge," says MasterCard's Dargan. "Some are charging more on the account management side and less on the investment side, and vice versa."
  While early entrants essentially have the field to themselves at the moment to determine accountholder fees, that will change as small and mid-size issuers create price competition. Because HSAs are portable, consumers can shop for the best deal, and they can move the accounts between jobs.
  Indeed, the ability to shop for the best deal is expected to help level the playing field for smaller debit card issuers, such as credit unions, which are expected to plunge fast into the HSA market to prevent attrition, says Jack Gebhardt, senior vice president at Brookfield, Wis.-based Fiserv, which has built a diversified health care business to help banks and insurance carriers better manage payment costs.
  The ability to use HSA cards to verify what the patient owes at the time of service will help drive down operating costs for carriers. About 50% of all incoming calls to insurers are to verify benefits eligibility, says Nick Santoro, CEO of Salt Lake City-based Exante, a subsidiary of Minneapolis-based United Health Group that has about 40,000 HSAs. "Streamlining costs is a big issue for carriers and health care providers," he adds.
  One way to further streamline costs is to create multipurpose HSA cards. Exante is developing a magnetic stripe card, scheduled to debut in 2006, that will support HSAs, flexible-savings, dependent care, health-reimbursement and commuter-expense accounts. Debits will be made to the appropriate account using a back-office, rules-based program that tells Exante's host which account to debit based on the merchant code.
  HSA cards for real-time adjudication for medical procedures at the time they are performed also are in the works. Avon, Conn.-based Evolution Benefits plans to introduce a real-time eligibility and adjudication application this year.
  Potential risks
  As lucrative as HSAs sound, card issuers still face certain risks. The biggest, arguably, is public perception.
  If HSAs create an undue financial burden on a large number of consumers that open accounts, the negative impact is certain to flow back to the provider of the account, argues First Annapolis' Reaser. With medical bills a major cause of about half of all U.S. consumer bankruptcies, according to a recent Harvard University study, financial institutions will need to create risk models for HSA customers, he says.
  HSA providers also must take steps to ensure they will not become ensnared in any cardholder disputes with the IRS over unqualified HSA transactions.
  "There is always a risk involved with payments and with health care," says Reaser. "There is no way to say financial institutions won't get caught in any of the negative cross fire that may crop up, even though they have the risk tools. The risks of HSAs are still an unknown for them."
  Despite the potential risks, HSAs appear too lucrative for debit card issuers to stand on the sidelines for long. As the megamergers continue to put more market share distance between the industry Goliaths and everyone else, HSAs represent a market in which debit card issuers of all sizes can compete and thrive.
  WHAT EMPLOYEES PAY FOR HEALTH CARE
  (Projected average annual costs, per employee)
  2005 $1,481
  2004 1,288
  2003 1,077
  2002 879
  2001 733
  Source: Hewitt Associates LLC
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