The Battle for the Best Health Card

  Each fall, companies typically enable their employees to make changes in health-insurance coverage for the coming year. And those that offer flexible-spending accounts, health reimbursement accounts and health savings accounts explain the purpose and use of those tax-deferred benefits, too.
  In the wake of Congress' authorization of HSAs as part of the controversial Medicare Prescription Drug Improvement and Modernization Act in 2003-which many Americans saw as a necessary adjustment and many others criticized as an erosion of crucial health benefits-open-enrollment periods also are on the minds of a growing number of payment processors and card issuers.
  Analysts predict rapid growth of tax-deferred spending and savings accounts as employers shift more health costs to employees. The promise of new revenue has prompted more financial institutions to enter the health-account competition.
  "Staying on the sidelines is a luxury that issuers can't afford," says Stacy Pourfallah, Visa vice president of health care prepaid products. "If you think that health care is a strategic opportunity for you, the best strategy is to get engaged."
  Traditional banks have the early advantage in offering health care accounts. Thus far just one insurer has its own bank designed to handle such accounts, but other insurers likely are considering similar moves.
  FSAs, created in 1978, are offered by employers to employees. Employees contribute pretax payroll deductions that they can spend on qualified health care, transit and dependent care expenses throughout the year. FSAs are not portable to other employers, and balances cannot be carried over from year to year.
  HRAs, created in 2002, are funded by employer contributions for employee spending on health expenses such as doctors' fees, medicine and necessary hospital services not covered by insurance. Balances can be carried over from year to year, but employers cannot refund remaining balances to employees.
  HSAs are tax-deferred accounts that enable consumers to save deposited funds for use in paying co-pay and deductible obligations of high-deductible health plans. Those insurance plans must have minimum deductibles of $1,000 for individuals and $2,000 for families, according to IRS rules. Third-party administrators often market HSAs to employers who want to lower what they contribute to employee insurance plans. But employees and consumers not part of employer health plans own the assets in their HSAs, and they can roll over unused funds into tax-deferred retirement savings or investment accounts each year.
  The U.S. Department of the Treasury reported recently that the number of HSAs stood at 3.2 million in January, up from 400,000 in September 2004. The Treasury Department says that number could rise to as many as 45 million accounts by 2010. McLean, Va.-based BearingPoint predicts that by 2010 HSA, FSA and HRA accounts will hold assets of $60 billion.
  By comparison, Boston-based consultancy Celent LLC estimates there are some 18 million FSAs today, 4.6 million of which are tied to debit cards. The firm estimates there are about 1.52 million HRAs, which can be tied to the same cards as HSAs and medical FSAs.
  While HSAs have added another layer of complexity and uncertainty to the realm of tax-deferred health payments, financial institutions and payment-product vendors see opportunity as well. Banks hope more consumers will park long-term HSA investment savings alongside IRAs and 401Ks, leading to increased deposit and investment revenue when account holders save.
  BUILT TO SPEND
  Unlike retirement accounts, HSAs are designed to spend for health care costs as needed before retirement. Therefore, more issuers, networks and processors are vying to partner with insurers and third-party health plan administrators to simplify the understanding and payment of out-of-pocket medical expenses for consumers.
  The opportunities for increased transaction and interchange revenue are driving competition to offer the most payment card functionality. Therefore, more issuers are rolling out or experimenting with optional lines of credit tied to HSAs. Unlike FSAs and HRAs, HSAs do not cover expenses beyond the amount deposited in the account.
  Issuers, health care providers, plan administrators and insurers also are trying to provide easier-to-understand medical pricing and up-front substantiation and billing. That way consumers can better shop around and providers can collect more payments earlier.
  Thus far, Minneapolis-based UnitedHealth Group is the only insurer to open its own bank for health accounts. It formed Exante Financial Services and its subsidiary Exante Bank in 2002 to streamline billing and payments between UnitedHealth and medical providers and to tap the potential of FSA and HRA payments. Exante adjudicates and processes payments (with help from third parties such as Columbus, Ga., processor TSYS Inc.) for its own insurance brands, such as Golden Rule. It also offers those services to competing insurers and third-party health plan administrators.
  Exante began offering HSAs soon after their legislative birth in 2003. Today, Exante claims some 200,000 HSA accounts and more than $250 million in assets related to HSA, FSA and HRA deposits.
  Exante plans to roll out services in early 2007 that add more functions to its MasterCard-branded health debit cards. The services will enable consumers to tap multiple health-account types, such as HSAs and FSAs, to make qualified payments from a single card. Their magnetic stripe coding also will be able to transmit with transaction details data about UnitedHealth plan eligibility, deductible and copay information, and personal health facts such as drug allergies.
  Exante also is piloting real-time adjudication capability on the cards in Rhode Island among physician groups and ancillary health providers who are part of UnitedHealth's network.
  The issuer will begin piloting an optional line of credit on a limited number of cards in early 2007, with similar qualification rules to standard MasterCard credit cards. Interest rates and credit limits will be based on credit scores. If all goes well, Exante will offer the credit lines more broadly later in the year.
  UnitedHealth got in early. Blue Cross Blue Shield Association's application for an industrial loan bank in Utah is snagged in the Federal Deposit Insurance Corp.'s six-month freeze on such applications so it can study the impact of a Wal-Mart-owned bank.
  Kirsten Trusko, co-lead of the consumer-directed health practice at BearingPoint, says traditional banks have little to fear from insurer encroachment, as many insurers that have studied potential banks have backed off. "It's a Herculean effort," she says. "That's why you see so many [insurers] are going with partners of various-size banks."
  In the 1990s, UMB Bank NA, a Kansas City, Mo.-based bank holding company, began issuing payment cards tied to Archer Medical Savings Accounts, an experimental precursor to HSAs. The cards enabled selective authorization of some products based on Visa and MasterCard merchant codes.
  EARLY ENTRANT
  UMB founded its UMB Healthcare Services division in 2004. The issuer's previous experience gave it a running start in HSAs, says Dennis Triplett, UMB Bank president of health care services. "It allowed us to take what we'd learned from medical savings accounts and apply those lessons to the new HSAs," he says.
  Today, UMB provides HSA custody and investment services in partnership with a number of insurers, including Humana and Assurant Health, and such third-party health plan administrators as Productivity Solutions Inc. UMB's "white label" services allow insurer and administrator branding to overshadow UMB's brand. The strategy has built some $50 million in health-account deposits for UMB, with an average deposit of $1,250 per account.
  First Data Corp.'s Healthcare Services division provides processing for the Visa- and MasterCard-branded debit cards UMB issues to access the accounts. When UMB's HSA cards are swiped in payment terminals, they enable checks of deductible amounts remaining, verify copayment requirements, and review health products and services covered by the cardholder's benefits plan. The cardholder's account is deducted accordingly.
  In September, UMB began two pilots of an optional line of credit tied to its health-benefits debit cards. Though Triplett would not disclose a number of details about the pilots, he offered these: Credit limits are the same as cardholder deductibles. Interest rates are the same for all, regardless of credit scores. Because employees in a group plan are more likely to discuss with each other the terms of their health-account cards, especially in the beginning when the offering is new, "we felt it was better to make it more uniform," Triplett says.
  American Express Co. began in early 2006 to issue an HSA payment card linked to the largest health insurer in New York state. High-deductible health-plan customers of WellChoice Inc., the parent company of Empire Blue Cross Blue Shield, can tap into their HSA funds on deposit at American Express Bank using the American Express HealthPay Plus Card.
  MORE CREDIT COMING
  The card deducts funds as a signature-debit transaction from a checking account (the accounts also provide checks for payment where AmEx is not accepted). Cardholders also may apply for revolving credit lines from AmEx. If approved, they may use the cards to pay for qualified medical expenses with their HSA funds, their credit lines or both. Cardholders can pay off their full balances with their next card statements or pay them off over time with HSA and other account funds. Interest rates on the credit line vary, depending on risk and other factors, but are similar to those on AmEx credit cards, according to company statements.
  The cards work anywhere AmEx is accepted, including in doctor's offices. AmEx checks cardholder deductibles, HSA accounts, credit lines and other factors. That can reduce headaches for consumers whose medical providers require them to pay immediately but otherwise would have to wait for their adjusted discount checks to arrive in the mail, AmEx says.
  JPMorgan Chase & Co. also plans to begin a pilot next year of a credit line tied to its HSA cards. Enabling spending on the accounts' MasterCard- and Visa-branded debit cards is as important as the saving, investment and account-management features for attracting and keeping HSA customers, says David Josephs, Chase vice president and head of consumer-directed health care. "The ability to use HSAs transactionally will remain one of the paramount factors of the offering," he says.
  Chase HSA holders can pay for health expenses using their cards or checks or by authorizing direct withdrawals from their accounts through the automated clearinghouse network. "We have integrated with our health-plan partners, so if a person has a claim submitted by their doctor, the health plan can reach into the HSA and pay the doctor," Josephs says. Participating insurers include Aetna, Cigna, Humana and several regional Blue Cross Blue Shield providers.
  Though Chase also issues cards tied to FSAs, it does not issue single cards that can tap both FSA and HSA accounts. FSAs tied to HSAs must be limited accounts that only cover health expenses, not other popular FSA offerings such as transit and child care. "We have seen no demand for it in the marketplace," Josephs says. "We've seen very few employers that are structuring their benefit programs with a limited-use FSA."
  Several other issuers are planning to add credit lines to their HSA cards soon. "We have several issuers who are going live with overdraft lines of credit [tied to] HSAs," Visa's Pourfallah says. "The platform, the processing and the logic have been around for a long time, if you consider this like a checking account with an overdraft feature."
  While adding credit lines may give consumers another option for paying HSA-qualified expenses-an option that helps keep purchase records organized for tax-reporting purposes-whether those lines of credit will pay off for issuers is unclear. "They'll be fairly small lines of credit, so there is the expense of underwriting and maintaining that," Pourfallah says. "Issuers are thinking through how frequently this line will be used and what's the business case for offering this enhancement."
  Questions remain, though, on how HSAs and credit lines can work together. An IRS spokesperson says he has no specific guidance on paying interest generated from HSA credit lines. But he adds that, in general, consumers can only use HSA funds to pay for qualified medical expenses, not interest fees.
  Other issues are when lines of credit will be offered to new HSA applicants: during workplace open enrollment, for example, or after the fact? How are workers informed if they are rejected for credit? Regulatory guidance on those questions is expected soon.
  Unanswered questions aside, issuers need to decide soon whether they want to join the health care payments game, as competition in the space continues to heat up.
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