HSA Health Savings Account Status for 2006

2006 HSA (Health Savings Account) Update

Three million Americans have signed up for them since they were introduced in 2004. And in the last year, the pace of HSA enrollment has picked up, with roughly 50,000 new accounts being opened each month, according to America's Health Insurance Plans, a trade group for health insurers. Now they look set to get a boost from President George W. Bush, who pledged in his State of the Union address to strengthen health savings accounts and make them more portable.

HSAs let people save pretax dollars for medical expenses as long as they are enrolled in a high-deductible health plan. The idea is that, by giving consumers a stake in their health care spending, they will have more incentive to shop around for cheaper drugs and treatment, thus helping to rein in runaway health care costs.

But by sparking a mass migration of the young and the healthy to low-premium catastrophic insurance, HSAs will give the $1.9 trillion health care industry the biggest jolt it has had since the advent of managed care. Even if insurers tack on catastrophic insurance to their offerings--as many are doing--they will find their profits squeezed as their traditional plans plummet in enrollment and risk profiles deteriorate sharply. (The chronically ill are not as apt to buy catastrophic insurance.) Meanwhile, drug companies will come under pricing pressure from makers of generics, and doctors may find their more patients suddenly haggling for discounts.

Yet the shift toward consumer-driven health care will create openings for others. "We think about $140 billion of revenue will be at stake over the next five years," says Aamer Baig of DiamondCluster International, a consulting firm.

Financial services firms are best positioned to gain. There could be as many as 15 million to 25 million HSA accounts holding a whopping $75 billion in assets by 2010, predicts DiamondCluster. And banks and asset managers are already scrambling to tap this fresh source of investable assets and account management fees. Fidelity Investments and Wells Fargo now offer HSAs linked to a Visa debit card.

But a boom in health savings accounts won't be quite the windfall for Wall Street that IRAs were because people will accumulate balances slowly, one paycheck at a time, and draw on them regularly to pay medical expenses. "There will be a lot of expensive little transactions," says Joe Antos, a health care expert at the American Enterprise Institute in Washington, D.C.

That may change, however, if the Bush Administration gets its way. At present, people can contribute up to the amount of their deductible or $2,700 for individuals and $5,450 for families, whichever is lower. But Bush wants to lift this cap so that people can cover all their out-of-pocket costs under their HSApolicy with pretax dollars, not just the deductible.

Doubtless more opportunities will emerge as HSAs evolve. For example, people may eventually be able to roll over into a credit facility once they've drawn down their HSA dollars, predicts Stephen Parente, an HSA expert at the University of Minnesota. This would provide a new source of interest revenue for credit card companies.

Tech giants, such as Cisco Systems and Intel, also stand to gain if the Bush Administration succeeds in its push for electronic medical records, which could eventually be linked up to HSAs. Moving digital images of X-rays and diagnostic tests from place to place in a secure manner will require "a lot of IT", Parente says.

Moreover, with the shift to consumer-driven health care, there will be lots of money to be made from peddling advice on how to get the most bang for the HSA buck. Already, several banks offering HSAs have already partnered with Internet health sites WebMD and Subimo. "They have potential to be trusted advisers," says Patricia O'Brien, the managing partner for DiamondCluster's health care practice.

But one could imagine demand for a buyer-review system--in the vein of Zagat's restaurant guides or eBay seller reviews--to score doctors, labs and drug therapies. "There's a huge opportunity for someone to come in and make this easier for the consumer and provide all the information they need in a very usable form," insists Baig.

Financial services firms and insurers clearly have the most at stake in the shift to consumer-driven health care and many will doubtless form partnerships to compete for HSA assets and customers, such as JPMorgan Chase and Humana have. Meanwhile, others are striking out on their own: UnitedHealth Group has started a bank to administer HSAs through a Visa debit-card and Blue Cross and Blue Shield will open its own bank next year. It is conceivable that banks will do the same, and try to muscle out insurers by starting their own insurance arms.

But in the race to snap up HSA assets, banks will likely have the upper hand. "I can't think of any major innovations in technology that have influenced consumer behavior on the health insurance side," observes Baig.

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