By William G. (Bill) Stuart
Director of Strategy and Compliance
Nov. 10, 2016
A dozen years ago, when HSAs were launched as part of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, a number of banks applied to become HSA trustees and custodians. Lured by the prospect of new assets under management, banks and other financial institutions of all sizes eagerly hired staff, built products and marketed accounts through employers, medical insurers and benefit advisors.
Fast forward a dozen or so years. Today, the HSA graveyard is full of tombstones bearing the name of some of the nation’s major financial institutions. Wells Fargo. Sovereign (now Santander). US Bank. JP Morgan. The Bancorp Inc. M&T Bank. Much of this activity has occurred during the past two years, as these banks have left the industry to concentrate on more lucrative business and sold their assets to former competitors.
First, while HSAs are growing at a 20 to 25% annual growth figure (even during the depths of the recession that began in 2008), they represent only an infinitesimally small portion of total assets in financial accounts. The banks that sold their HSA business either couldn’t attract a critical mass of HSA balances, shifted their focus to more lucrative and larger asset opportunities or sold their HSA assets to raise capital.
Second, employers view HSAs as a reimbursement program rather than a financial product. The distinction is important. While employers typically contract with a single financial institution to deliver only an employer-based qualified retirement plan. By contrast, the same employers prefer a single vendor partner to administer tax-advantaged reimbursement programs (Health FSAs, HRAs, commuter reimbursement programs) and COBRA administration. While some financial institutions partnered with reimbursement companies to offer a full suite of products with a single point of contact and unified employer and employee portals, most didn’t respond soon enough to this trend.
Third, banks reassessed their business models and portfolios. Some needed to raise cash to weather the recession. Others chose to shed units that couldn’t become major players in their market segments. Still others realized that they couldn’t reach the scale necessary to justify the investment in new technology (like mobile applications and electronic billpay) and human customer support necessary to remain competitive. Finally, most weren’t able to make a sufficient spread (interest received from lending HSA balances less the interest paid to accountholders) to justify remaining in the business.
A new model emerges – and dominates
Today, very few large banks remain HSA trustees or custodians. Instead, the market is dominated by administrators – companies that offer other reimbursement services, provide customer and employer support, maintain records and report account activity to accountholders and the IRS. These administrators work with financial institutions that hold deposits, usually in FDIC-insured accounts.
This model provides accountholders with the best of both worlds. Administrators can also manage a Limited-Purpose Health FSA (sometimes with a single debit card that has multiple “purses”) and Health Reimbursement Arrangements through one Web site and coordinate payments from an employee’s various accounts. Administrators provide all customer support. They usually partner with a technology company that has the scale (combining many administrators’ HSAs onto one platform with more accounts under management than the largest independent HSA providers) to invest in mobile applications, more robust educational libraries, electronic billpay options and employer self-service portals.
The bank that works with the administrator holds funds and provides FDIC insurance. Either the administrator or the bank contracts with an investment company to provide mutual fund options into which accountholders can invest balances that exceed a threshold set by the administrator, employer or accountholder. In many cases, these banks focus exclusively on HSAs.
Benefit Strategies’ solution
Benefit Strategies is an HSA administrator. We aren’t a bank. We offer reimbursement services to employers, including HSAs, Health FSAs, HRAs, commuter and parking reimbursement, COBRA administration, direct billing and fulfillment (including tuition, wellness and fitness reimbursement programs). We manage HSAs on a platform that includes more than 2.5 million accounts. We lease the platform from a company that provides and maintains the infrastructure to support more than 200,000 employers and more than 17 million employees’ accounts – giving it the scale to invest in innovative solutions and to apply technology from its other businesses (managing truck fleet fuel programs and supporting the transfer of money from consumers ordering airplane tickets, hotels and rental cars on most online travel portals to the vendors offering those service).
Our primary banking partner, a division of one of the largest independent banks in the Midwest, focuses exclusively on HSAs. It partners with a company that specializes in evaluating and recommending HSA investment options to offer an investment platform and best-in-class mutual funds. Accountholders can invest once they meet a threshold (typically $1,000 or $2,000). They can automatically direct new contributions into their chosen funds at their chosen allocation and liquidate investments when their cash balance falls below a pre-set amount that they choose.
When employees direct a portion of their income into a Limited-Purpose Health FSA to reimburse eligible dental and vision expenses, they receive a single debit card with two purses. The card is coded so that a debit card swipe pulls from the Limited-Purpose Health FSA at a dental or optometrist office and the HSA at a pharmacy, physician’s office, lab or hospital. If the employee exhausts their Health FSA balance, all subsequent transactions pull funds from the HSA. Employees can follow this activity through a single personal online portal.
When employees are covered by a Post-Deductible HRA as well as an HSA, we can receive a claims file from the insurer. We post those claims on employees’ online portals. Employees can see when the HRA begin to pay claims so that employees don’t inadvertently reimburse an expense from their HSAs that will be paid automatically from the HRA. Again, all activity is contained in a single personal portal.
The next few years
We expect to see continued consolidation in the HSA market. We believe that many of the hundreds of smaller regional and local banks will reassess their continued involvement in the market as consumers, particularly the growing number of Millennials enrolling in medical coverage demand better technology solutions. Smaller banks may not be able to invest the resources necessary to improve their product in this small piece of their portfolio of holdings. We anticipate that they’ll look for a friendly buyer or partner who can deliver effective administrative services efficiently so that the bankers can hold account assets without assuming the burden of managing accounts.
As the market reshapes itself, you can bet that Benefit Strategies will be at the forefront with innovative solutions that are affordable and easy to use and are supported by friendly customer service and a multi-media library of education tools to help accountholders maximize their HSA performance. We look forward to your joining us in that journey.
What we’re reading
Here’s an early look at Medicare Part D (prescription drug) plans and pricing for 2017 from Kaiser Family Foundation.
While many insurers have reported losses in ACA marketplaces and are selectively abandoning the individual markets in many states, Blue Cross and Blue Shield plans have experienced mixed results. While half the Blues plans have lost money in the public marketplaces, half have been profitable. A lot of factors come into play in determining success. Read more here.
Quick quiz: What was the average premium for family coverage in the US in 2015?
Answer: None of the above. It was actually just over $17,300. The figures above are for, respectively, Arkansas, Hawai’i, Wisconsin and Alaska, illustrating differences in average premium by state. Learn more in this Commonwealth Fund report.