Choosing an HSA Business Model

While credit unions may be inclined to adopt a retail business model for HSAs, they may wish to consider developing wholesale capabilities to align themselves with the market opportunity.


Health Savings Accounts (HSAs) are rapidly gaining in popularity among individuals and businesses as a means to address spiraling health care costs. As a tax advantaged deposit account tied to a high deductible health plan (HDHP), HSAs enable individuals to set aside pre-tax income for future medical expenses.

In just over two years, three million Americans have opened HSA accounts, and industry experts predict there will be 10-15 million accounts by 2010 with accumulated assets ranging from $10 to $62 billion. As banks and insurance companies work quickly to develop their HSA capabilities and attract these assets, the credit union industry needs to get serious about the opportunity before it is too late.

HSA Market Size and Trends – A Snapshot
The majority of Americans today receive health coverage through the private health insurance market. Of the 177 million privately insured individuals, approximately 90 percent (160 million) are group insured—i.e. they receive their coverage through a plan offered by their employer. The remaining 10 percent (17 million) are individually insured.


As health care costs continue to rise, an increasing number of businesses and individuals are expressing interest in consumer-directed health plans (CDHPs) which combine a HDHP with a tax advantaged savings account (i.e. an HSA) that employees can use to pay medical expenses. According to a 2006 study by the U.S. Government Accountability Office (GAO), nearly 50 percent of the three million HSA accounts opened to date were purchased in the individual market.

Preliminary evidence, however, suggests that future HSA market growth will come predominately from the group insured market. As illustrated above, the group market is significantly larger than the insured market. Further, each year an increasing number of companies are offering HDHPs to their employees. According to a widely-cited Watson Wyatt survey of mid-sized to large companies, the number of employers offering HDHPs has grown from approximately 7 percent in 2004 to nearly 30 percent in 2006.


Retail versus Wholesale Business Models
Broadly speaking, there are two business models a credit union can adopt with respect to HSAs: a retail model and a wholesale model. The retail model is characterized by a credit union offering HSAs directly to its members—i.e. similar to how credit unions currently offer most of their existing products and services.

In contrast, the wholesale business model requires a credit union to form strategic alliances and provide the HSA component of a comprehensive health care solution. In other words, the credit union would first establish its HSA program, form strategic partnerships with benefits providers and potentially other vendors, and approach employers and/or its select employee groups (SEGs) with a comprehensive program.

Strategic Implications for Credit Unions
In the past several years there have been signs of a coming convergence between banks and insurance companies in an effort to develop wholesale models and offer comprehensive HSA solutions. Several insurers, most notably UnitedHealth Group and Blue Cross Blue Shield, have established wholly-owned banks (Exante Financial Services and Blue Healthcare Bank, respectively) to round out their HSA offering.

To date, virtually all of the credit unions with active HSA programs are utilizing a traditional retail model. Of course, individuals will always have a need to purchase an HSA in a retail manner. However, if the experts are correct and future HSA growth will be driven largely by the group market requiring comprehensive HSA solutions, now is the time for credit unions to consider alternatives.

Credit unions have a head start on the competition given their pre-existing sponsor and SEG-based relationships. Credit unions also have a competitive advantage in terms of their ability to offer superior rates and service. To develop wholesale capabilities to compete in the group market, however, credit unions will need to acquire the skills to form and manage successful strategic alliances. Given the nascent stage of the HSA market, now may be the perfect time for credit unions to experiment and develop such capabilities. Choosing not to do so may result in a missed opportunity down the road.