Although the Health Savings Account (HSA) market is a mere two-and-a-half years old, the explosive growth in HSA accounts has financial institutions scrambling to develop and execute effective HSA strategies. While several credit unions have begun to dabble in the HSA market, largely in response to individual member requests, the vast majority of the industry remains on the sidelines. Yet now is not the time for indecision or lack of action. Credit unions have a window of opportunity to stake their claim to this burgeoning market, but the window may not remain open for long.
What is an HSA?
In brief, an HSA is a tax-free account that is established by an individual for the purposes of paying qualified medical expenses. Individuals are eligible to open an HSA if they are enrolled in a high deductible health plan (HDHP) that meets certain criteria such as a minimum deductible amount and a maximum limit on out-of-pocket spending. (1) Similar to a 401(k) account, individuals can contribute pre-tax wages to their HSA and employers may choose to contribute as well. HSA account balances roll over year to year without limit and the account itself is fully portable.
HSA Market Growth
Rising health care costs are the primary driver behind the growth in high deductible health plans (HDHPs) in general and HSAs in particular. For the individual, a HSA-eligible HDHP is an opportunity to lower one’s insurance premium and accumulate tax free savings. For employers, HSA-eligible plans promise to control spiraling health care costs by empowering individuals with their health care decisions. In theory, by giving individuals a financial stake in their health care decisions, they will have an incentive to manage their needs more cost effectively.
According to the U.S. Government Accountability Office, since the federal government authorized the use of HSA accounts beginning January 1, 2004 (2), the number of accounts has grown rapidly. Over 3 million accounts have been established in the past several years, and industry experts predict that as many as 10-15 million people will have HSAs by 2010 with accumulated assets ranging from $10 to $62 billion (3).
Accumulating and managing these assets is what every financial institution desires, and a number of insurance companies and banks are moving quickly to lay claim to this growing marketplace. But before this marketplace is defined by others, credit unions should thoroughly evaluate the HSA market opportunity and develop and execute the appropriate strategies.
Three Reasons Why Credit Unions Should Offer HSAs
In addition to the attractive growth trends, following are three reasons why credit unions ought to consider participating in the HSA market:
1. Credit unions have pre-existing sponsor/SEG relationships
As employers seek to reign in rising health insurance costs, more and more companies are turning to HDHPs. 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.
Given the growing preference among employers for HDHP plans, the group insurance market (i.e. employer-sponsored HSA programs) is expected to drive future HSA market growth. This should play to the credit union industry’s advantage. Credit unions have a leg up on the competition given their historical ties to their corporate sponsors and/or their SEGs. If managed properly, this relationship can pay dividends for credit unions.
2. Member demographics favor HSAs
HSAs are more popular with an average credit union’s core member base: middle-aged people with modest to above average household wealth. Information Strategies, Inc., an HSA research firm, found that 70 percent of those surveyed with HSAs were over 40 years old. According to one industry expert, the HSA product suits middle aged people because they are “more financially astute [that other demographic groups] and concerned with their retirement and health care planning needs.” Given that the average credit union member today is approximately 47 years old, the HSA product may prove appealing to a large segment of credit union members.
3. HSAs address many institutional needs of credit unions
There are a number of ways HSAs can help to address many of the challenges credit unions face in today’s highly competitive marketplace. For example, with industry share growth at a mere 4.3 percent, HSAs—like Individual Retirement Accounts (IRAs)—hold the promise of attracting much needed deposits. Further, by linking a debit card to a member’s HSA account, a credit union can generate additional interchange revenue. Finally, a well-designed HSA product can serve as one of the key elements of an effective strategy to serve as a members primary financial institution (PFI).
Credit unions are ideally positioned to reap the benefits of the burgeoning HSA market. To learn more about the opportunities and challenges of establishing an effective HSA program, please view our webinar, Health Savings Accounts (HSAs): Is Today the Window of Opportunity for Credit Unions? , brought to you by Callahan & Associates.
- Minimum deductible of $1,050 for single and $2,100 for family coverage; maximum out-of-pocket expense of $5,250 for single and $10,500 for family coverage.
- See Section 1201 of the Medical Prescription Drug, Improvement, and Modernization Act of 2003 (Pub. L. No 108-173).
- HSAs Growing in Popularity, Health Care Financing & Organization, November, 2005. See www.hcfo.net