Health Savings Accounts – A Strategic Outlook
A prime opportunity for credit unions.
It is rare that an occasion comes along that has the potential to bring significant new deposits to the credit
union industry; so when these types of opportunities present themselves, we tend to sit up and take
Health Savings Accounts are destined to bring significant deposit growth to credit unions. That is, if credit
unions act early to ensure they are educating their members, guiding their SEGs, and have the products
and services needed when consumers are ready to venture into this evolution in the health care system.
Credit unions offering expanded services, such as wealth management, may stand to gain additional
opportunities for deeper and broader member relationships, and increased income. In addition to deposit
growth, Health Savings Accounts offer the potential for moderate fee income and membership growth.
Within the next five years, Forrester Research, Inc. estimates that as many as 50 million Americans will
be utilizing a flexible Health Savings Account (HSA) to provide for their health care spending needs .
DiamondCluster Consultants further predicts that total assets of over $75 billion will be held in 10–20
million HSA accounts by 2010 .
While the expert predictions may vary, few disagree the opportunity is significant. In fact, some experts
say financial institutions haven’t seen an opportunity like this since the introduction of IRAs in 1974—and
today IRAs account for over $3 trillion in assets. At the current pace of 50,000 new HSA accounts per
month, indications are that HSAs are growing at a much faster pace than IRAs.
What exactly are Health Savings Accounts?
Health Savings Accounts were established by President George W. Bush on December 8, 2003, as part
of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. HSAs provide a way for
individuals to save money for qualified medical and retiree health expenses on a tax-advantaged basis.
HSAs are the only component of the federal tax code that allow both pre-tax deposits into accounts, and
tax-free growth of those deposits.
Any adult that is covered by a High-Deductible Health Plan (HDHP), and has no other first-dollar
coverage, may establish an HSA. Amounts contributed to an HSA belong to the account holder and are
completely portable between jobs and stages of life. Funds distributed from an HSA are not subject to tax
if they are used to pay qualified medical expenses. Unlike amounts in most flexible spending plans that
are forfeited if not used by the end of the year, unused funds remain available in HSAs for use in later
Just about any financial institution can serve as a custodian for consumer HSAs. Currently, there are very
few requirements imposed upon the financial institution.
Forrester Research, Inc., Cambridge, 2006.
Baig, Nuckols, & Dawson, DiamondCluster International, Inc., "Seizing the HSA Opportunity," Chicago,
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How are contributions made?
Tax-advantaged contributions to HSA custodial accounts can be made in three ways:
1. An individual or family member can make tax-deductible contributions to an HSA (even if
they do not itemize deductions).
2. An employer can make contributions to an individual’s HSA. (These contributions are not
taxed to either the employer or the employee.)
3. The employers sponsoring cafeteria plans can allow employees to contribute untaxed
salary through an automatic salary deduction plan.
To encourage saving for health expenses after retirement, individuals age 55 and older are allowed to
make additional ‘catch-up’ contributions to their HSAs (see below for allowed amounts). Once an
individual enrolls in Medicare, they are no longer eligible to contribute to their HSA. After age 65, HSA
accounts can continue to be used tax-free for out-of-pocket health expenses. Also, after age 65 the
money can be taken out, on a taxable basis, and spent on anything without incurring any penalties.
Eligibility requirements 2007.
An individual is eligible for an HSA if he/she is covered by a HDHP; such as a plan with minimum
deductibles of: $1,100 for individual self coverage, and $2,200 for family coverage. (These amounts are
indexed annually for inflation.) In addition, their annual out-of-pocket costs, including deductibles and co-
pays, cannot exceed $5,500 for self-only coverage, or $11,000 for family coverage.
In addition, the individual
cannot be covered by any other health insurance provider
cannot be enrolled in Medicare
cannot be claimed as a dependent on someone else’s tax return
cannot be under 18 years old (children cannot establish their own HSAs)
Spouses can establish their own HSAs, if eligible, and there are no income limits, or any requirement of
having earned income to contribute to an HSA. New for 2007, the legislation allows consumers to
convert HRAs and FSAs into an HSA, as well as a one-time rollover from an IRA into an HSA (not to
exceed the maximum contribution limit).
The maximum amount for 2007 that can be contributed (and deducted) to an HSA from all sources is
$2,850 for self-only coverage, and $5,650 for family coverage.
For individuals age 55 and older, additional ‘catch-up’ contributions to HSAs are allowed in the following
maximum amounts per year:
2006 - $700
2007 - $800
2008 - $900
2009 and after - $1,000.
The Internal Revenue Service, which is responsible for some HSA guidelines, requires the consumer to
enroll in a qualified, high-deductible insurance plan of at least $1,100 for single people, and $2,200 for
families per year. Such coverage makes HSAs more advantageous for younger, healthier people than the
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That explains why several of the largest financial services firms—including Bank of America, JPMorgan
Chase and Wells Fargo, along with Exante and American Express—are positioning themselves to
capture this expanding market.
Consumer statistics on HSA adoption rates and investment balances are promising, despite the fact that
HSAs are in their infancy relative to other financial products. A quarterly survey of more than 150 HSA
custodial advisors in 2006 indicates that an average of $1,940 is on deposit for accounts opened more
than a year, and $1,090 for those opened less than a year .
In addition, HSA balances tend to accumulate for longer periods of time, rather than serving as an active
transaction account. The majority of banks surveyed said at least 40 percent of deposited funds stay on
deposit. Blackhawk Bank, for example, estimates that less than 10 percent of the money deposited into
HSAs are actually being spent.
A study from America’s Health Insurance Plans (AHIP) offers some insight into the types of consumers
that generally purchase HSA accounts :
– 70 percent are families with children
– 61 percent are over age 40
– 31 percent have high school or technical school training as their highest level of
– 44 percent did not indicate having prior health insurance coverage on their
– 29 percent have family incomes of less than $50,000
– 19 percent have a net worth of less than $25,000
Product Maturity/Adoption .
Information Strategies, Inc, "Wide Availability Of New HSA Account Custodians Hides Strong Growth,"
www.hsafinder.com/07-06_04 Ridgefield, NJ, July 2006.
AHIP Center for Policy & Research, "HSAs and Account Based Health Plans,"
www.ahipresearch.org/pdfs/HSAsOverviewJun2006.pdf, June 2006.
Diamond Management & Technology Consultants, "Healthcare Industry Trends and Issues", Chicago,
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Credit union marketplace.
The National Association of Federal Credit Unions (NAFCU) recently reported that approximately 11
percent of the nation’s credit unions currently offer HSA accounts to their members. However, nearly 70
percent indicated that they anticipate growth in HSAs over the next year.
In addition, the average length of time the HSAs were in effect was six months. Of credit unions offering
HSAs, 63 percent offer HSA regular share accounts, 38 percent offer HSA share drafts accounts, 13
percent offer share certificate accounts, and another 13 percent offer an IRA-like HSA accounts.
Are credit unions missing the boat?
The Aite Group released a report in August 2006 entitled, Health Savings Accounts: A Bounty for Banks?
That report predicts large and specialty banks as the winners in the HSA market. It continues to speculate
that large banks will likely support 40 percent of HSAs (up from 20 percent in 2006), and specialty banks
will likely support 35 percent of HSAs (up from 30 percent in 2006) by 2010 . Credit union share of
market is expected to drop to only 5% by 2010.
Custodian Market Share Chart
The playing field.
Healthcare represents over 15 percent of the U.S. Gross Domestic Product (GDP). Annual spending is
currently approximately $2 trillion, and it continues to rise.
With the aging population, and the Medicare Trust Fund balance expected to encounter shortfalls,
demographic changes are driving up costs and changing policy choices. With increased medical
insurance premiums, many employers are looking for relief. In 2000, approximately 69 percent of
National Association of Federal Credit Unions, Flash Report, 2006.
Aite Group, Health Savings Accounts: A Bounty for Banks? Boston, MA. August 2006.
Aite Group, August 2006.
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employers offered health benefits. As of 2005, that figure had dropped to 60 percent . This is a crisis for
many Americans. In fact by 2013, it is anticipated that 56 million Americans will be uninsured. This is
approximately 18 percent of the U.S. population . With the average monthly worker premium around
$225, the time is now for consumers to take more control of their healthcare .
Over the years, healthcare has slowly evolved in this country. Costs, however, continue to far exceed the
rate of inflation. Managed care programs have failed to provide significant cost containment without
sacrificing quality and consumer choice. The latest wave in healthcare is Consumer Directed Health
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 provided a major step
forward in the evolution of CDHPs. It provided for a tax advantaged custodial savings account into which
a consumer can accumulate savings to pay for medical expenses. To qualify, the individual must be
enrolled in a qualified high-deductible health plan. This savings is available to pay for medical expenses
until the high deductible is met, at which time the insurance policy covers remaining healthcare costs.
This allows for greater flexibility and choice on the part of the consumer because it allows the savings to
be used for vision, dental and other expenses that might fall out of the traditional realm of an insurance
A paradigm shift.
HSAs are changing the paradigm of healthcare in the U.S. Healthcare becomes pro-consumer, allowing
the individual to provide greater control over their health decisions and expenditures. It is propelled by
business, which stands to save billions of dollars on health care premiums.
Other forms of CDHPs have existed for several years. Most notable are the Health Reimbursement
Account (HRA), and the Flexible Spending Account (FSA). Both allow pre-tax dollars to be used for health
expenses. However, each is limited in terms of its flexibility. For example, the pre-tax dollars deposited
into an FSA are forfeited if not used within the established annual timeframe. HRAs are limited in terms of
portability; benefits are lost if the employee changes employers.
On the other hand, HSAs allow tax deductible deposits to accumulate in the account, and allow for tax-
free growth of these deposits. Funds belong to the consumer and are thus, portable between jobs and
various stages of life. Upon retirement, the funds are available for broader purposes than medical
expenses, although for such uses they are at that point taxed as income.
"Legislators appear to be enthusiastic about HSAs and supportive of steps that need to be taken to
expand their use," says Eva Weber, an Aite Group analyst and co-author of the report Health Savings
Accounts: A Bounty for Banks? Weber also notes, "As a result, the IRS and the U.S. Treasury will likely
continue to issue periodic guidance on HSAs, but they are not likely to do anything that would suppress
Kaiser Family Foundation, "Kaiser/HRET 2005 Employer Health Benefits Survey," Menlo Park, CA,
Gilmer/Kronick, “It’s the premiums, stupid!” Health Affairs, 2005.
Kaiser Family Foundation, "Kaiser/HRET 2005 Employer Health Benefits Survey," Menlo Park, CA,
Aite Group, LLC, Health Savings Accounts: A Bounty for Banks?, Nancy Atkinson & Eva Weber,
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The revolution: a convergence of healthcare and financial services.
Some view the emergence of HSAs as a revolution in the healthcare market, rather than an evolution.
There is already a disruption of traditional lines of business occurring, and many feel that financial
institutions, especially banks and credit unions, have an opportunity to grab a significant piece of the
market if they move quickly and understand the new paradigm.
The assets that reside in the HSA mostly represent “new money.” That is, money that was previously paid
out by consumers in the form of health insurance premiums. While it is likely that the bulk of accumulated
assets will be forked off toward higher return yielding accounts, early behavior suggests that off-balance
sheet forms of savings (such as mutual funds) will hold a significant amount of deposits, and will also
likely remain in the transaction account.
HSAs are also viewed as a revolution with respect to consumerism. Since consumers with HSAs are now
in charge of paying “first dollar” for medical expenses, it is expected that they will want to make informed
decisions on price and quality, thus calling for more transparency in provided medical services.
Consumers will want to know the relative quality of a given provider, and there will be downward pricing
pressure as consumers ‘shop’ for medical services.
In addition, since consumers are paying for these services, it is likely that there will be a reduction in
healthcare utilization, or a reallocation toward lower cost forms of providing healthcare. For example, a
patient may decide to schedule an appointment with a clinic or physician’s office, rather than utilize an
emergency room for certain afflictions.
As more and more players enter the arena in this new medical landscape, it can be expected that there
will be increased competition to attract HSA deposits. Credit unions have superior member service skills,
and strong relationships with one or more SEGs, sponsors or employers. Therefore, credit unions should
capitalize on these relationship assets and educate both members and employers about this revolution.
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In addition, credit unions should also provide services that guide and fulfill the needs of these groups.
These include education, settlement, administration, asset management and member service. Large
financial entities, including national and regional banks and insurance companies, have already begun to
execute their plans for consumer acquisition.
The revolution will tie the health care and financial services industries closely together, and open up a
whole new world of services and competition.
"HSAs represent the first intersection of three different aspects of the financial services industry: banking,
health insurance, and investments. This fact only adds to their market appeal," cites the Aite Group in
their 2006 report "Health Savings Accounts: A Bounty for Banks?"
Developing a strategy; and the value chain.
Diamond Management and Technology Consultants have dissected the emerging value chain into
seven segments. A reference to that document is provided in the footnotes for those who like detailed
information. However, we will summarize the components of that document as it pertains to credit unions
and their opportunity for developing a strategy.
The good news is that credit unions have the skills to participate in several value segments of this
emerging market, and can develop partnerships to enable them to provide an end-to-end solution, if
desired. Since the HSA opportunity represents a disruption to the existing playing field, there is an
opportunity for credit unions to secure a larger share of the market if they move quickly, develop an
effective strategy, and aptly prepare to execute on that business plan.
There is no single strategy that applies to all credit unions. Strategy development depends on the credit
union’s existing competencies, its appetite for broadening service relationships, and its organizational
objectives. For instance, a credit union that is seeking to attract a share of “new money” from HSA
deposits might have a more narrowly defined strategy than a credit union that offers financial planning
and wealth management services to its members.
When examining the value chain within the context of an immature (newer) market, education and
awareness are key components of a successful strategy. Diamond refers to this as “health advocacy.”
Credit unions are in a good position to be a strong player in this emerging market. By working with their
SEGs, sponsor companies, and other employers, credit unions can increase awareness on the part of
employers to the tremendous benefits of HDHPs.
HDHPs provide a “win-win” for the employer and the employee. From an employer perspective, it helps
reign in a costly and inflationary benefit, yielding significant cost savings. From an employee perspective,
it provides greater flexibility in health care options, as well as offering a tax sheltered, retirement savings
As credit unions gain more expertise in the structure of HSAs, they can help employers design plans that
are successful in meeting their joint objectives. Conversion is critical. For example, experience shows a
very slow adoption rate of the self-directed option by employees for employers offering an HDHP as a
health plan option. However, employers that convert to an HDHP-only offering, but provide significant
education to their employees, and initially fund a portion of the HSA, have less difficulty in convincing
employees that the HDHP is an improved benefit.
Aite Group "Health Savings Accounts: A Bounty for Banks?” 2006.
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First strike advantage.
Credit unions also have the skills and opportunity to market awareness of HSAs to their members early,
before banks and insurance companies attract their attention. When the credit union does not have direct
access to the employer, it is particularly important for credit unions to let their members know that the
credit union can be the custodian of their HSA account. That way, if an employer utilizes the insurance
provider to educate their employees about HDHPs, and subsequently HSAs, the member is in a better
position to consider the credit union as the custodian for the account.
Credit unions can educate members, and market to them, in multiple ways. This includes, but is not
• statement stuffers
• newsletter articles/press releases
• website content
• educational sessions/webinars/podcasts
• teller handouts
• tent/counter cards/in lobby signage
• direct mail
In their marketing efforts, credit unions should strategize and stress to members the numerous
advantages there are with regard to having an HSA relationship with their credit union. Credit unions
should also brainstorm ways to tightly integrate this offering into the total member relationship.
A prime example that illustrates an interesting value-added component that strengthens the credit union
option as the custodian for HSAs was illustrated by Patelco CU (CA). Patelco teamed up with My Medical
Control (www.mymedicalcontrol.com), which is a consumer directed medical billing advocate that
performs medical claim review and settlement services. The service enhances the value of the HSA by
analyzing medical bills submitted by the consumer, and comparing the charges to averages paid for
similar, regional care. If the billing amount exceeds the tolerance of the system, My Medical Control will
intervene on the members’ behalf, often saving the member significantly on the payment. My Medical
Control charges the member a portion of the savings, only if they can save them money.
Other forms of “health advocacy” available to credit unions include tools that provide financial planning
and guidance through interactive means, media, or a financial planning CUSO offered by the credit union.
For example, Intuit announced an intention to produce a series of Quicken®-branded healthcare
management capabilities to help consumers improve decision-making. Such tools are likely to be of value
in assisting consumers to simplify the complexity of the new arena of healthcare. When examining these
value-added components, most credit unions will look toward some form of partnership to establish these
valuable member services.
Another opportunity presented by the emerging value chain is benefits planning. This includes the ability
to administer plans, as well as addressing the challenges of integrating the health plan and the financial
services aspect of the solution. From an administration standpoint, currently the ability to integrate point
of service delivery by having access to accurate information about deductibles and their status, and being
able to process claims, is a challenge. As a result, this burden falls on the consumer. Logically, insurance
companies that offer the HDHP, as well as an HSA, will be in an advantageous position to provide this
offering. However, there is a number of emerging third-party administrators that are positioning
themselves, driving the emerging model toward an open market solution. Because of the threat of tighter
integration on the part of insurers, credit unions should consider the importance of partnering with these
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Within this segment of the market is also the challenge of reviewing payments for eligibility in meeting
medical care requirements. Today, the HSA custodian has few requirements other than providing IRS
reporting. It is believed that in the near future there will be increased legislation requiring verification of a
qualified HDHP plan, as well as authorization of eligible HSA transactions. These requirements will be
placed on the shoulders of the HSA custodian (the credit union).
A third, broad category of opportunity for credit unions is in the area of payments. This includes both a
payment vehicle, such as checks and debit cards, as well as the ability to process transactions. Most
credit unions are skilled at providing appropriate payment vehicles, and are easily able to extend existing
capabilities for check writing, as well as offering a debit card attached to the HSA. Payment processing
follows current transaction flows, and any payment verification capability is likely to take place within the
payment networks. Again, these capabilities should be relatively easy for credit unions, for the most part,
but verification is likely to add marginal, additional cost to payment processing.
Another opportunity within the credit union value chain is to effectively manage HSA assets. It may be
surprising to many, that in practice, most consumers who are not faced with catastrophic medical care
costs utilize the HSA as a retirement vehicle. Some research indicates that many consumers will pay
medical expenses out of pocket with after-tax dollars rather than tap the investment in the HSA. With the
limits that exist on IRAs, and many individuals with inadequate retirement savings, this is less surprising.
Credit unions offering wealth management services have additional opportunities to manage these funds.
HSA custodians that can provide opportunities for individuals to manage these funds off-balance sheet
are at an advantage. While HSAs provide great opportunities for credit unions to attract new deposits, it is
likely that consumers will only maintain a few thousand dollars in liquid assets within the account, and will
seek higher yielding instruments for the remainder of their funds, particularly if they are viewed as
HSAs present a ‘golden egg’ opportunity for credit unions to gather significant deposits of new money.
This new wave in healthcare, toward a self-directed option, also supports a trend toward the convergence
of healthcare and financial services.
Credit unions should to take advantage of this golden opportunity, and increase awareness among its
members, SEGs and sponsor companies. In addition, there are a number of value-added components
that can strengthen and promote the consumers choice of where to place their healthcare deposits. By
taking advantage of these value-added components, credit unions can create a compelling and
competitive consumer offering.
Members United Corporate FCU is interested in working with a manageable number of credit unions to
enable the opportunities highlighted in this research document. The purpose of this work is to examine
innovation and product development within the framework of member needs and objectives.
This does not constitute an agreement that any solution will necessarily be brought to market, but it does
provide an opportunity for collaboration and idea development. If you are interested in participating in
such discussions, please send an email to email@example.com with a subject of “HSA.”
If you are interested in receiving further updates on this topic, please send an email to
firstname.lastname@example.org with a subject of “HSA.”
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CU VantagePOINT is a free resource that is provided by Members United Corporate FCU to its
members. There is a repository containing articles, research and current news with regard to HSAs.
HSAFinder.com is a website that provides consolidated information about Health Savings Accounts.
"Health Savings Account Answer Book," Gary S. Lesser.
"The Small Business Guide to HSAs (Brick Tower Press Financial Guide)," Joann Mills Laing.
"The Consumer's Guide to Health Savings Accounts: HSAs (Brick Tower Press Financial Guide),"
Joann Mills Laing.
Contributors to this research, as of March 5, 2007, include:
Charlie White, Chief Innovation Officer, Members United Corporate FCU
James Olney, Lead Innovation Strategist, Members United Corporate FCU
Thomas Bickauskas, Business Solutions Analyst, Members United Corporate FCU
Liz Mas, 320 Market, LLC
This is a “collaborative” research document that is provided by Members United Corporate Federal Credit Union to its
member credit unions. The concept of a collaborative document is that credit unions read the document and add,
modify, change or comment on the document. These changes should be sent to Charlie White, Chief Innovation
Officer, Members United Corporate, at email@example.com. The changes will be reviewed and
incorporated if they can in any way improve the quality of information for all. Insights, experiences, and observations
are encouraged. The components that each author contributes to the document will be credited and attributed
accordingly. Reasonable effort will be made to examine the validity and accuracy of the statements contained herein.
Readers are encouraged to examine the contents critically and to validate information on their own prior to making
critical decisions or formulating business plans.
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