Partners and Rivals

As growth in the health savings account market skyrockets, health insurers and banks are simultaneously partners in the value chain and rivals seeking to control customer relationships.

Since the creation of health savings accounts (HSAs) in December 2003 as part of the Medicare Prescription & Modernization Act, insurers, banks and other financial services companies have been scrambling to craft strategies to respond to the reality of the new tax-advantaged cash accounts, which are options for individuals enrolled in high-deductible health plans (HDHPs). The shift to the lower- premium HDHPs along with the redirection of healthcare dollars into bank accounts represents a serious challenge for insurers, and a serious opportunity for banks and other financial services companies. >>

In response, insurers are seeking to leverage their healthcare expertise and customer connections for all they're worth, and banks are moving to avoid a repeat of the opportunities missed at the emergence of the IRA and 401 (k), which were treated merely as depository instruments and not vehicles for further investment. Some insurers are seeking to offer an end-to-end HDHP/HSA solution by creating their own banks to serve as custodians of the accounts -- notably Minnetonka, Minn.-based UnitedHealth Group's ($45.4 billion in revenue) Exante and Chicago-based Blue Cross Blue Shield Association's Blue Healthcare Bank.

But given the brand power of established banks for consumers and carriers' reluctance to make major investments outside their core competencies, most insurance companies are forming partnerships with eager industry counterparts on the banking side. How astutely those partnerships are crafted may determine who ends up owning the key relationships with consumers.

Next-Wave Convergence

The appearance of HSAs has triggered nothing less than the next wave of financial services convergence, in the view of Alenka Grealish, a Portland, Ore.-based analyst for Celent. During the first wave, caused by the passage of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 -- which allowed banks, insurers and securities companies to affiliate -- some banks and insurers expanded their product lines. But as Grealish opines in her report, "Health Savings Accounts: How Will the Stars Align?" there was not a great shakeout of consumers' funds.

This time, however, things are different. "The HSA wave is likely to hit health insurers hard, reducing the overall health insurance premium market by as much as 5 percent by 2010 and 10 percent by 2015, converting premium revenues into net interest, account management and fee income," she writes. "All banks stand to gain if they effectively enter the market."

Success in that respect will depend on banks' ability to partner with health insurers, since the latter control the relationship with employer benefits administrators, which currently represent the most important customer-acquisition pipeline. The ability to deliver those customers gives many insurers leverage in forming partnerships that enable them to make the best of the HSA opportunity as demand increases.

And it will increase, according to Aamer Baig, a partner in Chicago-based DiamondCluster International's financial services practice and lead author of the consultancy's report, "Seizing the HSA Opportunity." Baig reports that since 2004, "HSA custodians have opened over 1 million HSA accounts and ... are currently opening over 50,000 HSA accounts each month." By 2010, there will be 15 million to 25 million HSAs holding $75 billion in assets, DiamondCluster projects.

The stakes have driven a musical chairs-like rush on the part of insurers and banks wary of being left behind without a partner. Seeking competent partners to assemble an HSA value chain is a good idea, according to Baig, but he says most partnerships have been struck with an emphasis on acquiring and servicing member customers through the employer health plan channel. "Very little thought has been placed on providing a good experience to the consumer right from enrollment, through point of sale, through investing of the consumers' funds," Baig comments.

In many cases, bank-insurer partnerships have established what Baig describes as "loose partnerships" in which the consumer's engagement with each party is essentially separate. Under such an arrangement, customers may enroll in an HDHP and then be directed via written correspondence to open an account at a bank location or Web site. The detached nature of the HDHP-HSA linkage results in an unsatisfactory point-of-sale experience for the consumer and a costly manual process for bank and insurance partners, Baig offers.

More-customer-friendly and, ultimately, more-successful approaches will leverage technology toward three objectives, according to Baig. No. 1, systems should provide a seamless experience so that customers can navigate easily between health plans and HSAs. No. 2, platforms must integrate multiple partners on the back end, including health insurers, enrollment providers, tool providers and payment processors. And No. 3, in order to be prepared to acquire customers from either the employer channel or through more-direct means, systems should enable companies to offer a product that has both institutional characteristics -- that is, it needs to be associated with an employer, as in the case of a 401(k) -- and also retail characteristics (meaning portability for the customer) while meeting compliance requirements.

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio