The final feature that makes CDHPs with HSAs truly unique and powerful is that the HSAs are triple tax advantaged — tax-free when contributed; tax-free as they grow (they can be invested); and tax-free at withdrawal (whether one day after the money is deposited or 20 years later). These advantages will undoubtedly inspire financial-services providers to create new ways for individuals to maximize lifelong capital accumulation across categories (retirement, health care, life insurance, disability, higher education), as well as to mix and match these funds at different stages of life. People will accumulate significant balances while single and in their 20s, which can be spent later on the expenses of having children and middle age. They may be able to borrow from long-term funds to cover high-expense years, or to leverage their assets in other creative ways. The new HSAs should be viewed as products within a full range of consumer risk protection and wealth-building services, with several key interrelated components:
• Transaction convenience and flexibility have already seen significant activity and development. Debit cards are the current norm for health reimbursement accounts (HRAs) and HSAs, and card issuers are likely to push their services further into the back rooms of insurance to take on additional aspects of claims processing.
• Protection of assets will be driven by insurance providers. As consumer services expand beyond health-care coverage, this protection will come to encompass life insurance and perhaps disability insurance. The increasingly high deductibles of health-care plans will create a need for mechanisms and products that bridge the gap between the funds that consumers have available for spending and the higher threshold costs of a catastrophic illness or accident.
• Borrowing products and services make up the segment of the value chain that is likely to see the most innovation over the next year or two — making it easier for people to leverage their assets during low-expense years to pay for the added costs of years with high health-care or education expenses.
• Accumulation products and services address the need to invest and manage longer-term savings. These components will be more important in five years or so, when HSAs have been in place long enough to have generated a critical mass of rollover capital.
In their short history, consumer-directed health plans have already driven structural change in the health insurance industry. The early results on costs, utilization, and satisfaction are decidedly upbeat. As the potential for a broader, more comprehensive framework becomes more evident, HSAs are garnering more serious interest from traditional financial-services firms. Virtually all of the major insurance players have now joined the CDHP fray, and the pure-play entrants continue to grow and innovate. In the biggest structural move so far, the UnitedHealth Group of insurance providers acquired the CDHP pioneer and specialty firm Definity in June 2005.
We expect to see more of these plays in the months ahead. Although enrollment in CDHPs remained small in absolute terms, 2004 was another year of triple-digit growth, and there’s every reason to believe the country is on the early section of an S-curve of industry growth. The new HSA regulations that permit rollover and personal ownership have attracted the attention of such financial-services giants as Mellon — resulting in alliances with traditional carriers (several Blue Cross Blue Shield organizations) as well as CDHP pure-play companies (Lumenos and Definity). Other big names in financial services — Fidelity, Principal, and JPMorgan Chase — also have begun to place their CDHP/HSA bets.
Financial-services firms and policymakers are attracted to the field because they recognize that CDHPs can help fix a subset of problems that may never inspire a broad political consensus. Chief among these, of course, is upward-spiraling health-care costs. Employers have few options for addressing the alarming rate of cost increase. Higher deductibles and co-pays have, for many, run their course, and the only other private-sector option is mandating a return to highly restrictive, closed-panel HMOs. But consumers (and their representatives) have already made it clear that higher deductibles and co-pays, or a return to mandated strong-form managed care, are dead ends. They simply have not been accepted by employers or employees at large.