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AIS's Health Business Daily
Featured Story May 20, 2008 Bear Market Could Maul Some Owners of Health Savings AccountsReprinted from INSIDE CONSUMER-DIRECTED CARE, a biweekly newsletter with timely news and insightful analysis of benefit design, contracts, market strategies and financial results. By Steve Davis, Managing Editor, (sdavis@aispub.com) Over the past two and a half years, James Moscou, a Denver-based freelance reporter, says he has plugged $6,000 into his health savings account (HSA). Over the past year, his balance dropped from $7,000 to $5,927 in March due to a turbulent stock market. The loss is especially troubling given that he and his wife have a baby on the way and his individual health policy doesn't cover prenatal expenses. And while pretax HSA dollars can be used to cover those medical services, the expenses do not count toward the $5,000 annual deductible or the out-of-pocket maximum. "The prenatal costs…will bury us if something bad happens," he tells ICDC. "What this [stock market] meltdown shows is that there is no safe vehicle for investments. It is scary, especially with a kid on the way." While HSA administrators say the vast majority of their account holders have their assets in safe, low-yield accounts, Moscou says he thought his investments were "safe," too. His account, held by JPMorgan Chase, is split between three mutual funds, all of which have lost value since January. "This could become more of an issue given the downturn in the market," says former HSA Bank CEO Nat Brinn, who is now a private-equity investor and consultant. "We're seeing the first major equity market downturn since HSAs have existed, and no one has really focused on this issue." People who view their HSA as a long-term investment (i.e., savers) probably shouldn't be concerned with a 10% drop in the market, but those who occasionally tap their accounts could be in trouble if they placed funds in something other than a bank deposit account (BDA). At HSA Bank, Brinn says, 97% of account holders kept their money in a BDA. Brinn adds that banks make more money on BDAs than on investment accounts, such as mutual funds. That gives them little incentive to promote investment options. Bill West, M.D., president of First HSA Inc. in Reading, Pa., says HSA owners should always keep at least their deductible amount in a low-risk FDIC-insured account. His clients must have at least a $3,000 balance in a BDA before an investment account can be established. And a cushion of at least $1,000 must stay in the BDA. While some clients boast HSA balances in excess of $70,000, West says only about 4% of his clients have an account worth more than $15,000. Although The Bancorp Bank offers more than 6,000 mutual-fund and individual-equity options, only a tiny percentage of HSA owners have opened an investment account. Interest rates for the more traditional BDAs vary by balance up to a maximum of 4% for the highest balances. "I think that many of our customers are happy with that rate, and they have no monthly fees," says Jill Kelly, senior vice president. The Principal Financial Group says its interest rates have fluctuated a little since the beginning of the year. For example, HSAs with a balance of $50,000 or more earned 4.07% interest in January, but only 2.67% in April. However, account owners with between $500 and $4,999 saw their interest rates increase from 0.86% in January to 1.06% in April. Principal also offers certificates of deposit (CDs). A 12-month ($10,000 or more) CD that paid a rate of 4.45% in January paid 2.10% in April. Only a small percentage of HSA clients have invested in Principal's mutual-fund portfolio, says Jerry Ripperger, director of consumer health. Over the past three months, the return on investment (ROI) for mutual funds available to West's clients has varied from a high of 7% to a low of negative 17%. Over the past three years, however, the ROI is about 2.5%, he says. At First Horizon Msaver, less than 1% of HSA deposits are in an investment vehicle, which is offered through Goldman Sachs. "A couple weeks ago, I transferred my HSA dollars from a mutual fund into a [lower-risk] money market account," says Craig Keohan, the company's president and chairman of the American Bankers Association's HSA Council. "We tell our clients to invest only what you can afford to lose. My losses were less than 3%." Fed Cuts Have Small Effect on HSAs Financial firms say the rule of thumb is to maintain an HSA balance in a low-risk BDA that will at least cover the annual deductible. But even those accounts, which typically have interest rates tied to the Federal Reserve's core rate, are earning less than they did a year ago. Since September, the Fed has lowered its rates by a total of 3.25%. And with the quarter-point adjustment announced April 30, BDA rates could drop again within the next 30 to 60 days, says Msaver spokesperson Marty Trussell. The interest-rate cuts from the Fed, however, have not caused any "drastic swings" in BDA rates compared to those seen in mutual funds, Trussell adds. And while rates for such accounts are low, he says it's important for HSA owners to remember that the interest is being paid on pretax dollars. UnitedHealth subsidiary OptumHealth Bank requires its clients to have an HSA balance of at least $2,000 before they can open an investment account. While about 20% of the bank's clients qualify, just 2% have actually placed HSA dollars in one of eight available mutual funds. Those clients tend to keep an average of $3,300 in a BDA and have an average of $4,400 in mutual funds. Between Jan. 1 and April 30, those mutual funds were collectively down an average of 4.1%, while the Standard & Poor's 500 stock index was down 8.2% for the same period, says Todd Berkley, vice president of account-based products. OptumHealth's BDA interest rates have fallen about 0.8 percentage points since September. "HSA rates have become even more attractive on a relative basis since the Fed began decreasing rates last fall, he adds. West says interest rates for his FDIC-insured accounts remained unchanged for five years. Over the past 15 months, however, the company has dropped its rates twice. HSA owners with at least a $500 balance now earn between 0.5% and 3.5% depending on their balance. Previously, rates were one percentage point higher across the board. Brad Arends, CEO of Alliance Benefit Group's Minnesota division, says about one-third of his HSA clients have funds in an investment account similar to a 401(k) retirement fund. He urges clients to keep their HSA dollars in an interest-bearing checking account unless they don't intend to touch those funds over the next seven to 15 years. People who use the mutual-fund option tend to see their HSA as an asset that will be used to cover medical expenses in retirement. Consumers Need to Be Prudent Moscou says he pays $350 a month in premiums (up from $233 in June 2005) for an individual family policy from Anthem of Colorado (a WellPoint, Inc. subsidiary). Once the deductible is met, he is responsible for 20% coinsurance up to another $2,000. The plan does not cover prenatal expenses or maternity. "Consumers who buy individual policies need to be prudent in their coverage selection whether they buy an HDHP (with HSA) or a traditional policy," warns John Hickman, a benefits attorney with Alston & Bird. Under the HSA rules, excluded amounts under the policy (e.g., experimental, investigational, in excess of reasonable and customary charges, out of network) do not count toward the deductible or the out-of-pocket maximum, he adds. While some states require individual policies to cover prenatal expenses, most do not. For health plans, such coverage could lead to adverse selection if people purchase coverage only when a pregnancy is being planned, and then drop it once the child is born. "This isn't an HSA issue; it is an individual-market issue," says J.P. Wieske, director of state affairs at the Council of Affordable Health Insurance. The Pregnancy Discrimination Act and Newborns Mothers Health Protection Acts mandate maternity coverage for group coverage offered by employers with more than 15 employees. No such rule exists in the individual market. Indeed, pregnancy is "almost never covered" under individual policies, though, Wieske explains. However, he adds, pregnancies are almost always covered if it becomes "complicated." But as long as Moscou maintains his HSA, he can use pretax dollars to reimburse himself for the uncovered expenses, notes Steve Neeleman, M.D., CEO and founder of HealthEquity, Inc., an HSA administrator. "If he wants, he could take the next 20 years to pay himself back with pretax dollars," he explains. "He wouldn't be able to do that with other types of coverage." 'Trap Doors' Lurk in HSAs Another problem Moscou didn't foresee was the coverage of preventive services. While his policy includes first-dollar coverage for some preventive services, such as colonoscopies for people over the age of 40, it doesn't cover some other services. Moscou, who has a family history of colon cancer, is still in his thirties and will have to use HSA dollars to pay for a colonoscopy. And the cost of the procedure will not count toward his deductible. "On the surface,
the HSA idea is great," Moscou says, "but there are some trap
doors." |
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