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AIS's Health Business Daily
Featured Story Sept. 22, 2009
Failing to Meet Its Own Stated Expectations, Blue Healthcare Bank Now Is Seeking a Buyer Reprinted from INSIDE CONSUMER-DIRECTED CARE, a newsletter with timely news and insightful analysis of benefit design, contracts, market strategies and financial results. By Angela Maas, Managing Editor, In 2007, Blue Healthcare Bank’s president and CEO projected that by the end of 2009, the company’s health savings account (HSA) deposits would total more than half a billion dollars. Now, a few months away from the self-imposed deadline and with only a small fraction of that projection, the Blues bank has put itself up for sale. Its relatively small amount of assets, plus its complicated governance structure and potential liabilities, limit the number of potential buyers, industry insiders say — and the bank very well may find itself without a buyer at all, others posit.
Created by 33 Blues plans and the Blue Cross and Blue Shield Association, the bank officially opened in early 2007. The original plan was for the bank to open as an industrial loan corporation (ILC). But after the Federal Deposit Insurance Corp. adopted an initial six-month moratorium on applications for deposit insurance by ILCs owned by retailers and other commercial entities that then was extended by 12 months, the bank made the decision to open with a federal savings bank charter.
Shortly after it opened, then-President and CEO Robert Gross predicted that total HSA deposits were expected to exceed $500 million by the end of 2009. Based on an average account balance of $1,500, that would translate to about 333,000 accounts. According to Jeff Smokler, a spokesperson for the Blues association, the bank has around 6,300 HSAs.
An insider with Fiserv, Inc. — which the Blues bank at one time had contracted with to provide an array of back-end services — tells ICDC that the Blues association “sort of overlooked the natural skepticism on the part of plans about anything the association does besides running the association.” The source, who asked not to be identified, says that by the time the Blues bank became operational, all of the Blues plans pretty much had HSA administrator arrangements with other banks. “The Blues by and large wouldn’t work” with the bank, says the source. “At the end of the day, you have to please your Blue Cross members, or they won’t work with you.”
“Due to the current challenging economic climate and marketplace uncertainty against the backdrop of health care reform, Plans Holding Corporation, owner of Blue Healthcare Bank, is currently seeking a buyer for the Bank’s assets, including its federal savings bank charter,” Smokler tells ICDC. “Our priority will be to assure that the sale of Blue Healthcare Bank will cause no disruption to existing client services. We are committed to working closely with the Office of Thrift Supervision, the primary regulator of federally chartered thrift institutions, to keep the agency informed of ongoing developments.”
Blue Cross Blue Shield of Arizona (BCBSAZ) is one Blues plan whose members have HSAs with the Blues bank, says Renee Hunt, a spokesperson for the plan. Members “also have the option of setting up an account with HSA Bank or another administrator of their choosing,” she explains to ICDC. “Blue Healthcare Bank — which is independent of BCBSAZ — will continue to provide its customers with health care-related banking services as the transition plans are finalized and will assist members with the process of moving their health savings accounts to another bank of their choice.”
According to James G. Knight, M.D., CEO of Consumer Directed Health Care, Inc., “a group wanting to start a bank might buy it for a discounted core deposit premium, or perhaps more likely somebody like HSA Bank will buy it to capture the HSA accounts and fold them into their existing operations.” Carlton Doty, vice president and research director at Forrester Research, wonders if WellPoint, Inc. “or a multiple-state BCBS firm like HCSC [i.e., Health Care Service Corp.] or Regence” would be possible suitors.
Bank Has About 6,300 Accounts
Knight points out that as of the Utah-based bank’s June 30, 2009, call report, it “had 6,296 accounts with an average balance of about $1,012, as compared to 4,600 accounts with an average balance of $1,379 a year prior.” He says it’s hard to determine a potential purchase price “based on the small account sizes and single product niche. Core deposit premiums in this economy are unpredictable.” He adds that “a high estimate for [a purchase price for] the bank subsidiary alone is perhaps $1 million plus net equity capital after purchase accounting. They likely have some net operating losses on the books that a healthy purchaser can probably take as a tax benefit.” Red Gillen, a senior analyst with consulting firm Celent, questions how much value the accounts and infrastructure offer a potential buyer. “I don’t know if there are highly attractive assets left now,” he says. “The 800-pound gorilla in the room is what is the future of HSAs” with health care reform. Companies “are not chomping at the bit to buy this.”
Another potential complication, says Gillen, is the bank’s ownership structure involving the Blues association and 33 Blues plans. A sale would be “complicated by governance,” he says. The key, says the Fiserv insider, is what kind of and how much in liabilities the bank has. “Who does it owe money to? I’m not certain what it could fetch…because surely it has liabilities that need to be written off.”
Nevertheless, buying the bank would allow a company to pick up its HSA accounts and to get “a bank charter on the cheap,” Knight says. Gillen adds that the Blues brand may also be attractive to a potential buyer.
Will Bank Even Find a Buyer?
Several sources tell ICDC that one potential outcome of the proposed sale is that no one will be interested in purchasing the bank. Such an outcome is “very possible given the negative political environment,” says Knight. “I do believe there is a good chance that nobody is interested,” echoes Doty.
Were that to happen, says Gillen, “the bank would be required to close its accounts and return the deposits to the owners.” In order to not be penalized by the IRS, the people holding the accounts would need to find another HSA in which to put the deposits returned to them, he explains. “They can’t treat it as cash. The burden is on the account holder to find a new custodian bank.…It’s incumbent upon the Blues plans who had an alliance [with the bank] to reach out to their members” about their options.
“This is a hard time to be on the market with an HSA-related business; the uncertainty around health reform has made buyers skittish and valuation difficult,” Alexander Domaszewicz, a principal at Mercer Inc., tells ICDC. “I suspect that the assets will go somewhere, but maybe not until the health reform dust settles a bit.”
So what lessons learned are there in the Blues bank example that similar organizations would be wise to heed? “HSAs can be a great long-term opportunity for core deposit accumulation if they survive the ongoing political vicissitudes of Congress,” says Knight. “But in the end there must be a strategy to safely leverage the balance sheet. Opening a niche bank like this just in time to have the wheels fall off the banking and investment industry wagon was very bad luck indeed!”
“This was a good idea gone wrong,” adds Gillen. “They were late to the game.” Maintaining that it’s “too late to get into” the HSA market now, he projects there will be more market consolidation among companies. “There are a lot of small banks out there,” he says, and ones with less than 20,000 accounts — and potentially even less than 30,000 or 40,000 accounts — could see some ownership-change action. |
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