Advocates see growth for health savings accounts

BOSTON Tue Mar 23, 2010 1:58pm EDT

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BOSTON (Reuters) - Taking care of retirement savings has been a bonanza for financial companies. Now some in the industry hope tax-advantaged healthcare accounts will become the next big thing.

Under the sweeping reform bill passed by the U.S. House of Representatives on Sunday, individuals will have to obtain health insurance. Experts expect many consumers to opt for lower-premium, high-deductible plans, paving the way for large amounts of new money to move into health savings accounts.

Even before the bill, balances in these accounts were growing because of their tax breaks and cost-cutting by employers. Now "you're going to see an explosion of these assets," said John Vellines, president of Richmond, Virginia-based Health Savings Administrators, the largest mutual fund recordkeeper for HSAs.

HSAs allow employees to set aside money tax-free for future healthcare costs. Only people covered by high-deductible health plans -- currently about 10 million U.S. workers and their families -- can establish them.

GROWING WITH HIGH-DEDUCTIBLE PLANS

HSAs have attracted $8.6 billion in assets since they were signed into law in 2003. By contrast, retirement accounts like 401(k)s held $2.4 trillion at the end of 2008 and drive the $10 trillion mutual fund industry.

But some industry experts forecast HSA assets rising to $50 billion to $100 billion in coming years. For one thing, money in the accounts can be carried over from year to year, unlike so-called flexible spending accounts that require workers to use their annual contributions by year-end or lose them.

Also, executives say workers are getting more comfortable with the accounts. "It's a maturation of the product," said Elizabeth Ryan, a Wells Fargo & Co (WFC.N) senior vice president overseeing the bank's unit that sells HSAs. "It's going from 'I'll try it initially and see if it works'" to more regular use.

At the San Francisco-based company, these assets rose 30 percent in 2009 to $417 million among 250,926 customers -- a modest average of about $1,600 per account.

Wells Fargo and other big banks like JPMorgan Chase & Co (JPM.N) manage most HSA assets. Fund firms also have seen more flows lately: Vanguard Group and Fidelity Investments now hold a combined $250 million worth of this money.

In 2010, HSAs are only available to those whose insurance plans have an annual deductible of at least $1,200 for individuals or $2,400 for families.

People covered by the plans, sometimes called catastrophic insurance, pay more out of pocket expenses when they receive treatment.

The plans are thought to appeal to lower-income workers who cannot afford high premiums, or younger, healthier ones who don't expect to incur large medical expenses.

But the plans, with HSAs, have also gained a following among wealthier workers as an additional tax break beyond 401(k)s. Each year, 30 percent of HSA holders contribute the maximum to the accounts, which for 2010 is $3,050 for an individual or $6,150 for a family.

"People equate the HSAs to an IRA," said Will Applegate, the Fidelity vice president overseeing the area.

Even so the potential tax break does not benefit many low- and middle-income earners with high-deductible plans. A 2008 study by the nonpartisan Government Accountability Office found that nearly half of these policyholders had not opened the savings accounts; many said they could not afford one.

Meanwhile, companies are embracing high-deductible plans to reduce spending, much as they once used private retirement plans to cut pension costs.

Textron Inc (TXT.N) and Deere & Co (DE.N) were among the 78,000 U.S. companies offering high-deductible plans paired with HSAs at the start of 2009, said Donald Mazzella, chief operating officer of Ridgefield, New Jersey-based Information Strategies Inc, which tracks the market.

Another 20,000 companies added HSAs last year, he estimates. One was General Electric Co (GE.N), the largest U.S. conglomerate, which last year ended its traditional healthcare plans and began to offer a high-deductible plan to its 75,000 U.S. salaried employees as an option.

PROS AND CONS

Republicans first backed HSAs as a way to make individuals more aware of medical costs. Studies have shown that HSA owners visit the doctor less frequently.

"When people have skin in the game, they do a better job shopping around for affordable care and asking better questions," said Sen. John Barrasso, a Wyoming Republican.

Critics say postponing care for minor ailments or skipping medications to avoid high out-of-pocket expenses -- as those with high-deductible plans are known to do -- can allow medical problems to become more serious and more costly to treat.

But even many Democrats now say they support the principles of HSAs. President Barack Obama mentioned them in a March 2 letter as a possible compromise with Republicans, offering rules to promote more high-deductible plans.

"This could help to encourage more people to take advantage of HSAs," Obama wrote.

(Additional reporting by Joe Rauch in Charlotte, N.C.; editing by Ros Krasny and Lisa Von Ahn)

(Ross.Kerber@ThomsonReuters.com; +1-617-856-4341; Ross.Kerber.Reuters.com@Reuters.net))

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