As Health Accounts Grow, So Does HealthEquity

H ealthEquity Chief Executive Jon Kessler doesn't use a lot of elaborate business jargon to explain his company's success. It's really pretty simple, he says.

"If we're not executing day after day -- if we are not making life a little easier for our customers -- they'll find somebody else," Kessler said in an interview. "It's not magical."

HealthEquity ( HQY ) is one of the nation's top administrators of health savings accounts, or HSAs, and hasn't had a problem keeping customers to date. About 90% of all HSA accounts ever opened at HealthEquity are still there, Kessler says.

The company offers HSA products via a network of health plan and employer partnerships, including 20 of the 50 largest domestic health plans. As of July 31, it had 1.5 million HSA members and $2.6 billion in assets under management.

HealthEquity continues to grow its market share against rivals that include banking giantsWells Fargo ( WFC ) andBank of America ( BAC ), as well as managed-care behemoths likeUnitedHealth ( UNH ).

Demand for HealthEquity's products and services is evident in its financial results.

The company has run off 10 straight quarters of 30% or better revenue growth.

Its top line has increased at least 43% in each of the last four quarters, and its stock price set a new high of 35.78 this month.

One reason why the company is doing so well: HSAs are becoming increasingly popular. Citing industry data, Kessler says that the number of HSA members in the U.S. is expected to grow by 20% this year to nearly 20 million.

Tax Advantages

HSAs are tax-advantaged savings accounts for people enrolled in high-deductible health plans.

Because of the high deductibles, these plans -- paired with HSAs -- are less expensive for employers than traditional health maintenance organization (HMO) or preferred provider organization (PPO) plans.

Meanwhile, employees can contribute money tax-free to HSAs, determine where and when the money should be spent, and build up savings over time. High deductibles also encourage members to be more discerning in where they spend their money. If you have a set amount of money to spend, rather than a minimal copay every doctor's visit, you might not be so quick to have every little ache and pain checked out.

"The premise behind these products is that the individual consumer has at least some skin in the game with regard to the marginal cost of care," Kessler said.

One result, he says, is that the total cost of insurance paid by employers and others is increasing at the lowest rate in years.

"The underlying market continues to grow because these plans do what they are supposed to do," Kessler said. "They play a significant role in containing health care cost inflation."

ObamaCare Effects

The Affordable Care Act, also known as the ACA or ObamaCare, has stoked much of that growth because it requires employers to offer health insurance premiums that workers can afford. The requirement makes HSAs attractive to employees, Kessler says.

"A family premium for an HSA might be $50 a paycheck, while the same plan in a traditional PPO or HMO might be $100 a paycheck," he said.

Another key provision of the ACA, the so-called "Cadillac tax," is due to take effect in 2018.

It's a 40% excise tax on employers that provide high-cost health packages to workers, which employers can avoid with lower-cost HSA plans.

Kessler says that it's uncertain whether the tax will be implemented and how. If the tax is implemented, he says, it should create opportunity and growth in the market.

Expansion Seen

JPMorgan analyst Lisa Gill has a similar take, noting in a recent report that the HSA market should continue to expand, thanks to rising health care costs and the pending Cadillac tax. She says that market expansion and leverage within the company's operating model will drive HealthEquity's future growth.

As fast as the overall HSA market is growing, HealthEquity is expanding even more rapidly.

The 1.5 million members it had at the end of its fiscal second quarter represented a 45% increase from the prior year.

The company gets revenue from three different sources: account fees paid by employers or individuals; custodial fees or interest earned on assets; and card fees charged to merchants using HealthEquity's HSA cards.

Revenue Streams

During its second quarter, which ended July 31, account fee revenue gained 38% from the prior year to $14.6 million. Custodial fee revenue rose 52% to $9 million, while card fee revenue increased 60% to $6.8 million.

Earnings came in at 9 cents a share, up 50% from a year earlier. Analysts polled by Thomson Reuters expect full-year EPS to rise 43% this fiscal year and another 50% next fiscal year.

HealthEquity should get another boost from its $34.4 million buyout of a majority ofThe Bancorp 's ( TBBK ) HSA portfolio. That deal, announced Oct. 23, brings aboard 170,000 accounts with more than $400 million in deposits.

Gill noted that the acquisition was HealthEquity's first since 2011 and its largest to date.

"It grows (HealthEquity's) membership base by 11% to 1.68 million and increases its assets under management by greater than 15% to about $3 billion, reflecting the higher average balance of the acquired members," Gill said.

'Nice Down Payment'

Kessler calls the deal "a nice down payment on the promise we made at the time of our (August 2014) IPO that portfolio growth would be part of our plan."

Expect more of this type of deal as banks decide to unload non-core businesses.

"Ultimately you will see a shift from general banks/investment firms to specialists that are really focused on the HSA business," Kessler said.

He says that HealthEquity can deliver better, more focused HSA service than banks like BofA or Wells Fargo. That's what it's set up to do.

"It's nothing against banks -- it's just a function of how each organization approaches the business," Kessler said. "We are not a bank and we don't make loans, so we don't know how to service loans. But we do know how to provide products and services around HSAs."

The only reason why many banks got into the HSA business in the first place is because HSAs must be held by a custodian, and a bank serves as a custodian. Kessler reckons that a lot of these banks are ready to unload their HSAs to focus on their core businesses.

"There will be more buyouts, from us and others," he said.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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