Wall Street banks on fees from employee HSA savings.

HEALTH insurers aren't the only companies salivating over the prospect of health savings accounts, the tax shelters touted by President Bush as a panacea to fix the crippled U.S. health care system.

So are some of the biggest names on Wall Street.

JP Morgan, Mellon Financial and old line institutions such as Wells Fargo are eying the tax-free accounts as a new source of revenue and are teaming up with top insurers nationwide to manage them.

Wellpoint Inc., parent of Blue Cross of California; UnitedHealth Group Inc., parent of PacifiCare Health Systems, and other insurers are projecting that the accounts could generate some $75 billion in deposits by 2010.

Along with that would come a projected $3.5 billion in asset management and account fees that could be generated if HSAs gain traction over the next four years, according to consulting firm DiamondCluster International Inc.

"The last time banks and financial institutions were presented with an opportunity like this was the introduction of Individual Retirement Accounts in 1974," said Aamer Baig, a partner at DiamondCluster, who wrote a recent report titled "Seizing the HSA Opportunity."

Health savings accounts were established by the Medicare Modernization Act of 2003, and got a big boost when they were promoted by President Bush in his last State of the Union address.

They are among a number of so-called consumer-driven health initiatives that aim to give employees more choice in how they spend their health-care dollar, while holding down spending and employer premiums.

The accounts, available to consumers with high-deductible health insurance plans, allow employees to shelter up to $2,700 a year for individual medical costs, and $5,450 a year for families--money that has to sit somewhere and be managed.

So far, insurers have either hooked up with big-name financial firms and plan to share the money management fees, or have opted to form their own banks and keep all the fees to themselves.

Humana Inc. has picked JP Morgan as its HSA custodian and Visa to deliver a Humana-branded health care debit card. Meanwhile, the Blue Cross/Blue Shield Association, a trade group, has chosen Wells Fargo as the custodian of HSA accounts created by its member insurers--but also has announced plans to form its own bank.

"Health insurers want a piece of the action. They want some reward for essentially acting as a marketing arm and bringing customers to a financial institution," said Alexander Domaszewicz, a senior consultant at Mercer Human Resource Consulting in Newport Beach.

One of the biggest challenges for banks and financial service firms is the difficulty of creating one product that offers a consumer's health information with an investment vehicle.

Ron Gruendl, a Mellon spokesman, said Mellon formed an alliance with Wellpoint, because it wanted a single product that offered a "seamless experience for employees and employers." Consumers are given a checking account and debit cards to pay for medical expenses out of their HSA, and they also have access to health plan services.

"Employees are most interested in the many tax advantages," Gruendl said.

UnitedHealth went its own way three years ago, forming its own bank, Exante Bank in Salt Lake City, to make it easier for consumers to work with their health insurer to pay for health care costs.

Exante is in the process of issuing 17 million health care cards that have a magnetic strip on the back. The card serves dual purposes--as a health care I.D. that allows a doctor to easily access medical records and determine eligibility, and as a payment method that can be swiped like a credit card. The bank can pay the full amount of a consumer's health care costs and then just send a bill.

"We're rolling out a product where we pay the full amount for health care and we send a bill to the consumer with total charges, so we're acting as a credit card company," said John Prince, chief executive of Exante Financial Services, whose bank already has $120 million in assets.

The five largest U.S. health insurers--Wellpoint, UnitedHealth, Aetna Inc., Cigna Corp. and Humana--do risk losing a portion of their health care premiums that will be diverted through HSAs to a financial institution in the form of deposits. But insurers think they can more than make up in cost-cutting what they lose in premiums. And if they take a cut of the fees, or operate a bank, they come out ahead.

"From an administrative claims processing standpoint, the insurance industry loves it," said Fred Adams, vice president at HSA for America, an Web-based insurance agency.

Still, Baig at DiamondCluster, said he thinks health insurers are underestimating the fact that they will be losing a significant portion of health care premiums to financial institutions.

"These accounts are going to put revenue pressure on health insurers," he said. "There are opportunities for insurers but it pales in comparison to the risk they face as consumers become more of the decision makers, not the employers, and their whole business model changes."