SAN FRANCISCO — When it comes to Health Savings Accounts a new Celent report finds that slow and steady is still the best way to win the race. HSAs are tax-free, portable savings accounts that can be used to pay for medical expenses including prescription and over-the-counter drugs incurred by individuals, spouses or dependents. These accounts are accompanied by high-deductible comprehensive insurance policies that cover preventive care and larger medical bills. Unused HSA money rolls over from year to year and can then be used to pay for medical care up to the plan’s deductible.

So far, despite the high projected expectations, for most, HSA growth has been impeded by the fact that all providers involved, including employers, have underestimated what a monumental transition the HDHP-HSA represents. Celent found that they wrongly assumed that, because employees weathered the transition from defined benefit to defined contribution plans so well, they would naturally embrace self-direction in healthcare. As result, there has been inadequate pre-and post-sale education, insufficient decision-making tools, and limited employer funding of accounts. Consumers are overwhelmed by the choices and are unable to conduct an adequate cost/benefit analysis.

According to the report, HSAs: Moving Beyond the Growing Pains, the HSA market is ripe for a remodel–one that will spur growth, customer churn, and market concentration.

Celent estimates that there were 1.9 million HSAs in 2007, but this number will jump to 3 million in 2008, resulting in a boost in the growth rate from 36% (in 2006-2007) to 60%. In addition, over the next five years, HSA growth will hover between 40% and 50%, resulting in 12.5 million accounts by 2012.

“The next two years will mark a period of tearing down and rebuilding at select providers and stagnancy and exiting at others. The re-modelers will gain market share during the expected strong growth years of 2008 and 2009. The market will bifurcate into manufacturers and distributors,” says Alenka Grealish, author of the report and managing director of Celent’s banking group.

During this growth spurt, the HSA market will be up for grabs. Celent believes that over the next 24 months, the market will experience churn as consumers shop for a better offer–one not necessarily based solely on price but also on customer service and other services such as expense management tools. The key to a successful remodel is pleasing the consumer and generating positive word of mouth. During this period, those financial institutions that add value will have a chance to gain higher ground.

“The best word to summarize this market is immature on both the demand and supply side,” said Grealish. “The supply side is still for the most part ahead of the demand but players have to be committed to continue to build it and be in it for the long run to get the economies of scale.”

That means to attract business and be on top, platforms must constantly be enhanced from the back office to customer facing ones. Celent foresees an attractive segment in which HSA balances will grow into five and six digits– affluent individuals near retirement or retired. Celent expects that brokers will readily draw in funds from HSA holders frustrated with inadequate investment offerings or high transaction fees from their initial HSA provider. The rise of double accounts is already occurring and will continue, driven in part by baby boomers entering retirement. Consequently, financial institutions need to develop a long-term strategy that encompasses not only growth in new HSAs but also retention.

For credit unions, opportunities can be found in the small business market as a way to strengthen relationships. See other report highlights below: