Most Americans are painfully aware that healthcare costs have been rising quickly for years. The situation has gotten so bad that Warren Buffett recently stated that increasing costs act as a "tapeworm of the American economy."
To combat rising costs, many employers are turning to high-deductible health plans. Premiums for high-deductible health plans are about $1,900 lower per year than traditional health plans because coverage doesn't kick in until after a large amount of out-of-pocket spending takes place.
To help ease the burden of meeting that higher out-of-pocket spending, the U.S. Government introduced Health Savings Accounts (HSA) to market in 2003. These accounts offer a triple-tax advantage that makes them a no-brainer choice for eligible employees.
While HSAs were slow to take off, they've now become a popular choice for millions. More than 23 million Americas have opened an HSA account and collectively hold more than $50 billion in total assets.
This backdrop has served as a fantastic tailwind for an innovative healthcare/tech company called HealthEquity (NASDAQ: HQY). The company provides employers, health plans, and individuals with tools and resources that enable them to maximize their savings and get the most out of every healthcare dollar.
HealthEquity monetizes its accounts in three primary ways:
- Health plans and employers pay monthly service fees.
- Account holders pay custodial fees for assets held under management.
- Interchange fees are charged whenever a payment is made on its networks.
This business model provides HealthEquity with multiple streams of recurring revenue. When combined with its customer-centric culture, the business has been flourishing, and early investors have already made a killing.
But what makes HealthEquity stand apart from the crowd? To find out, I recently held an exclusive interview with Jon Kessler, HealthEquity's CEO. Below is a transcript from our conversation (which has been lightly edited for clarity):
Brian Feroldi: So why would a health plan or employer choose HealthEquity over any other HSA provider?
Jon Kessler: So from our perspective, this entire industry is about connecting health to wealth. We are trying to get to a destination where consumers are making savvy decisions on a day-to-day basis with regard to their healthcare finances and their health, but also making savvy decisions with regard to investment allocation to finance their long-term health. We believe that we are better than anyone else at helping consumers down that journey, meeting them wherever they are, and getting them there. We are better than anyone else because we've focused over the course of 15 years on building a platform that actually provides consumers with information that's relevant to them and connecting with our partners' ecosystem[s] in ways that are relevant to the consumer. So we can be more than debits and credits and provide a high level of service to consumers. We call that "Purple," and I'm happy to explain why, but that really differentiates us from the experience that consumers expect. And frankly, that's what employers expect from companies in the benefits technology or healthcare space.
Feroldi: One of the things I've seen in your investor presentation is that the average HSA account on your platform has a higher balance than the average HSA account. Do you use that as proof to show your healthcare partners that if they partner with you that you can actually help employees save more?
Kessler: It is. It's something that can be difficult to see because we have so many new accounts and we're growing the business so much faster than the industry average, that newer accounts start out with very low balances, and that's a reflection of needing to meet the consumer where they start. But if you look at accounts that have begun to mature, we have a higher percentage of members who are investing, we have higher balances. We have a tremendous level of engagement with our consumers. More than a quarter of our members interact with us monthly on our platform. Depending on the month, between 5% and 8% of our members interact with us on the telephone every month. We are happy to have that interaction because we're using it as a way to educate consumers and move them down the journey from uncertainty with healthcare and finance to a level of confidence and ultimately becoming a long-term saver.
Feroldi: Speaking of bringing on new accounts, how much market-share gains have been organic versus from acquisitions?
Kessler: Almost all of the growth that we've experienced in recent years and over the course of the company's history is organic. We have an active program where other entities will exit the business and we may acquire those portfolios, but we have preferred to focus that program on smaller portfolios and on entities that have been as concerned as we are about the level of service that their customers receive. So smaller bank portfolios, credit unions, etc., entered the business to take advantage of some of the tax attributes of the HSA market for their customers, and then found that it was a more complex business than they originally anticipated and really wanted their customers to have great service. And so for that kind of entity, we've been an acquirer of choice, but those portfolios are small. So the bulk of our growth today is organic.
Feroldi: Well that's music to my ears. One of the things that really attracts me to this business is that you have multiple ways to monetize consumers that are already on your platform. So not only do you grow by adding new customers, you're also growing with your existing customer base. So moving forward, how much of your growth is coming from growing accounts and signing on new health partners, and how much is from just increasing the revenue that you could take per account?
Kessler: A great way to look at that is from an industry perspective. There are roughly 20 million HSAs in the industry, and those accounts have somewhere between $2,000 and $2,500 in them. So let's say $50 billion in total assets. Our view is that at maturity, the industry will look more like 60 million accounts and average balances will be between $15,000 and $20,000. So the implication is that we have a long way to go in terms of the maturity of the industry, and that's reflective of the fact that only 21% percent of Americans who are under 65 and working -- that is to say in the commercial insured market -- even have an HSA qualified plan yet. But we're even a longer way in terms of success at helping Americans use these accounts in conjunction with other tax-saving accounts to really optimize their savings. My answer is both, and in both areas, we've got a long way to go. We're in the early innings, and it's fairly easy to quantify the possibilities.
Feroldi: What are the biggest opportunities ahead of the business that investors should pay attention to?
Kessler: We really believe that the advent of health savings accounts presents an opportunity for the next leg down in terms of cost of investing -- if you want to look at it that way -- or the next leg up in terms of a consumer's ability to grow their savings quickly for the long term. Let me explain why. The average American family has about $75,000 annual income, and that same family will incur something on the order of $65,000 in expenses before considering healthcare or retirement needs. What's happened over the course of the last 30 to 35 years is that the healthcare component has grown so rapidly that it's crowded out the ability to save for many American families. Using data from Kaiser Family Foundation, the average American family is paying about $6,000 in premiums and about $4,000 to $5,000 in out-of-pocket expenses. That doesn't really leave anything to save, which is one reason why it's very difficult for employers to be asking consumers to save and preaching the gospel of saving on the 401(k) side, and at the same time having to do the sort of messenger of the realities of healthcare. Our view is that sort of generation, one of consumerism and high-deductible plans and HSAs and the like, was essentially, "We'll give consumers these plans, we'll tell them that they can use them to spend less, we'll give them some tools, and we'll hope things work out." In my view, that is not a formula for success. And it hasn't been a formula for success in generalized retirement, and it certainly is not a formula for success in healthcare. This is the reason we're getting a little more involved in retirement.
What we are doing is giving individual consumers the support that they need to deal with the real issues that can let them spend more confidently and more effectively -- things like understanding their medical bills -- and [what] we're trying to do in getting involved in a modest way in the retirement industry is really alter the way that people think about allocations for retirement. The focus today is on efficient allocation among investments. That's great, and there's a lot of opportunities there, but our view is that the initial focus should be on efficient allocation among their accounts. If consumers allocate efficiently across accounts, HSAs, as well as 401(k)s and other retirement accounts, you can increase the value of a dollar relative to a thoughtful investment strategy three or four times, in terms of the amount of money you have at the end to spend on your needs in retirement. So when we're talking about reducing costs to invest, we're talking about a few basis points. That's great, but here is an opportunity for the average investor and the average saver to significantly increase the pace at which they can accumulate savings, or put differently, the amount they have to save. And it's going to require work. It's going to require changes in mindset, and so forth. But that is what we are engaging the retirement industry in and we're trying to engage it thoughtfully. This is not for us about building a new revenue stream. It's about changing the way that people think about savings to take advantage of what's available to them. The result of that will be higher revenue and profitability for our investors because people will understand how these products work and they will allocate more funds to them. We think this is the thing about this whole industry that is genuinely not well understood, and that the potential impact on how the American families save.
Feroldi: HealthEquity is adding more than 700,000 HSA accounts every year. How do you educate and change the mindset of that many people?
Kessler: Every new HSA is an opportunity for us to educate that consumer. What we've learned over the course of time is that Americans aren't stupid -- we are busy. In addition to the fact that we all are stretched financially, it's also true that we have incredibly busy lives. Most American families now have two income earners, so conventional mechanisms of education need to be rethought. Our approach is to use every service interaction we have with a member as an opportunity to educate, and secondarily to use data to help us deliver the right message to that person given where they are. So for example, you might call our member services organization, which is available 24/7, because you are asking about a balance. Well, why do people ask about balances? Because you have an expense coming up! So that's an opportunity to educate the consumer about how they might pursue that expense in a way that's most tax efficient. If it's a big expense, it's an opportunity to talk to them about different ways to see if they can spend less. If it's a smaller extent, it's an opportunity to educate them about spending money from other sources so they can build the most tax-efficient asset. Let me ask you a question: Have you ever taken a 401(k) loan?
Kessler: You know, without any level of benefits education, that a 401(k) loan is not a good idea, right?
Kessler: You don't need a tool. You don't need a calculator. You just know that pulling money out of an HSA is sort of like a 401k loan which can never be returned to the tax-advantaged account. And so that's evidence again of the challenge and also the opportunity.
Feroldi: Sure. Switching gears a little bit, I'm a big Seth Godin fan, so I really appreciate your reference to DEEP Purple. One thing that I focus on is corporate culture, and I pay close attention to Glassdoor ratings. You guys have stellar Glassdoor ratings, so I don't think that "DEEP Purple" in your case is corporate nonsense. But can you just talk quickly about what that is and what's unique about your corporate culture?
Kessler: Sure. We take the definition from Godin as he offered it, which is "Purple" -- to us, means "extraordinary." Extraordinary means something that is so different from what you expected that you would be prepared to remark upon it, that you would tell someone about it. And that's what we're trying to deliver to our members. But it's also what we are trying to deliver to each other and teammates at HealthEquity. I have to say that the entire credit for our culture goes to the early members of this team, and in particular, my partner and founder of the business, Dr. Stephen Neeleman. Steve is really an extraordinary individual. He is a doctor by training and until fairly recently, a physician by profession. He's somebody who does the grunt work of the emergency room, not the really glamorous stuff you see on TV, but gallbladders and those kinds of things. Steve and his family are also entrepreneurs. Steve's brother David was the original founder and CEO of Jetblue (NASDAQ: JBLU) and he now leads both Azul -- which is sort of the JetBlue of Brazil -- as well as the Portuguese national airline TAP. Steve was David's first employee and Steve's wife, Christine, was JetBlue's first at-home agent. Steve observed that if medicine treated patients the way that airlines treated customers, they would be very angry and go to another airline. As a start-up airline, you cannot treat customers this way, so Steve was determined to create a business that has a different culture in terms of customers, but also in terms of the team. That was something that I was extremely pleased with 10 years ago when I joined. So it's really a big part of what we do.
It implies a few things. First, we have a strong focus on internal promotion and development. We're not perfect, but we keep track of and report to our team members every quarter on the percentage of our positions that are filled by people who already work at HealthEquity or by those they refer. It means that we have a very strong focus on how we communicate with each other and how we treat each other, and a very low tolerance for disrespect. It also means, though, that we treat our workplace as a business. You are not going to find oxygen bars at HealthEquity. The vast majority of our team members have families, and it's important that their families remain their first priority. I make no bones about the fact that my family is my first priority. And so that means we also put a lot of focus on having a balanced environment where people do their work, communicate respectfully with each other at work, but then go home to their families. And those are the pillars of what we try to do.
Feroldi: Is the biggest risk facing the business for investors a "Medicare for all" system getting passed in the U.S.?
Kessler: No, I don't think so, actually. While I do think the regulatory environment is important, I think no matter what health system you have, the involvement of the consumer is extremely important, and I think both democrats and republicans understand that we would all like a healthcare system that we never had to worry about money, and so forth. That would be wonderful. But both parties recognize the value both in terms of controlling cost and providing signals for innovation, that involvement of the consumer. For example, in Medicare, consumers have out-of-pocket expense and it's significant. While we wish we didn't have that, it also provided incredibly valuable signals for innovation. Medicare is probably the area where healthcare actually provides its best service to consumers because it has to compete for them. Obviously, you never know what's going to happen in Washington, but our view is that the biggest risk to the industry is the industry itself, and we really need the street to start to think about this as nothing more than an administration of financial services or retirement services business and not about what it really is -- it is an effort to transform the way that Americans think about healthcare and finance. And that means we can't shirk our responsibilities to continue raising the bar on educating consumers, on helping consumers, on being humble about what we're asking consumers to do. If we do that, I think this industry will be just fine under any regulatory regime.
Feroldi: Thank you so much for your time. I really, really appreciate it.
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