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Is there a health care debit card in your future?

Consumers and banks slow to adapt to health card payments

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A relatively small but growing number of Americans carry a little-used debit card in their wallets to pay for health and medical related expenses.

Debit, prepaid cards ease medical bill payments
Medical card payments

What's new? Payment card issuers have pulled back from health care debit and prepaid cards, mostly because of the complex health care billing system. Use of the cards has not grown as rapidly as banks and health insurance companies anticipated.

The cards represent an unmet opportunity for potential new revenue for banks and card issuers who took note of two key developments in the health care market:

  • The rise in out-of-pocket health care costs for consumers.
  • The move toward so-called consumer-directed health insurance plans in which consumers rather than employers shoulder more of the health care costs.

Together, the two trends were projected to generate billions in revenues from transaction fees. One 2007 estimate put the total amount of out-of-pocket health care costs paid for with cash, checks or payment cards at $269 billion.

Promise unmet
Debit cards tied to health savings accounts have huge potential to streamline how consumers pay for medical expenses. But health and financial services industry analysts say routine use of debit cards to speed the entire medical payment process is not in the near future.

Even without the recession and Wall Street financial meltdown, use of payment cards (such as debit and prepaid cards) for health care expenses haven't taken off as banks had hoped. The reason: Card issuers underestimated the hurdles before them in adapting payment cards to the health care arena. They found the health care payment process much more complex than anticipated and still tethered to cumbersome paper-based processing methods.

"To date, the experience has been largely disappointing, and many pilot programs have been abandoned," according to Ann Kjos, an industry specialist for the Federal Reserve Bank of Philadelphia. Kjos published a paper in November 2008 examining trends that could help jump-start health care payment cards in the future.

What are health benefit cards?

Debit or prepaid cards can be used to access money in each of the following types of health benefit accounts: 

Flexible spending or Flex accounts (FSAs). Allow workers to pay for eligible health and dependent care expenses in pre-tax dollars. Employees select an amount they expect to spend each year. That money is deducted from their paychecks in equal amounts.  Any money remaining in the account at the end of the year is forfeited. Flex funds are not transferrable if you change employers. 

Health spending accounts (HSAs). Allow workers who have high-deductible health plans to set up accounts into which they, their employers or others can put pre-tax dollars. The accounts are portable to other employers and do not expire at year's end. 

Health reimbursement arrangements (HRAs). Allow employers to establish and contribute to workers' accounts to pay for qualified medical expenses. There is no limit to how much employers can contribute. Unused amounts can carry forward to later years. Reimbursements may be tax free.

For more information on these health savings plans, go to the IRS website.

A study by the Mercator Advisory Group, a Boston-based payment and financial services consulting firm, shows the health debit cards have had modest growth in recent years. The researchers estimate the number of cards in use will grow to 2.2 million by 2011 from 2007's nearly 1.7 million cards. Kjos says more consumers should be made aware that they can simplify their health care purchases with debit cards linked to health savings accounts.

"Health care costs are really rising and they are continuing to rise and this is an important part of paying for those costs," says Kjos.

Unlike using credit cards to pay for medical debt, debit cards don't rely on borrowing to cover health care expenses. The money behind these transactions is loaded either by the patients themselves or by their employers. Government-approved health savings plans allow consumers to set up special accounts from which they can withdraw funds via debit cards to pay for health care expenses. The accounts are tax free or allow account holders to use pre-tax dollars. Money held in some accounts can be invested in mutual funds that grow in value and provide dividends.

3 types of accounts
The three types of health care spending accounts are: flexible spending or Flex accounts (FSAs), health spending accounts (HSAs) and health reimbursement arrangements (HRAs).

American Express made inroads into health care payment cards with its HealthPay Plus Card tied to HSAs in 2005. AmEx, however, pulled the card in 2007 saying it did not meet expectations. Discover Financial Services also backed away from plans to partner with major insurance companies on health debit cards.

Chase and Wells Fargo, however, are among the large banks that have remained in the HSA market. Wells Fargo offers a Visa debit card that allows you to access money you or your employer have deposited into the HSA. These are tax-deferred accounts designed for people with health plans that require them to pay high deductibles before their health insurance plan begins to cover medical costs. Annual HSA contributions are capped and adjusted each year for inflation by the IRS. The individual HSA cap in 2008 was $2,900; it's $3,000 in 2009.

FSA and HSA card issuance

Researchers predict only moderate growth in the coming years in network-branded FSA and HSA debit cards.

FSA and HSA card issuance is growing.

When out-of-pocket costs arise, patients can pay for them with the HSA debit card. Unlike a Flex account, a popular tax-deferred account offered by employers to allow workers to pay for child and dependent care or medical expenses in pre-tax dollars, the HSA doesn't have a yearly "use it or lose it" time limit on using the funds.

The debit card is accepted anywhere Visa debit cards are accepted and can be used to pay for doctor's office co-pays, deductibles, prescription drugs or other health-related costs.   

For doctors and patients, using debit cards are a way to streamline a complicated health care billing and payment system. 

"Payment cards certainly are the definition of efficiency," says Red Gillen, an analyst for Celent, a Boston consulting and financial research firm.    

Drug stores accepting cards
Currently, health care debit cards -- sometimes called health benefit cards -- are used for a relatively small portion of health-related transactions. Consumers with Flex, HSA or HRA accounts can use the cards to pay for prescription drugs and medical supplies (contact lens solution, eye glass cleaners, hearing aids) at pharmacies around the country, including CVS, Walgreens and Wal-Mart. A 2003 and 2006 IRS ruling requires drug stores, pharmacies and certain retailers to provide itemized sales receipts showing purchases that qualify for health savings account reimbursements. Merchants have until July 1, 2009, to comply with the IRS' rules for upgrading their inventory information approval systems (IIAS) to identify approved medical expenses.

In the early days of Flex accounts, employees who made qualified health-related purchases had to keep their paper receipts, fill out reimbursement forms and wait 10 days or more to receive their money. The debit card has the advantage of avoiding paper forms and having instant access to the funds. Users must still keep copies of their original receipts in case there's an IRS question about the medical purchases. 

The problem is that pharmacy and drug store purchases -- while substantial -- are a small part of overall health care spending. The debit card is pulled out and used infrequently.

When you leave, they don't know what they are going to charge you.

-- Tim Sloane    
Director of prepaid cards, Mercator Advisory Group    
That's not good news for a card issuer hoping to cash in on transaction fees.

"It's only going to be a transaction when the cardholder is sick," says Tim Sloane, director of prepaid cards at the Mercator Advisory Group, a health and financial services industry consulting firm. "Most of the time it's in the wallet. A good prepaid general purpose card that's always pulled out making purchases is way more profitable."

He adds: "Even when the account is being used, it's only being used on the card for a relatively small component of the overall amount spent -- not for the tests that you're taking, not for the doctors that are involved or the anesthesiologist."

More like retail
The bottleneck in the process is at doctors' offices, hospitals and labs, agrees Gillen, the Celent analyst. He says the nation's health care billing system should become more "retailish." That is, paying for a service at the time it is received -- rather than weeks later.

More often than not in the health care arena, "You don't know what your portion of the payment cost is at point of sale," says Gillen. "The medical industry should find ways to collect upfront."

Currently, insured patients who receive care or lab work at health care facilities don't know the final amount of their bills until several weeks after they receive service. Depending on their plan, they may pay a nominal amount -- $25 for example -- for the office visit. But the bill for the actual services rendered is sent to the health insurance company for review. An administrator decides how much the insurance will pick up, what to pay the doctors (based on pre-negotiated pricing) and how much the patient is expected to pay based on deductibles.

People get a bill from their doctor's office. Its paper ... They've been trained for years to get a payment stub.

-- Red Gillen
health care payment analyst

Deciding whether a service is covered under the insurance plan, a process called claims adjudication, slows the payment process.

"Until they find a way to automate the claims process and do instant adjudication, you really can't use the cards from these HSA accounts in the doctor's offices and clinics and medical laboratories," says Sloane. "When you leave, they don't know what they are going to charge you."

Faster alternatives?
Gillen recommends three alternatives to help speed up the system:

  1. Treat health care payments like hotel room charges. They swipe your card at the front desk and send the final bill through once they know if you've used the minibar or charged anything to the room. Similarly, a doctor's office could swipe the patient's card and send it through once the patient's portion of the payment has been set by the insurance company. However, medical billing errors make this method problematic and may add another level of complexity in reversing charges. Also, if the bill totals more than the amount in the account, the patient could be hit with overdraft fees, although Gillen says putting a ceiling on the payment amount avoids this problem.
  2. Have health insurance companies adjudicate claims in real time to provide rulings on what is and isn't covered while the patient is still in the doctor's office.
  3. Estimate the bill and charge patients a portion of the estimated amount due.

Adds Gillen: "As costs shift from insurance companies paying to you and me paying, cards are going to play a role for both payer and payee."

Another key factor: Training the public away from paper-based health care records and payments toward more electronic and high-tech methods.

"People get a bill from their doctor's office. It's paper," says Gillen. "They've been trained for years to get a payment stub. People need to use their cards when they're at the doctor's office and when they go to the hospital."

Impact of Obama health reform
Some wonder if the Obama Administration's plans to reform the nation's health care system will be an impetus to push health debit cards over their current hurdles.

President Barack Obama has said he wants to reform health care in part by streamlining some of the billing processes. But beyond that, the plan has few specifics related to health payments.

Gillen from Celent says it's much too early to know how payment cards may be affected.

Adds Sloane: "While it's unclear exactly what approach he's going to take, it is almost assuredly going to change the existing infrastructure, that is almost assuredly going to have an impact on the HSA market."

To comment on this article, write to: Editors@CreditCards.com.

See related: Special report: Do credit cards offer health care Rx?, 15 tips for paying high medical bills, Compare health care credit options, CreditCards.com poll results: credit and health care costs, 'MedFICO' score: Good medicine or bad? No credit card, no medical service?, Blog: Americans worried about health careBankruptcies near record levels as economy sours, Study: 79 million struggling to pay medical bills and debt   

Published: April 14, 2009


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