“Risk comes from not knowing what you are doing.” – Warren Buffett.

Peter Lynch advised starting with companies whose services or products I am using. If I like the service or product, then I might like the company. Health Equity is one of those companies. I was introduced to Health equity when I decided to enroll in HSA program with my employer. I knew I could use them to pay healthcare bills or find and compare treatments, but I registered to take my employer’s contribution and invest pre-tax dollars with tax-free benefits. I am their happy customer, As they provide me with an easy-to-use mobile app to view and pay my bills and, more importantly, invest automatically. But I now know, The company is bigger than that, and I need to dig deeper.

I will follow the basic template.

1. What is the industry?
2. What is the business?
3. How do they make money?
4. Understand their finances. (Still Learning)
5. Make up a story. Why to invest or not. (Peter Lynch’s Way)
6. Conclude.

INDUSTRY

Bush administration in 2003 passed a law provisioning for establishing HSA’s for tax-free savings accounts that can pay for medical expenses incurred by individuals, spouses, or dependents. As this is not a very old law, The HSA market is still in the growing stage. The big problem with the industry is that not many people are aware of HSA, and if they are, they are not making the most of their HSA’s. Following are some recent articles.

https://www.cnbc.com/2021/09/17/health-savings-accounts-not-used-by-older-americans-who-need-them-most.html

https://www.cnbc.com/2021/08/12/why-americans-arent-taking-full-advantage-of-health-savings-account.html

Nonetheless, The industry is thriving and snowballing. Following are some of the findings of the Devenir HSA report.

Critical Takeaways for me from All reports and news:

1. The industry is growing at a rapid pace.
2. An estimated 60% more HSA assets will be added by 2023.
3. Healthy Growth in HSA accounts.
4. Only 6% of Accounts are investing a portion of their HSA dollars. But the investment assets are supposed to pick pace.
5. 24 Billion $ added to HSA’s and 16 Billion $ withdrawn. Means patrons like to keep money in HSA account.
6. Covid might have played some part, but it’s not that evident from the above figures.

COMPANY AND BUSINESS

Health Equity started with HSA but now has a variety of products: HSA, FSA, DCFSA, COMMUTER, COBRA, etc. When most of the products are for health care or dependent care, Commuter is a bit different.

HSA: Health Savings Account – Pre-tax dollars to pay for medical expenses and tax-free savings.

FSA: Flexible Spending Account – Pre-tax dollars to pay for medical expenses, but you lose unused money by year-end.

DCFSA: Dependent Care FSA – Pre-tax dollars to pay for dependent care, i.e., Daycare, Summer Camp, Elder Daycare, etc.

HRA: Health Reimbursement Arrangement – It’s essentially free money your organization gives you to pay for eligible expenses like deductibles, copays, and more.

COBRA: Consolidated Omnibus Budget Reconciliation Act – The insurance program allows some employees to continue health insurance coverage after leaving employment.

Commuter: Provides benefits include using pre-tax dollars to pay for eligible transit and parking expense.

I am not sure of the total addressable market listed in the report, but I assume a lower target of 600 Billion $. We can assume (not safely) that the company can control 100 Billion $ of HSA Assets on maturity. 6.5 times more than what they have currently.

Since 2019, Health Equity has been on Acquiring spree to control the market share, and potential cross-sells. Some acquisitions include WageWorks in 2 Billion dollars, Luum (Commuter) – 67 million dollars, And is currently in talks to Acquire Further (Nation’s ninth-largest HSA custodian ).

Following are some highlights from their recent presentation.

Key Takeaways

• The industry is growing and expected to grow at an above-average rate in the next couple of years.
• HSA Assets increased decently even during covid.
• HSA/FSA/HRA/COBRA is their core business.
• Not many people are aware of the HSA program. If They are, Not many are using it appropriately. It can turn around if the adoption gets near to 401K number. (60 Million people have 401K – 30 Million have HSA).

WageWorks Acquisition:

• Acquired in 2 Billion Dollars. 1.2 Billion in loan and 800 million in cash.
• It brought more CDBs (consumer-directed benefits) like FSA’s and HRA’s.
• Because of acquisition, they have a single platform for HSA’s and CBDs. Potential to cross-sell.

Competition:

• United Health Group’s Optum
• Webster bank
• Well-known investment companies like Fidelity.

Pros:

• Pioneer and Leaders in the industry. They have increased their market share from 4% in 2010 to 16% by 2020. Health Equity is 2nd largest by Assets.
• Using technology as a platform, they are creating an eco-system of similar products, and the potential of cross-selling has not even scratched the surface.
• Their platforms are built on a business-to-business-to-consumer, or B2B2C, channel strategy. They work with Network Partners and Clients (i.e my employer) to reach consumers (i.e. me) and directly market their services to these potential members. Getting the consumer is critical for them to increase the number of our HSA members.
• Strong customer retention rates as switching require a certain amount of effort on the part of the account holder (I am lazy as well) and may result in closure fees (Which any company where I am moving would be happy to pay).

Cons:

• Susceptible to government healthcare regulation.
• IRS regulations
• Wait out if the acquisition strategy is working.
• What if Fidelity put more resources to increase their HSA presence.
• Adversely affected by interest rate changes.

I will check how they make money in my next post and look closely at their financial numbers. Stay tuned. Until then, Adios.