Here's How HealthEquity Lowers Healthcare Costs

HealthEquity (HQY -1.63%) has grown to become America's leading administrator of health savings accounts (HSAs), which offer triple tax advantages to eligible enrollees. With the cost of healthcare on the rise, HealthEquity looks perfectly positioned to grow for years on end.

In this episode of The Motley Fool's Industry Focus: Healthcare, host Shannon Jones and Fool.com contributor Brian Feroldi discuss HealthEquity's business model in detail and share how the company helps to save its members money.

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This video was recorded on Sept. 25, 2019.

Shannon Jones: Let's start with the top stock for you, Brian, the first one being HealthEquity, ticker HQY. For our listeners who may not be aware, Brian, can you explain exactly what HealthEquity does and how it's aiming to solve the healthcare expenditure problem?

Brian Feroldi: Sure. HealthEquity is a company that we've covered on the show before. They're the country's leading provider of health savings accounts. They actually just completed an acquisition recently of a company called WageWorks. As long as we've been covering them on the show, they've been the No. 2 provider, but they've now leapfrogged into the No. 1 position. They now administer 4.9 million health savings accounts. They also provide other types of healthcare-focused savings accounts, such as flexible spending accounts, health reimbursement arrangements, COBRA benefits, etc.

Health savings accounts are their bread and butter. These accounts are basically a triple-tax-free free savings vehicle for healthcare expenditures for Americans. You can make contributions to an HSA before tax. Any funds that are in there grow in the account tax free. And then, as long as you spend them on qualified healthcare expenditures, that's also tax free. So, these are almost a no-brainer choice, if you have access to them.

However, not every American has access to an HSA account. In order to gain access, you have to have a high-deductible health plan. That is a health plan that has a $1,350 deductible for an individual or $2,700 for a family. High-deductible healthcare plans are becoming increasingly popular with employers around the U.S. because the average high-deductible health plan offers a premium savings of about $1,700 per year. These things are definitely growing in popularity with both employers and members.

Jones: Absolutely. With this particular model, with HSAs, popular especially with the younger adults who tend to be on the healthier side. One of the key things with HealthEquity -- you had a chance to talk with the CEO. I know Motley Fool co-founder and CEO Tom Gardner and I had a chance to sit down with him. One of the big things I think with HealthEquity, I love the ability to save for expenses and then be able to invest those expenses. But I think the education piece is key to that. Obviously, most people are getting their insurance through an employer. So, it requires an employer being educated about this particular option, and then having the employer also educate their employees. So, I think there's a huge opportunity within this space to increase overall awareness, and continue to get people interested in learning about the advantages of an HSA and the advantages of just being able to invest and set aside money for healthcare expenses long term.

Feroldi: Yeah. You touched on a couple of important points right there. HealthEquity does administer the HSAs themselves, which can lead to significant cost savings. They also do a couple of other things that help members save money. Through their investments, they actually have partnered with Vanguard, the leading provider of low-cost index funds, to enable their members to invest in Vanguard funds once they have funds in their account. They also provide a high-touch model. If you're a HealthEquity member and you have a big healthcare expense coming up -- say you need an MRI or a PET scan or something like that -- you can actually call HealthEquity and they can actually do some shopping around for you so that you can save money on your spending by them recommending to you a certain facility over another one. They are helping their members to save money in numerous ways.

For investors, what really excites me about HealthEquity is that HSAs have come a long way, but there is still an enormous amount of room for growth there. To put some numbers on it, there are currently about 22 million HSA accounts in the U.S. Within the next couple of years, that number is expected to reach at least 50 million. The number of members is going to grow. The amount of assets that are held in these HSA accounts is, combined, about $8 billion today. HealthEquity believes that at market maturity, that figure will grow to $600 billion. That's really exciting for investors in HealthEquity because they earn fees on both assets under management as well as subscription fees and transaction fees. The more people that choose HSAs and the more assets they have, the more money that HealthEquity will make.

Jones: Absolutely. A huge long-term runway right there for HealthEquity. A lot to watch with this particular platform, especially with that WageWorks acquisition that you mentioned. They are aiming to be an end-to-end solution for healthcare expenses. A lot to watch there.