I think HealthEquity Inc. (NASDAQ: HQY) shows why health savings accounts will not work.
HealthEquity is a non-bank health savings trustee. That means the Internal Revenue Service (IRS) gives HealthEquity (HQY) the right to manage Health Savings Accounts for financial institutions.
A Health Savings Account (HSA) is an untaxed or tax-deferred savings account. Account-holders can only use HSA money to pay for approved healthcare expenses. Conservatives sold HSAs to the American public as an alternative to health insurance. However, most HSA holders also have health insurance policies.
HealthEquity is a Finance Company
Hence, HealthEquity (HQY) is a finance company. However, it is a finance company regulated by the IRS, which is odd. Remember, the IRS is not a regulatory agency it is a tax collection organization.
In addition to HSAs, HealthEquity offers Flexible Spending Accounts and Health Reimbursement Accounts or Agreements. A Flexible Spending Account (FSA) covers out-of-pocket medical expenses with tax-free dollars. A Health Reimbursement Agreement (HRA) is an employer-funded plan that reimburses employees for medical expenses and health insurance premiums.
The idea at HealthEquity is to replace public and private health insurance with tax-free accounts. The threats to HealthEquity are continually rising healthcare costs and the widespread availability of public and private health insurance plans that cover most Americans’ medical expenses.
HealthEquity vs. Medicare and Medicaid
For example, Statista estimates that 17.2% of of Americans were on Medicaid in 2019. Statista estimates that Medicaid paid for 17.9% of American healthcare and projects that 78.5 million Americans will be enrolled in 2022. Similarly, Statista estimates that 18.1% of the US population was on Medicare in 2019.
Hence, HealthEquity competitor and opportunity is Medicaid and Medicare. Medicaid and Medicare threaten health equity because they offer cheap or free health insurance to 36% of the US population. Medicaid and Medicare are an opportunity for HealthEquity because many people will want to augment them.
Unfortunately, most Medicare and Medicaid recipients will not have the money to support a Health Savings Account. Employer health insurance is a more complex matter because it varies widely.
However, the Affordable Care Act (Obamacare) requires organizations that employ over 50 people to offer health insurance to employees. Obamacare also finances health insurance for some employees. Hence, Obamacare does create some opportunities for HealthEquity.
Does HealthEquity Make Money?
HealthEquity (HQY) makes little money from health savings accounts. HealthEquity reported quarterly revenues of $184.2 million, a quarterly operating income of $4.25 million, and a quarterly gross profit of $83.30 million on 30 April 2021.
Moreover, HealthEquity is making less money in the aftermath of the COVID-19 pandemic. For instance, HealthEquity’s quarterly revenues fell from $190.01 million on 30 April 2020. In addition, the quarterly operating income fell from $15.07 million and the quarterly gross profit fell from $89.37 million.
Conversely, HealthEquity’s quarterly operating cash flow rose from $15.03 million on 30 April 2020 to $33.23 million on 30 April 2021. Similarly, the quarterly ending cash flow rose from $171.09 million to $736.77 million in the same period.
Unfortunately, the quarterly operating cash flow rose because HealthEquity borrows money. HealthEquity reported a quarterly financing cash flow of $442.35 million on 30 April 2021. The quarterly financing cash flow rose from -$10.37 million a year earlier.
HealthEquity reported $1.058 billion in Total Debt on 30 April 2021. The Total Debt fell from $1.309 billion on 30 April 2020.
What Value Does HealthEquity Have?
I think HealthEquity (NASDAQ: HQY) has little value. It had $3.162 billion in Total Assets on 30 April 2021. The Total Assets grew from $2.562 billion on 30 April 2020.
I think the low levels of value and revenue at HealthEquity show that health savings accounts are not a profitable or viable business. To elaborate, I think HealthEquity can make enough money from HSAs and other products to survive as a financial company.
I like many finance companies; including Goldman Sachs (GS) and Wells Fargo (WFC), because they have enormous amounts of cash. Conversely, HealthEquity has a small amount of cash. HealthEquity had just $737 million in cash and short-term investments on 30 April 2021. The cash and short-term investments grew from $171 million on 30 April 2020.
In contrast, Goldman Sachs had $515.484 billion cash and short-term investments on 31 March 2021. Similarly, Wells Fargo & Company had $439 million in cash and short-term investments on the same day.
I do not think HealthEquity has enough cash or assets to survive. My prediction is that HealthEquity will collapse or be sold to a bank or health insurance company.
Mr. Market Overvalues HealthEquity
I think Mr. Market overvalued HealthEquity (HQY) at $80.85 on 6 July 2021. In my opinion, HealthEquity shares are only worth around $20.
HealthEquity’s share price rose from $60.63 on 6 July 2020. Thus, HealthEquity’s share price rose as its income and revenues fell. I cannot see how Mr. Market can sustain the share price for HealthEquity. I think HealthEquity’s share price is unsustainable because it makes a tiny amount of money.
Furthermore, I believe that Health Savings Accounts are an inferior product compared to health insurance. To elaborate, health insurance pays for most medical expenses often in full without the need for a savings account. In contrast, an HSA can only pay for a portion of medical costs.
HSAs cannot cover Healthcare Costs
I think there is no way HSAs can cover healthcare costs that are rising at 1.1% a year. Instead, insurance will be necessary which makes HSAs an inferior good.
Conversely, there is a growing market for HSAs. Devenir estimates that there were 25 million health savings accounts in the US at the end of 2018. The number of HSAs grew by 13% in 2018. In addition, Devenir estimates that US Total HSA assets grew from $53.8 billion in 2018 to $64 billion in 2019 to $75 billion in 2020.
In the final analysis, I consider HealthEquity a terrible stock in a lousy business. For instance, HealthEquity pays no dividend. I advise investors to stay far away from HealthEquity (HQY).