In 2007, WellPoint Inc., the nation's largest health-insurance company, ran into a snag while pursuing an important new business initiative.

Federal banking regulators insisted on classifying WellPoint as a health care company. And that was interfering with the company's efforts to open a bank.

The Federal Reserve Board eventually agreed that WellPoint's core insurance business could be considered "financial services." But what about its mail-order pharmacy and its program for managing chronic diseases, which was overseen by WellPoint doctors and nurses? Wasn't that health care?

WellPoint finally convinced the Fed that those activities were "complementary" to its main business - financial services. It pledged to limit them to less than 5 percent of total revenue.

That a medical insurer would agree to keep a lid on health care expenditures so it could get approval to open a bank illustrates a fundamental change in the industry: Insurers are moving away from their traditional role of pooling health risks and are reinventing themselves as money managers - providers of financial vehicles through which consumers pay for their own health care.

A SYSTEM IN NEED OF REFORM

Today, four publicly traded corporations - WellPoint Inc., UnitedHealth Group, Aetna Inc. and Cigna Corp. - dominate the market, covering more than 85 million people, or almost half of all Americans with private insurance.

On Wall Street, they showcase their efforts to hold down expenses and maximize shareholder returns by excluding customers likely to need expensive care, including those with chronic diseases such as asthma and diabetes. The companies lobby governments to take over responsibility for their sickest customers so they can reserve the healthiest (and most profitable) for themselves.

Meanwhile, insurance premiums are becoming a heavier burden on employers, many of which say that rising health care costs cut into their ability to compete and, in some cases, to survive.

As a result, the percentage of Americans covered by traditional group health insurance has declined steadily. Nearly 46 million U.S. residents have no insurance at all. Medical debt has become a leading cause of personal bankruptcy and a growth business for collection agencies.

Even some top insurance executives agree the system is inefficient and sometimes inhumane.

Like home and auto insurance, traditional health coverage is based on shared risks within broad populations of customers: a small proportion with big medical expenses and a large majority with few or none.

Premiums paid by the latter help pay the costs incurred by the others and provide a margin of profit for insurance companies. In theory, this system serves everyone's interests, because people generally cannot know in advance which group they will fall into.

For several decades, health-insurance companies have been retreating from this paradigm.

A sea change occurred in the 1970s, when large employers self-insured employee medical costs, in part because a new federal law exempted self-insured plans from state regulation.

Insurance companies remade themselves as administrators, providing employers with expert help in processing claims and negotiating rates with physician groups and hospitals. Profit margins on these services are high because insurance companies can charge fees without assuming the cost of underwriting employees' medical needs.

A similar change is now rippling through the rest of the health-insurance market, driven by federal tax breaks for individuals who pay for their own routine medical care.

"This is a turning point," said Jacob Hacker, a professor of political science at the University of California, Berkeley, who has written extensively on health care reform. "It's a fundamental shift away from the idea of broadly shared risk. It's going to lead to a complete transformation of the health insurer, which will be increasingly focused on providing management of money."

'HEALTH SAVINGS' APPEAL TO BANKS

Among the signs of the change is the growth in "health savings accounts," which allow individuals and families to pay out-of-pocket medical expenses from tax-exempt savings.

As with individual retirement accounts and 401(k) plans, the money in HSAs tends to sit for long periods and can be invested in mutual funds and securities.

HSAs are different from "flexible spending accounts," which allow employees to set aside tax-free dollars to pay deductibles and other medical expenses. At the end of the year, any unspent money in a flexible spending account is lost. In contrast, money in an HSA can carry over year after year.

Federal tax rules for HSAs were liberalized in 2003, making them very attractive to wealthy taxpayers. Commercial banks, such as Bank of America and Mellon Bank, seeing the opportunity to collect management fees on the accounts, jumped into the business.

"Every bank wants to increase its share of HSAs," said John Casillas, director of the Medical Banking Project, a Franklin, Tenn., organization that helps medical administrators develop financial service systems.

"There's fees for managing the account, transaction fees, fees for investing the funds," Casillas said. "You're going to see many billions of dollars moving from premium payments to professionally managed investment funds under HSA rules. Some people think that banks are going to threaten health plans by replacing them in the marketplace."

Hence the rush by medical insurers to open their own banks.

"This is an offshoot of what's going on in the market," said Kelvin Anderson, chief executive of OptumHealthBank, founded in 2005 by UnitedHealth Group, owner of PacifiCare and other insurance plans.

"Our choice was either to start a bank or partner with a third party," Anderson said. UnitedHealth chose to start its own bank, he said, to "provide better service to the customer."

The company also stands to collect fees for maintaining the accounts, handling some disbursements and investing the balances - and for overdrafts, electronic transfers, even printed checks and monthly statements.

OptumHealthBank has attracted $600 million in health savings account deposits from nearly 400,000 customers. The bank collected more than $34 million in service charges on those deposits in the year ending June 30, according to its reports to federal banking regulators. Over the same period, it earned $46 million in interest and produced a profit of nearly $33 million for its parent company.

That's a small fraction of UnitedHealth's $4.6 billion in overall profit in 2007, but it required a capital investment of just $35 million. Moreover, the business is growing fast: Deposits have more than doubled in the last 18 months.

OptumHealthBank was the first bank to be chartered by a medical insurer, but it was not alone for long. In 2007, Blue Healthcare Bank, funded by 33 of the 39 member plans of Chicago-based Blue Cross and Blue Shield Association, was chartered as a Utah-based thrift, and WellPoint's Arcus Bank received approval from the Federal Deposit Insurance Corp. in 2008.

Arcus is awaiting formal approval from state regulators in Utah, its home state, but expects to be in operation within six months, according to Chief Executive James Rowan.

Utah has been the state of choice for the new charters because state law allows nonfinancial companies to establish state banks without subjecting the parent company to the supervision of federal bank regulators. In 2007, however, the FDIC imposed a moratorium on granting deposit insurance to such banks unless they were owned by a financial services company - hence WellPoint's attempt to show that its principal business was financial services, not health care.

WellPoint had to make that case to the Federal Reserve Board to get a waiver of the FDIC moratorium. In the end, the company reached an agreement that allows it to obtain no more than 15 percent of its revenue from pharmacy services and disease management, triple the limit initially set by the Fed.

Rowan and Anderson say their banks will benefit customers by offering health savings accounts and health care coverage under one roof.

"We want the customer to be empowered," Rowan said.

A FIX FOR THE HEALTH CARE CRISIS?

Whether these new services represent a solution to the nation's health care crisis is widely debated.

Health savings accounts are "a step backward," said George Halvorson, chief executive of the giant Kaiser health plan system and outgoing chairman of America's Health Insurance Plans, the health insurance industry's Washington-based lobbying arm.

He calls the medical banking trend "off the point of where we need to go" to provide medical coverage to all Americans.

That's because HSAs and their related health-insurance policies, which carry high deductibles and offer bare-bones coverage, are beneficial to healthier, younger and wealthier customers. If these customers abandon the conventional insurance market, they will trap people with chronic or serious conditions in a shrinking, high-cost insurance pool.

"Eventually, it will be harder and harder to find individual policies that aren't high-deductible plans," said Timothy S. Jost, a law professor at Washington and Lee University in Lexington, Va., and a critic of health savings accounts.

"Those plans are great if you're healthy. Other people will find that they have access to health insurance but not health care."

HSAs are rooted in a conservative principle called "consumer-directed health care," the notion that health care expenses have been rising in part because American consumers, who receive health coverage as an employment benefit, don't know how much their care actually costs.

If Americans paid for more health care out of their own pockets, the argument goes, they would become more frugal and discriminating. They would avoid seeing doctors for trivial complaints, insist on generic drugs rather than costlier brand names and seek out cost-effective treatments, not fashionable or experimental therapies, even for serious conditions.

To foster this change, the insurance industry developed a new form of health plan carrying a low premium and a deductible - the amount a customer must pay out of pocket each year before the insurance kicks in - of $5,000 or more.

The new plans offer fewer overall benefits than traditional plans. They are designed to cover catastrophic medical expenses. Routine medical care becomes the responsibility of the consumer. Some of the plans exclude maternity benefits, preventive health care and mental-health services.

Federal rule changes in 2003 required anyone opening a health savings account to be covered by a qualified high-deductible plan, giving the insurance industry a convenient hook to market the products in tandem. The idea was that the tax break provided by HSAs would give individuals a greater incentive to buy a high-deductible plan.

Under federal rules, contributions to HSAs are tax-exempt, as are their investment gains. Withdrawals are also tax-exempt if used for qualified medical expenses. Over time, HSA balances could grow to hundreds of thousands of dollars.

PATIENTS ARE 'NOT IN A SHOPPING MODE'

Already, HSAs and high-deductible plans have made strong gains in the marketplace. America's Health Insurance Plans, the industry lobbying group, reported that 6.1 million Americans were covered by high-deductible plans by the end of 2007, a 35 percent gain from a year earlier.

Only a fraction of those customers have also opened an HSA, however. That has led to charges from critics that the savings accounts function more as a tax shelter for wealthy taxpayers than as a tool to manage health care costs. A study in 2008 by the Government Accountability Office found that the average taxable income among HSA holders as of 2005 was $139,000, more than double the average for all taxpayers.

The GAO also found that average withdrawals per year were less than one-half of contributions, suggesting that the account holders were building up retirement savings.

There is evidence that enrollment in high-deductible plans has grown not because the plans offer greater value but because they are often the only plans that customers can afford - and sometimes the only plans an insurer will offer applicants with chronic conditions such has asthma, diabetes or depression.

A 2006 survey by Kaiser Family Foundation found that although customers in high-deductible plans did cut back on medical services overall, they tended to avoid arguably beneficial services as well as purportedly wasteful ones.

They were more likely than participants in conventional plans to avoid filling a prescription or to take less than the prescribed dose, to skip a test, treatment or follow-up visit recommended by a doctor, or to skip a checkup.

"The basic premises of consumer-driven health care are seriously flawed," said Mark Hall, a professor of law and public health at Wake Forest University Medical School, who contends that people with serious conditions have little time or inclination to search for the most cost-effective treatment.

"They're not consumers, they're patients. And when you're a patient, you're not in a shopping mode. You have other things on your mind."