Medicare bill holds big changes for younger workers

Author: Mary Deibel

Published: December 3, 2003

Retirees aren't the only ones to be affected by the Medicare prescription-drug bill. The new law President Bush will sign Monday holds big changes for younger workers that could prompt employers to pass on higher health-care costs and move the country away from work-based health coverage to a system that has you fending for yourself.

Here's why: The new law creates hefty tax breaks for people with high-deductible health insurance - individuals who pay at least $1,000 out-of-pocket before their health insurance kicks in, $2,000 for couples.

To cushion out-of-pocket costs, those under 65, their employers or family members can contribute pre-tax dollars to new Health Savings Accounts, or HSAs. Annual contributions equal to the deductible are allowed up to an estimated $2,250 for individuals or $4,500 for families, with extra contributions of $500 next year, rising $100 a year to $1,000 by 2009, for individuals 55 and above until they reach 65 and qualify for Medicare.

The money is tax-free on withdrawal, too, if it pays for doctor and dental bills; prescriptions; hospital and nursing care; laboratory tests; and other health-care costs; otherwise, distributions are subject to income tax and a 10 percent penalty.

And, unlike use-it-or-lose-it Flexible Spending Accounts, unused HSA balances get rolled over to invest year after year until the money is needed for future medical expenses - even into retirement.

The approach - pushed by conservatives after then-Speaker Newt Gingrich and the Republicans took over Congress in 1995 - is predicated on the belief that HSAs will hold down medical costs by getting people to comparison-shop.

Critics counter that sick people don't respond as if they're buying a laptop or car. "Who shops for the best price if you're in pain?" says Rep. Pete Stark, D-Calif.

Even so, HSAs could prove popular with the self-employed and small-business owners who are stretched to finance individual or small-group coverage.

And they're certain to do better than a pilot program Congress approved in1996. It allowed the self-employed and small businesses to set up Archer Medical Savings Accounts, named for Texas Republican Bill Archer, then-chairman of the tax-writing House Ways and Means Committee. But the experiment never signed up more than one-tenth of the 750,000 people it was authorized to cover because Archer accounts had so many qualifications. Starting next year, when the new law takes effect, Archer accounts will be rolled into HSAs.

With the new accounts, however, Todd McCracken of National Small Business United predicts that small employers will like the newfound flexibility, and he sees "even more companies offering health benefits. HSAs create a health-care system where employers, employees and medical professionals all have a stake in keeping costs down."

By January, when the new law takes effect, insurance carriers and investment firms should devise detailed HSA plans for approval by state insurance commissioners, principal regulators of the insurance business.

Health economist Len Nichols of the non-partisan Center for Studying Health System Change expects that, once the accounts are approved, many self-employed workers and uninsured people will buy HSAs as a safeguard against catastrophic illness and accidents at minimal cost. "For them it's a no-brainer," he says.

After that, Nichols sees small business as the next testing ground, with large employers watching to see how smaller companies fare before deciding whether HSAs are preferable to today's group insurance plans despite three years of double-digit premium increases.

Employer insurance expenses soared from $4,000 a worker in 1998 to $5,646 last year, according to the benefits-consulting company Mercer, with projections of a 14 percent rise in 2004, or another $700-plus per employee.

During the booming '90s, employers used benefits to woo talented workers in the face of a labor shortage, but not anymore: Even before the Medicare bill's enactment, employers began shifting more and more medical costs to workers through higher premiums, deductibles and co-payments.

The next step was supposed to be so-called "consumer-driven" policies that combine sharply higher deductibles with fixed contributions by the employer. Under these plans, for instance, the first $1,000 of your medical costs would be covered by insurance. You'd pick up the next $500, and you and your employer would split the next $1,000 before coverage kicks in again for catastrophic illness or accidents.

The real question the new law poses is whether HSAs will speed this evolution because of their incentive to shift more costs to workers, who may be asked to "match" their employer's contribution to a HSA with its high deductibles and high co-payments.

Urban Institute economist Len Burman worries they will accelerate the change, with HSAs becoming "a boon to the healthy and wealthy and a bane" to older, sicker co-workers left to confront higher costs and premiums in traditional health plans.