By: Karen Lee
Though disagreement persists on senior citizens' gains under the Medicare reform act, industry analysts
are touting the new law's provisions - especially the addition of Health Savings Accounts - as a boon to plan
sponsors.
As expected, seniors will receive government-provided coverage for most of their drug expenses, with the
exception of a $1,350 hole that participants would have to pay for themselves. Means testing will be established
for provision of the supplemental medical insurance benefits program, also known as Medicare Part B, under which
those beneficiaries who make more than $80,000 annually pay more for coverage. And an oft-disputed provision allows
private health plans to compete with the fee-for-service Medicare program on a trial basis, beginning in 2010.
Tax-free drug subsidies for employers who continue to sponsor retiree coverage and new health savings accounts
(HSAs) that would allow active workers to put away money for medical expenses, including health care upon retirement,
promise financial respite for cash-strapped companies.
"From the employer perspective, this is clearly a good bill because employers will spend less on retiree medical
than before," says Jonathan Nemeth, a senior vice president at Aon Consulting. "This is a good bit of news for
employers."
Radical vision
Under the new program, employers who offer retirees "actuarially equivalent" drug coverage will be reimbursed by
the government for 28% of drug costs between $250 and $5,000 per person.
Meanwhile, they also can establish HSAs, attached to high-deductible plans, for active employees to pay for
medical expenses, including retiree health care. Like flexible spending accounts (FSAs), HSAs are funded with
employee money, and like health reimbursement arrangements (HRAs) they can be carried over into subsequent calendar
years. Participants will be able to save up to 100% of the annual health plan deductible, or up to $2,600 for self-only
policies and $5,150 for family policies. People ages 55 to 65 are allowed to contribute more.
And as the American Benefits Council's health care legal counsel, Susan Relland, points out, charges to HSAs and
HRAs can be made to debit cards, which also got a break from the Medicare bill. The 1099 filing requirement for health
care debit and credit cards has been removed, clearing the way for more employers to make them a part of their health
plans.
"HSAs are going to be very valuable tools for employers... and the best way to give employees that money is to give
them debit cards," Relland says.
Some expect that HSAs may replace such arrangements as the employer-funded, relatively inflexible medical savings
accounts (MSAs). HSAs, in turn, could lead to a radical new vision of health care, one that, according to Joe
Martingale, Watson Wyatt's national leader for health care strategy, could result in "more high-deductible,
account-based health care.
"We want to reform the health care marketplace by centering everything around a powerful, informed consumer who
is spending his own money. This might be the thing to bring that to life."
What about retirees?
Martingale's effusive praise is typical of most consultants and business group representatives who have been
monitoring the bill, and justifiably so.
For the past several years, employers have endured double-digit health insurance premium rate increases with no
end in sight, and many also have many thousands and, in some cases, millions of dollars to support retiree health
care programs. Moreover, they are facing an onslaught of retiring baby boomers in the coming years - more than 70
million by 2030, compared to half that many in 2002 - and a number of employers have cut back on or eliminated their
post-retirement health programs.
What is good for the business, though, may not be so good for the retiree. Even several of those who think the
Medicare bill means nothing but good for employers acknowledge that those subsidies may not be enough to incite them
to retain their post-retirement health care programs.
Martingale notes that the subsidies are "not overwhelming, and not something that's going to make a huge
difference. But for the first time, the government will help pay for prescription drugs. If an employer keeps his plan
the way it is, retirees won't be affected by this at all."
However, despite the promise of greater affordability, retiree health programs are "enormously expensive and a
competitive disadvantage for companies. I think employers will be inclined to reconsider the nature of retiree
medical for future retirees," he says.
Robert Moffitt, director of the Heritage Foundation's Center for Health Policy Studies, goes further than that.
While he and his Heritage colleagues support the concept of HSAs, they are "quite beside the point of Medicare
reform." Moffit believes that an entitlement program such as Medicare, without what he considers to be viable
competition with private health plans, could eventually destroy employer-sponsored retiree health care entirely.
"If there is another program being paid for by taxpayers, that changes the incentive structure," he says. "I think
the majority of employers will scale their programs back to wraparound plans. The effect will be that senior citizens
will get a benefit that will be far less than what they used to have."
Ed Kaplan, Segal Co.'s senior vice president and national health practice leader, explains that seniors who did not
have any sort of prescription drug benefit obviously will benefit with the new law. But those who have retiree coverage
- or, at least, who have it coming to them - actually may find themselves on the short end of the stick.
"Our clients are looking at the cost per capita and determining what the value is of offering retiree health
benefits," Kaplan says. "A retiree health care program used to be a selling point, but the employer hasn't gotten
value out of it in promotion and goodwill. With all the accounting calculations, the sign I'm getting is, unless we
establish value, it may be time to convert from a defined benefit plan to a defined contribution plan for retiree
coverage."
HSA risks
Of course, that defined contribution form - using HSAs to squirrel away money for retiree health care - is exactly
what many have lauded as the future of health care. But there are a number of risks inherent in establishing a savings
account.
The first, simply, is that the account may not be enough to cover a retiree's medical expenses. Half of pre-Medicare
retirees have coronary artery disease, congestive heart failure, diabetes, hypertension and asthma, all potentially
high-cost conditions. The expected lifetime cost of medical benefits for a retiree and spouse currently age 55 is
more than $500,000.
Now, some employees surely will put away as much money as they can and save prudently. But Kaplan notes that many
may not use their money wisely, spending it, for instance, on chiropractic treatment and other discretionary care and
then finding they cannot afford necessary medications and procedures.
"In general, going to a tax-free earnings approach is a good idea," he says. "It's a good model, but I think we
will see horror stories about people not understanding their choices or spending too much money."
Therefore, Kaplan advises employers who establish HSA programs to include education and advocacy programs for their
employees about the medical choices available, and to shore up their provider networks so they do not deteriorate.
Aon's Nemeth agrees with the necessity of education programs, but also points out that consumers can be pretty
intelligent about their finances. Hence, the fear that, once introduced, private competition could lead to adverse
selection. To guard against that, Nemeth says a balancing act between benefits and contributions must be built into
the pricing structure.
- K.L.
Copyright 2004 Thomson Financial, All Rights Reserved
This story is from BenefitNews.com. (http://www.benefitnews.com)
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