The lead story in the February 1, 2005 Birmingham News stopped a lot of us in our tracks. “Shifting health care’s bill,” the headline proclaimed. “Employer-provided medical insurance would end under plans of Bush, GOP.”

A trend that began in 2004 has apparently picked up steam, with supporters in business and Congress anxious to move the concept of “personal responsibility” to a family’s health care. As consumers of health care in this “ownership society,” you and your family will ultimately bear the financial burden of your health choices. Make good choices, the theory suggests, and you will save money; make poor choices and you will pay. Not a bad theory – until you or a loved one gets sick.

Skyrocketing health care costs

Anyone who has negotiated a labor agreement in the past 20 years has had to contend with the enormous increases in health insurance costs. Every penny we gained in wage increases – and then some – went to defray increases in health insurance. Double digit increases year after year left workers with smaller paychecks and less generous health benefits. Employers, meanwhile, could do little to stem the increases. Those paying health benefits for retirees, especially, sought to reduce or eliminate those benefits in the face of ever-increasing costs.

Unlike countries with national health care plans, the United States has developed over the past 60 years a system of employer-based health insurance. Most workers obtained their insurance from the group plans provided at the workplace. In a few cases – mostly unionized employers – the employer paid the total premium for this insurance; in most cases the employee shared in that cost. As the costs have risen, more and more employers have expressed a desire to get out of the health insurance business entirely.

Whose responsibility?

If employers no longer want to provide health insurance, then who should undertake that responsibility? Any discussion that tends toward societal or governmental responsibility sends policy makers and politicians scurrying for cover. That leaves the individual – the party least equipped to pay the freight -- to take on that challenge. And here’s where “personal responsibility” and “ownership” come in.

There has been a lot of talk over the past several years about “consumerism” in health care. This consumer focus really has two aspects:

1. If you make better health decisions – through diet, exercise, and other lifestyle choices – you will be healthier and will have fewer medical expenses.

2. The more that insurance pays toward your medical bills, the more likely you are to use medical services. This concept, known as moral hazard in the insurance industry, means that you will use less medical care if you have to reach into your pocket to pay for that care.

Underlying the proposals to introduce “personal responsibility” into health care, then, is the belief that, if you have to pay a larger portion of your health care costs, you won’t make frivolous trips to the physician and hospital, and you won’t demand all those unnecessary tests. Furthermore, you’ll make better health choices when you realize that you’ll have to pay more of the cost of your health care. Merely getting sick or dying, apparently, is not incentive enough.

Enter the Health Savings Account

For many years workers have had the opportunity to set aside pre-tax dollars in a Flexible Spending Account (FSA). FSAs are used for dependent care and medical expenses. The major drawback is that all the money set aside must be used within the calendar year; any money not claimed is lost. Many workers have shied away from FSAs because they have been wary of the “use it or lose it” provision.

In January, 2004, the tax code began to allow a new pre-tax savings device: the Health Savings Account (HSA). These new accounts have many advantages:

1. the employer can also contribute;

2. the balance of the account can roll over from year to year;

3. the HSA is portable and can move with the employee if he or she changes jobs;

4. HSAs can earn interest, and

5. qualified withdrawals from HSAs are also tax-free.

The downside? HSAs can only be offered in conjunction with high-deductible health insurance plans. The annual deductible must be at least $1000 for single coverage and $2000 for family coverage. Contributions to the HSA can equal the amount of the annual deductible, up to a cap of $2650 for individuals and $5250 for families (year 2005 limits). The deductible and contribution limits are revised annually.

High-deductible plans, of course, don’t pay medical costs until the yearly deductible is met, although plans can exclude some preventive care from the deductible. The HSA is intended to cover that initial high deductible, or other medical expenses the family may incur during the year.

Are HSAs good for you?

There is no question that an account like an HSA can provide tax benefits for many families. Health savings accounts are the only individual accounts that provide pre-tax withholding and tax-free withdrawals. If the employer contributes to the account then the worker saves even more.

Young and/or healthy workers may find HSAs attractive because they have few medical bills, and they can keep the money in the account, drawing interest, until they finally have occasion to use it. It’s possible that some workers might be able to build a substantial fund to finance future medical costs.

But HSAs are not cost-free, as some might suggest. Some of the costs a worker might encounter:

· Even with a high-deductible insurance plan, the worker would still have to pay premiums. High-deductible plans tend to have lower premiums – usually 20% to 40% lower – but there is still a monthly premium to pay.

· HSA administrators charge fees to open the accounts and monthly fees to maintain them.

· The tax advantages of HSAs tend to fall to the wealthiest taxpayers. For those with low incomes, there are few if any tax benefits.

· The prospect of having to pay a huge deductible – as high as $5000 under some family plans – is daunting to most of us. If one uses an HSA to pay the deductible, then there are no funds to pay other medical expenses, such as prescriptions, dental bills, or eye care.

One recent study found that those who used health savings accounts had incomes 48% higher than those who selected low-deductible plans. A second study found that those who opted for HSAs were “significantly healthier on every dimension measured.”[1] Yet another study found that 49% of those with deductibles above $500 per year – a much lower figure than what HSAs currently allow – had outstanding medical debt, compared with 32% of those with low-deductible coverage.[2]

Are HSAs good for the health care system?

What difference does it make if higher-income or healthier people select these plans? Will it affect you or your employer-provided insurance?

Eventually it will, in some very dramatic ways:

1. If the healthiest people opt out of any particular insurance program, it leaves the remaining plans to pick up a disproportionate share of those who are most sick. Insurance relies on the concept of the risk pool, with each insurer spreading the risk of having very sick people in the pool over a vast group of much healthier beneficiaries. If the pool contains more and more sick people – and fewer and fewer healthy people – the insurer faces what is known as adverse selection. Rates must go up in the pool to cover the higher risk. So, if healthy people leave your plan to go to a high-deductible plan, your rates invariably will go up.

2. As the costs of the low-deductible plans escalate, we can expect more and more employers to offer only high-deductible plans.

3. Over the long term, what the Bush administration is proposing is to move health insurance from the workplace to the individual level. As more and more people sign on to these defined contribution plans, employers will ease out of the insurance business altogether. The President’s current health care plan promote HSAs along with proposals to provide tax credits for purchasing individual insurance, changes in who can offer health insurance, and a “national marketplace” for consumers to shop across state lines to buy coverage. There is nothing in these proposals that encourages employers to continue to offer good workplace-based health insurance, but plenty to encourage workers to seek individual coverage.

4. HSAs propose to solve the ever-increasing costs of health care by making consumers responsible for their own health decisions. The largest driver of high costs, however, is the extended hospital stay after surgery. Even with high-deductible plans, the costs of those stays falls to the insurer; after a patient pays a deductible of $1500 or $2000, the balance of a $50,000 hospital bill would still be paid by the insurer. How would such a system rein in escalating health care costs?

Over the next four years, we’ll be hearing more and more about being “empowered” to make our own decisions about health care and, as the Social Security debate heats up, our retirement income. Younger workers, having faced no medical bills and being unable to imagine ever getting old enough to retire, will be especially vulnerable to these enticements about “ownership” and “personal responsibility.” It is our job to make sure that labor’s voice is heard in any discussion about health care, retirement, and other worker issues. Without that voice, workers have no power at all.

Judi King

Director and Associate Professor

February 7, 2005