When the Philadelphia Inquirer profiled Bill Brown on its front page in April of this year, it was because Brown was retiring as one of the last people in America to have been with one company continuously for 50 years. The average worker in this country retiring today has been with his or her employer for only 10 years. This trend, and the costs of providing pensions and health plans to retirees, has vastly diminished expectations for defined retiree benefits.
And yet, in the interest of retention and recruitment--as well as the simple human instinct to take care of people who have given you a good chunk of their lives--many employers, especially large ones, would love to have a way to re-enter the retiree-health-benefits game, which most abandoned long ago. Some are now seeing health savings accounts as at least a partial way of doing so, because such plans have the potential to serve as a kind of defined contribution health-care plan for retirees.
A recent estimate released by Fidelity Investments indicates that the average 65-year-old couple retiring today will need $190,000 to cover medical expenses over the next 15 to 20 years (not counting such costs as over-the-counter medications, dental services and long-term care).
"Most individuals aren't aware of this and aren't planning for it," says Brad Kimler, senior vice president of the Health and Welfare Consulting group at Fidelity Employer Services Co., a division of Fidelity Investments. Experts have deemed the failure to save for health-care expenses one of the foremost threats to retiree economic security.
"Employers certainly see a need here and would still like to be helping," says Susan Relland, health policy legal counsel for the American Benefits Council. "Our members are excited about the idea of HSAs addressing this. It's the first vehicle that even hints at something that could be workable and affordable for the employer."
NO LONGER WORTH THE RISK
For companies calculating the pluses and minuses of offering retiree health, altruism alone has never been the only plus. Employers who do find a way to offer this benefit have a nice carrot to dangle. "Companies can use the offer particularly to attract people in midcareer," notes Jay Savan, health and welfare practice leader at Towers Perrin.
But at the rate at which health-care costs have outstripped the U.S. gross domestic product in recent years, health care is, in certain senses, no longer affordable in the United States. And retirees, of course, are a particularly high-cost group to insure. With employers now having to accrue, and account for, funds for this purpose annually, providing health care to this group of former employees has simply become too expensive for most companies.
In fact, the very existence of companies has been threatened by the financial weight of obligations to retiree benefits such as health care. Recent news, for example, about strain of such commitments on both Ford Motor Co. and General Motors has called into question the viability of offering such open-ended retiree benefits as health insurance. Even large companies, which have been able to afford to offer such conventional perks in the past, are groaning under the increasingly escalating costs as annual health inflation remains in double digits.
So challenging is this arrangement that some companies have looked at the risk-benefit equation for retiree health and felt forced to drop these benefits despite past promises to keep them going for the lifetime of the retiree. Dreadful PR, legal actions, government involvement and other undesirable results can, of course, ensue thereafter.
In the current climate in which retiree health care is a rare benefit, employees in their 50s and early 60s, who might otherwise retire, sometimes feel forced to keep their jobs for fear of being without any health benefits. While this can result in retention of valuable, experienced workers, it can also mean that less motivated or less productive employees remain longer than the employer might desire, thus creating workforce issues.
Employers have sought a way to shift the retiree out of existing health plans but permit them to take a benefit of some sort with them. To do this, they have wanted a vehicle with defined, manageable costs, not costs that are connected to health-care inflation indefinitely.
"Employers need some kind of defined contribution for retiree health in the same way they did for retiree income before 401(k)s came along," explains ABC's Relland.
Employers asked lawmakers to come up with an alternative account type for this purpose. One result has been the advent of HSAs. These accounts have many of the features that businesses and their beneficiaries have sought. For example, employees can contribute to the accounts with pretax dollars; the funds grow tax free; withdrawals are tax free if used for allowable health-care expenses; and the accounts are portable, remaining with the holders whether they retire or move to new employment.
Savan reports that his group now "sees more organizations evaluating HSA-based health plans, in part because they can choose to sponsor the account funds or the cost of the required high-deductible health plan (HDHP) or both."
Kimler emphasizes the employee-contribution aspects: "HSAs are the first crossover approach that allows us to emphasize what people need to do for retirement. Individuals can take more risk when they are current employees and have the income to sustain a higher deductible."
Analysts believe that HSA plans are particularly relevant to pre-Medicare retirees. Normally, individuals in this group have a need for tax benefits on their income (whether it's coming from an IRA, pension or investments) and want major-medical health insurance at the very least.
"If you're living on a fixed income, what you need most is tax protection and catastrophic--not first dollar--coverage. This year and next, we'll see more employers permitting their younger retirees to enroll in an HDHP to save for this purpose," says Savan. He notes that, once entitled to Medicare, retirees can use HSA funds to pay Medicare premiums.
But using HSA-based plans to prepare employees for retirement health-care expenses could have its drawbacks. One of these results from basic human nature: Most people prefer to spend rather than save.
The United States has one of the lowest savings rates among its Western and competitor nations. There are no guarantees that employees will put money in health savings accounts once they have them.
And if they or their employer do put money in the account, there's no guarantee that the employee will use it for health-care expenses, let alone wait to do so after retirement.
If they are willing to give up the tax benefit and absorb a 10 percent excise penalty, employees can spend out these accounts each year for nonhealth expenses.
Recent analysis of the market by Forrester Research indicates that a small percentage of HSA users--the 20 percent or so who can really afford the deductible and still have money to put away--will drive the vast majority of savings taking place through this strategy. However, the majority share of HSA owners will spend all or a significant portion of the funds annually, according to the prediction.
"In that case, we're not doing much for this latter group, and as a result the majority won't get much value from these accounts over the long haul," speculates Savan. "If the account holder uses the monies for things other than health care, then both the employee and the employer are at a loss."
The HSA approach has other limitations:
-Employees are restricted in the amount they can contribute to the plans (not more than the amount of the deductible in the accompanying HDHP).
-Employers can't apply their HSA funding against their obligations to existing retiree health premiums.
-Employees also won't get the tax benefit if they use the funds to pay health-insurance premiums prior to age 65. "This is a flaw in the design of HSAs," says Savan.
-In addition, once someone reaches age 65, nonhealth distributions are still taxable, but no longer subject to the excise penalty. This is the first time retirees have been able to use health-care account funds for nonhealth purposes.
Given the average American's predilections when it comes to personal finances and consumer behavior, some benefits departments are having trouble seeing HSAs as a prudent strategy to push for their employees for health coverage in retirement.
"We have not introduced HSAs yet, but we would if certain modifications were made," says Andy Mekelburg, vice president of federal government relations for Verizon. "Right now an HSA-based plan is not necessarily a great accumulation program, because you can't build up enough in these accounts, but we are working to try to have this fixed." Verizon has also lobbied in favor of another new approach, the retiree medical benefit account, or RMBA.
Even if they have a retirement health plan, future retirees will end up having to pay a much larger percentage of their lifetime medical costs than in previous decades. And under today's regulations, the ideal type of account, health plan or benefit to counter this trend does not exist, according to employer-services experts. Whether it's even possible to construct such a solution, short of a much expanded, government-directed, universal insurance system, is a gigantic looming question ahead.
Plus, the HSA is unlikely to be a complete solution for anyone. "The HSA is meant to be both a savings and spending vehicle, with the dual purpose of supplementing active health and retiree health," says ABC's Relland.
Kimler favors the experiment, though.
"How well will people fund the accounts?" he says. "Will they have the discipline? We don't know. But they would be spending that money on other things anyway, so it's worth a try."
The ABC points out the opportunity to set incentives for employees to save. The Council notes that some employers are considering making a partial contribution to an employee's annual health reimbursement account, or HRA, if the employee contributes to his or her HSA.
"But when it comes right down to it, HSAs are a tax play," concludes Savan. "As a result, they are a reasonably good device for certain circumstances, especially the pre-Medicare retiree."
But then, of course, there's the other original impetus behind HSAs and consumer-directed health: to affect the costs in the trenches. Nancy J. Morgan, M.D., a family physician in Washington whose practice is pioneering new fee strategies with patients, says, "The added benefit of HSAs is that, by leaving the actual medical-care choices up to individuals, it forces the employees to be aware of how much care really costs."
RUSS ALLEN, a Pennsylvania-based writer, is a frequent contributor of health-care stories to Risk & Insurance®.
September 1, 2005
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