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Proposed Tax Break May Spur Companies to Discontinue Benefits

February 14, 2006
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If you went to the kitchen during the State of the Union address, you may have missed President Bush’s proposals to reform health savings accounts. They only took up two lines of a 70-paragraph speech.

In this case, brevity may be the soul of profound policy changes that affect whether and how employers offer health benefits. Bush wants to give individuals tax breaks for the purchase of high-deduct­ible health insurance plans, which provide catastrophic coverage that can be augmented with health savings accounts.

The accounts, which accumulate money tax-free for medical expenses, are the essence of consumer-driven health care. Proponents argue that people spend health dollars more wisely when they use their own money.

Bush’s proposed tax deductions for HSA-eligible plans would put individuals--and small businesses--on the same footing with big companies, which are allowed to deduct health insurance costs. In addition, Bush advocates tax-free contributions to HSAs for all out-of-pocket costs. Currently, the maximum that can be contributed to an HSA is $2,700 for an individual and $5,450 for a family, or the deductible amount for the health plan--whichever is less.

Through this complex tinkering with the tax code, the White House asserts that the number of people projected to use HSAs by 2010 will jump from the current estimate of 14 million to 21 million.

But some younger, healthier people might opt for a less expensive high-deductible plan and an HSA on their own, dropping their employer-sponsored insurance. That would leave companies to cover less healthy populations.

LARGE EMPLOYERS SAVE WITH CONSUMER PLANS

Plan typeAverage per employee cost
Consumer-driven$5,714
PPO$6,518
Traditional indemnity$6,630
HMO$6,658
POS$6,709
Source: Mercer, "2005 National Survey of Employer Sponsored Health Plans"

“Some employers are going to start to question whether or not it makes sense for them to offer health benefits,” says Paul Fronstin, director of health research and education at the Employee Benefit Research Institute.

Not all employers will conclude that they should drop benefits. More important, the journey from State of the Union rhetoric to law is tortuous. “It’s difficult to pass legislation, especially in an election year,” Fronstin says.

Even though the House and Senate are controlled by Republicans, who tend to support HSAs, Congress may be limited by the $337 billion federal deficit.

“Most HSA changes cause a tax loss,” says Susan Relland, senior manager of human capital at Ernst & Young. “The more popular the idea is, the more expensive it will be.”

Created in the 2003 Medi­care reform bill and available since 2004, HSAs are growing in popularity. As of late January, 3 million people were receiving health coverage through a high-deductible health plan combined with an HSA, three times the number covered in March 2005, according to a recent study by America’s Health Insurance Plans.

Companies are saving money with HSAs, according to a report by Deloitte Center for Health Solutions. The survey of 152 major U.S. employers shows that the cost of consumer-driven health plans rose by 2.8 percent over the past year, compared with an average 7.3 percent increase for all types of plans.

Consumer-driven health plans are “going to see a big take-up next year and the year after,” says Martha Priddy Patterson, a Deloitte director.

“People are desperate to try to save money on health care.” But she emphasizes that much more must be done--like educating consumers about prices and preventive measures.

The Bush administration is likely to urge companies to adopt HSAs, Patterson says. It undertook a muscular lobbying effort to secure corporate backing for Medicare reform. “They know how to get what they want from the business community and they are not afraid to push their ideas,” she says.

Democrats, who assert that HSAs do nothing to help low-income people obtain health insurance, will resist. “What we’ve got is devolution of our health care system, where everyone is out there on their own,” says a House Democratic health policy staffer who cannot speak for attribution. “If the president gets what he wants, health care will be like pensions.”

--Mark Schoeff, Jr.

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