Changes In Insurance Programs Could Be Windfall, Catastrophe For Companies

Experts are trying to figure out where the estimated $200 million in unused funds from flexible spending healthcare accounts will go if many firms switch to HSAs.

Right now, according to Mercer Human Resource Consulting, a majority of that money is used by employers to cover the costs of their current medical plans.

If significant numbers of firms switch to HSAs, many experts expect them not to fund these programs. Therefore, the funds will originate from employees.

As a result, there could be a swing of as much as $100 million to companies in the form of profits, according to Dr. Kenneth E. Lehrer. The Houston economist is conducting ongoing research in HSA adoption rates. He points out that the funds not allocated to healthcare programs will be diverted to other resources with the majority of the funding being made up by the employees.

Long Term Shift In Payment Burden

Critics of HSAs complain that most of the funding for them will come from employees. This will happen regardless of what healthcare scheme is used. Surveys by Small Business Digest (www.2sbdigest.com) and others have shown that there is a significant trend by small businesses towards shifting the burden of healthcare to employees.

“The only advantage to employees is that the funds will now be pretax dollars and will rollover each year,” he added.

In a flexible healthcare spending account program, employees forfeit millions of dollars a year because they don't use all the money contributed to accounts by year's end — giving up cash even as they face rising health care costs.

10% Savings Possible

If employees do in fact lose 3% of the funds and spend as much as 10% in the last month of the year seeking to use up their allocation,” Lehrer adds, “then we will have a net savings of more than 10% to employees under HSAs.”

Mercer estimates as much as $210 million in unspent money is forfeited each year.

About 7 million Americans are enrolled in flexible spending accounts, according to the Employers Council on Flexible Compensation. Employees put on average about $1,000 into these accounts annually. Research by Mercer shows that about 3% is forfeited because the programs require employees to "use it or lose it" — surrendering any money not used that year.

In the past, according to Mercer, the beneficiaries were employers, who typically use the money to cover the costs of administering the accounts.

Healthcare spending accounts let employees contribute a set amount of their paychecks each month to out-of-pocket medical costs. Because the money is exempt from federal, state and payroll taxes, employees can save 30% or more on medical costs.

HSAs contributions are also tax exempt but with the added advantage of being eligible to rollover from year to year.

While the amount companies gain is viewed as “negligible” by some benefit experts, if employees are able to keep those funds for another year, this will in time grow into a significant total.

Lehrer points out that some expenditures counted as healthcare costs are really vanity or, worse, downright frivolous. The Wisconsin State Journal in Madison reported on one case where a patient purchased prescription sunglasses simply to use up the money left in his account.

''The individual discovered he had $289.60 left to spend in his health care flexible spending account before the year-end deadline. So he burned it off by buying a pair of prescription sports glasses at Eye Contact on the city's West Side.''

Experts Disagree

"Most employees will figure out how to spend it," says Paul Fronstin, director of the health research and education program at the Employee Benefit Research Institute (EBRI).

Lehrer believes many employees will figure out how to save these funds if they know they can keep them for another year.

Employers also can lose if an employee uses all the spending-account funds, then quits before year's end, because employees have access to the entire amount they allocate before payroll deductions are taken.

HSAs To Predominate

About 75% of large employers offer health care spending accounts, according to EBRI. This total is expected to shift by the end of the decade to 50% HSAs.

At Ford Motor, forfeited spending-account funds are used to cover administrative costs and any losses related to running the program.

An Intel spokeswoman says Intel also uses forfeited funds for administrative costs. Xerox applies any unspent funds to the company's total health benefits costs for the following year, which officials say has the effect of helping reduce health care costs for employees.

In December, many employees rush to spend the remnants of their spending accounts.

Eye Care Centers of America, a San Antonio-based company that owns 377 optical stores including Hour Eyes and Visionworks, displays signs reminding customers to use their medical benefits before year's end.

"It's kind of amazing," says Doug Shepard, a spokesman at Eye Care Centers. "December is kind of slow, and on Dec. 26, we literally see a large pickup we attribute to people trying to use their eyeglass benefits."

In general, employees are forfeiting less this year because a change in federal rules allows them to use the money for over-the-counter drugs.