The paradox that is small business healthcare funding is starting to crack at the seams.

At the same time, there is great division as to the best way to fix the system.

While healthcare costs are increasing at double-digit rates, the premiums for employees are generally outpacing these raises.

Yet, worker population changes, fostered by recent demographic trends, economic factors and technological restructuring, are increasingly creating a younger, healthier workforce. Since health issues generally increase with age, these factors should lead to a reduction in the usage of healthcare facilities.

The reason this has not occurred is because the nation is burdened with a “user” healthcare model. A “user” model is described as one where the true cost of a healthcare encounter is usually hidden from the patient. In its most usual form this is done by way of the “co-pay” provision whereby the patient only foots a modest $5 or $10 fee for a $200 office visit.

Today, for a majority of Americans with medical insurance, job related healthcare programs are the primary means of paying for ever-increasing medical costs.

In the past, employers paid these costs. Today, the burden is being shifted to employees, many of whom have come to see the price they pay for healthcare insurance as too high in today's workplace.

According to Dr. Kenneth E. Lehrer, a Houston economist who is studying the employee healthcare practices, the future workplace is projected to be:

•  an environment wherein jobs will become much less permanent,

•  outsourcing, aside from international outsourcing, will grow,

•  independent contracting will proliferate and

•  telecommuting will become an accepted career alternative at all income levels.

This evolving society will clearly create a demand on the part of workers for more affordable healthcare, portable health insurance and associated and aligned medical / pension benefits they can personally carry with them.

Given the attractiveness of HSAs to proprietors and employees, it is possible to see substantial growth in HSA compatible healthcare plans over the next few years, according to Dr. Lehrer.

Statistics indicate that approximately 148 million individuals comprise the present workforce, excluding farms. These employees are grouped into approximately 25 million firms including proprietorships, partnerships and corporations of all sizes. Lehrer relies upon the initial utilization of IRAs and 401(k)s and projects this prior utilization forward, concluding that a commencement rate of 10% of all firms utilizing HSAs is realistic. This will then equate to approximately 2.5 million organizations with a projected payroll of 20 million individuals initially being covered under HSA plans by the first quarter of 2006.

Assuming an average retention rate of $600 for each account, this will put more than $120 billion under management by the end of 2006. Given his projection is off by a factor of two, it still leaves more than $60 billion in new investment capital.

Critics will argue that the untaxed portion at an effective rate of 20% would mean $12 billion in lost tax receipts.

While an HSA cannot solve all of these career-centered issues, its flexibility and adaptability should make a positive contribution in fulfilling existing gaps facing workers and their healthcare demands.

Through HSAs, employees will be able to create their own, in his words, "medical financial storehouse". As a result, the negative effects of career changes, multiple jobs, and independent contracting will decline as a significant hurdle in fulfilling an individual's healthcare / medical budgetary considerations.

In seeking to project an HSA adoption rate, Lehrer postulates a combination of social and economic scenarios that should yield at least a 4.0% - 6.0% yearly penetration in the utilization of HSAs beginning in 2005. Over time, like IRAs and 401(k)s, HSAs should reach a level of equilibrium of approximately the 40% - 50% penetration level within the next decade. His estimates, and those of other economists, estimate an adoption figure of more than 20 million individuals by the fall of 2006. Lehrer also argues that events could propel this figure even faster.

The paradox in healthcare is that for a majority of workers, healthcare costs never exceed their premiums. In fact, less than 37% of all Americans exceed $500 in yearly medical expenses. The number of workers that exceed $1,000 a year in medical costs is less than 10%. Add the taxes paid on these premiums in the form of FICA and income levies, and healthcare issues become of great concern to managers. Alternatives that avoid tax penalties are obviously very attractive, argues Lehrer.

HSAs arrive, Dr. Lehrer argues, at an opportune time. It is clear that tax-delayed retirement programs have become a part of the country's compensation system.

At the same time, the concept of the individual being able to foster and support his or her own future financial needs has become and is continuing to enhance the American working household balance sheet. What was once considered a prerogative of the wealthy has, since the end of the Second World War, filtered down via the introduction of IRAs and other similarly styled, financially enhancing options.

Heavy IRA Usage

According to data from the Investment Company Institute in Washington, DC, approximately 60% of all working individuals over the age of 18 participated in an IRA, 60% in a 401(K) plan, and 81% of all working households participate in some form of a defined contribution retirement benefit plan.

Therefore, Lehrer argues, HSAs will be an attractive alternative for employees as well as a vehicle for reducing employer healthcare costs.

Healthy workers will opt for high deductible insurance programs. These often are the most cost-effective for insurance companies as well as individuals.

Insurance companies and corporate officials acknowledge that the 80-20 rule seems to be working in healthcare programs as in many other situations. That is, 20% of a company's workers cause 80 percent of claims. Critics fear that the healthiest workers will opt-out of regular healthcare programs leaving them burdened with the sickest participants. However, this may indicate a need to change the healthcare model.

To slow the rise in healthcare costs and rein in rate increases, critics and proponents alike are suggesting the development of a “consumer” model that puts more of the healthcare choices in the hands of workers.

They argue for moving the primary choices, in healthcare plans, usage and ultimate payment, into the hands of the users.

That this trend is being fostered by HSAs is another reason to encourage their adoption.

It has been argued that previous attempts to provide alternative solutions have not been as successful as hoped for by proponents. Dr. Lehrer suggests that the current economic environment is remarkably different from that of 1996 when HSAs were originally launched under a pilot program and called Medical Savings Accounts ("MSAs" or Archer Savings Accounts).

A max of 1.5 million Americans were allowed under this program, which was restricted to small businesses and self-employed individuals. By 2000, the initial program proved to be both a cost saver and a responsible method for individuals and families to control their own healthcare expenses.

Via the Medicare Prescription Drug, Improvement and Modernization Act in 2003 (Section 1201), the Legislature decided to revamp the program and open the opportunity to all businesses, whether large or small.

Today, as Dr. Lehrer points out in his analysis, there are several other aspects associated with HSAs that will encourage early adoption at a rate unseen in previous situations.

What makes the inclusion of HSAs for the average household's balance sheet a more likely occurrence is the fact that some creative financial institutions and / or brokerage organizations will "bundle" an HSA account into or with an IRA, 401(K), SEP, or other tax-oriented individual alternative.

Just as credit cards have become closely tied to checking accounts and, in many cases, can automatically be drawn against brokerage account margin balances, it is only a matter of time, creativity and potentially some additional legislation, that an HSA account will become another tool in a family planning household arsenal.

While it is difficult to remember an America before pensions, social security, Keogh's, IRA's, or weekly mutual fund contributions, it is equally reasonable to project that in future years, high school students will plan on creating and utilizing an HSA in a manner in a similar to how they utilize the internet and e-mail as research tools for term papers.

Further, Dr. Lehrer argues that with the role and position of marriage being a more open alternative, as denoted by the high rate of divorce (averaging about 4.1% per 1,000 population) and even the high rate of re-divorce, an HSA, when properly structured and operated, can help eliminate healthcare gaps during periods of marital disharmony, especially in caring for children, step-children and children of blended families.

Other Advantages

In researching the available alternatives to protect households during periods of marriage dissolution, Lehrer believes none compare to the options, ease or alternatives associated with an HSA. Courts could easily utilize these storehouses of benefits for those truly in need. While a person might use a need for a new automobile to obtain a financial advantage during a period of a marriage settlement, such would not be the case in the event of a kidney, lung or other medical event.

In trying to predict the growth, inclusion and utilization of a newly created financial arrangement, Lehrer reviewed the economic / financial environment into which the matter is being introduced.

He believes that at the present time, and for the mid term foreseeable future, the economic environment of both the overall nation and most individual households can best summarized as follows:

•  A good percentage of what the baby boomers had hoped to achieve and possess by their 55th - 60th birthdays is not going to be fully realized.

•  Wealth accumulation has met some recent solid resistance, career growth has become stalled via a combination of technology, increased immigration, extended working careers, sustained inclusion into the workforce by working mothers (single or married),

•  The ability of individuals to achieve an acceptable education on a part-time basis while making some significant preliminary entry into the workforce is now an accomplished event. This last category was not available during the formative years of the baby boomers due to the then-existing military conscription ("draft").

Methodology Discussed

From this economic scenario, Lehrer drew a rationale for the adoption rate of HSAs in the near term:

First, he examined past plans, similar to the tax structured accounts of HSAs, namely IRAs and 401(k) accounts. He noted that these types of accounts grew somewhat slowly at first in the 1980's and early 1990's, but as soon as the average taxpayer began to observe and receive the yearly tax benefits these tax structured accounts offer, they have made a solid penetration into the American working and tax planning scene.

He determined that the penetration of these type tax structured accounts on a close basis, both IRA and 401(k) plans have increased approximately tenfold over the period of the early 1980s until the present time.

Current participation for both IRA and 401(k) plans is estimated in the 40% - 50% category.

Inasmuch as some workers who have changed careers, positions, and employment over the past two decades could theoretically have both an IRA and a 401(k) plan, definite statistical analysis is somewhat difficult.

Moreover, with each individual plan having a separate penetration of between 40% and 50%, Lehrer reasonably concludes that at least 80% of all American working households are covered by either or both of these type tax-oriented retirement plans.

Relying upon the fact that most American households have become "schooled" to utilizing the legally afforded tax-oriented programs enacted over the last three (3) decades, it is possible to conclude or project that a solid percentage of American households will afford themselves the opportunities of the newly created HSA.

However, in the instance of HSAs, employees are somewhat at the mercy of their employer. As noted, in order for an employee to be eligible for an HSA, the general type of healthcare insurance under which they are covered must conform to certain criteria with a high deductible.

Are HSAs the panacea for everything that is wrong with healthcare? Obviously not.

Can they help employers and employees alike break this spiraling cycle of rising costs? Probably yes.

Will they have financial and social impact on America? Very definitely.

The road is before us. Many of us will need to take it.