Medicare Health Accounts: A New Policy Option to Help Adults Save for Health Care Expenses Not Covered by Medicare

U.S. health care costs are climbing by 7 percent a year and are expected to continue to outpace growth in the economy over the next decade. Rapid medical cost inflation disproportionately affects those with the greatest health care needs and the most exposure to health costs. Among those at greatest risk are older adults. While Medicare was designed to protect people over age 65 from health costs and facilitate access to needed services, the program has substantial costsharing requirements and does not cover such high-cost services as long-term care. Medicare beneficiaries spend 22 percent of their incomes on premiums and out-of-pocket medical expenses—a figure that is projected to increase to 30 percent by 2025. In 2004, Medicare Part B monthly premiums for physician and other services averaged $67, while premiums for private supplemental insurance ranged from $144 to $230. Employer retiree health benefits have provided relief to some retirees, but in the past few years many employers have limited benefits or dropped them altogether. While savings will increasingly be needed to fill the gaps in Medicare benefits, Americans are saving less than ever before. In 2004, personal savings dropped to just 1 percent of household disposable income, down from a peak of 11 percent 20 years earlier. New strategies are needed to encourage people to save more for their retirement.The Commonwealth Fund Survey of Older Adults, a nationally representative sample of 2,007 adults ages 50 to 70 conducted in late 2004, asked respondents about their interest in new savings accounts that could be created within the Medicare program. Such accounts would allow people to automatically save for health costs that are not currently covered by Medicare. With Medicare Health Accounts, up to 1 percent of earnings could be deducted automatically from people’s paychecks and placed in an account in the Medicare program. The savings could then be used by people in their retirement to cover costs of long-term care, home health, and other costs not covered by Medicare. Among older adults in households in which at least one member was working, nearly seven of 10 (69%) said they would be interested in having a Medicare Health Account (Figure 1). Respondents were asked whether they would be interested in having 1 percent of their or their spouse’s earnings deducted from their paycheck, tax-free, and placed in their own Medicare account to use for long-term care or other expenses not covered by Medicare. There was broadbased, majority interest in the proposal across income groups, regions of the country, and health status. Democrats, Republicans, and Independents expressed equally high rates of interest (Figure 2). Similarly, interest among older adults with incomes of less than $20,000 was nearly as high as that among older adults with incomes of $60,000 or more (Figure 3). Interest was greatest among the youngest in the age range. More than three-quarters (76%) of older adults under age 55

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