Medical Savings Accounts have become a very popular health insurance alternative. More than 2,000 employers have adopted some version of an MSA plan. In addition, 18 states now allow tax-free deposits to MSAs under their state income tax codes. The apparently universal experience is that MSA plans reduce health care spending by giving employees incentives to manage their health care dollars wisely.

Currently, employer deposits to Medical Savings Accounts are subject to federal income and payroll taxes. However, employer-paid health insurance premiums are not taxed. Legislation now before Congress would allow tax-free MSA deposits, leveling the playing field among MSA plans, fee-for-service insurance and HMOs.

Senator Edward Kennedy (D-MA) objects to the proposal, asserting that MSAs would appeal only to the healthy and wealthy. However, a recent study produced by the prestigious Rand Corporation disputes this assertion. In addition, new research from the Urban Institute finds that racial minorities would gain the most from MSAs. And a new poll by Harvard researchers raises serious questions about the primary alternative to MSA plans: managed care.

MSAs only for the healthy? Rand says no. Rand researchers conclude that MSAs would be attractive to those who expect to face high health care costs. That's because potential out-of-pocket expenses under traditional health insurance, which requires deductibles plus copayments, are higher than under MSA plans. Thus sick people pay more under a traditional health insurance policy than under an MSA plan.

MSAs only for the wealthy? Rand says no. Under legislation now before Congress, Medical Savings Account deposits could be funded by employees or employers - but not both. Rand researchers compared employee-funded MSAs with employer-funded MSAs as well as traditional health insurance and HMOs. The conclusion: almost three-fifths (57 percent) of the population would choose an MSA if given the opportunity.

As Figure I shows, employees choosing the employer-funded MSA plan (the most popular MSA option) would have an average income of $29,000, only slightly higher than those remaining in fee-for-service plans ($28,000) and well below the income of those choosing an HMO ($43,000).

MSAs good for minorities? Urban Institute says yes. In a separate analysis, the Urban Institute estimates that about 80 percent of nonelderly Americans would gain by switching to an MSA plan. The proportion of blacks who would benefit (83.9 percent) is even higher than for whites (79.2 percent). Although the sampling of Hispanics is too small to be statistically significant, the percent of Hispanics who would gain from MSAs (91.2 percent) is also higher than for whites.

Will MSAs save money? Rand says maybe. Private employers report that health care spending drops significantly after the introduction of MSAs. Rand estimates smaller savings under the proposed legislation. The reason: the treatment of MSA withdrawals for nonhealth purposes would reduce people's incentive to economize on health spending. Currently, account holders can withdraw unspent MSA dollars at year-end and spend them on something else. Under the legislation, each dollar withdrawn would be subject to income taxes and a 15 percent penalty.

According to Rand, if everyone in the under-65 population switched to an MSA, health care expenditures would decline between 6 and 13 percent. However, savings might be nonexistent if people can make an unbiased choice among all the insurance options. (Note: Most employers do not allow their employees to make choices among all insurance options.)

Even if Rand's estimate that little money will be saved is correct, MSAs are still desirable. They allow individuals to make their own health care decisions and, as a new survey of HMO patients indicates, they may enable them to get better health care.

Harvard Poll: HMOs may be harmful to health. Critics of managed care have long contended that HMOs limit patient choices and often preclude patients from seeing specialists, obtaining diagnostic tests and getting other needed health care. Public opinion polls seemed to contradict this contention, showing that, on the average, HMO enrollees were just as satisfied with their health plans as fee-for-service enrollees. HMO critics responded by observing that HMOs skimp only on the small number of patients who are actually sick and may overprovide services to the healthy.

Now, a new survey of sick people confirms the critics' contention that patients in managed care plans face more obstacles, even when both the physician and patient believe care is needed. According to a survey by health economists at the Harvard School of Public Health, "In all, 15 items (out of 66) revealed significant differences between limited-choice managed care and fee-for-service plans. For all but two items (needing to fill out forms and out-of-pocket costs), the finding was more favorable to fee-for-service plans than to managed care plans."

As Figure II shows:

• Managed care patients were almost twice as likely to complain that they were not getting treatment they and their doctors thought necessary.
• Managed care patients were about 50 percent more likely to be unable to see a specialist or to get needed diagnostic tests.

This Brief Analysis was prepared by NCPA President John C. Goodman and Vice President Merrill Matthews.

Note: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any legislation.

A National Institutes of Health (NIH) panel said it cannot recommend regular mammograms for women in their forties-- that women should make such decisions for themselves. The American Cancer Society and the American Medical Association give contradictory advice. Differences in medical opinion are not unusual, nor is it unusual for people to make their own decisions in the face of conflicting advice.

According to the Harvard Risk Assessment Project:

• Annual mammograms for women in their fifties cost about $110,000 for every year of life saved as a result of those tests (see figure).

• For women in their forties, that number climbs to $190,000 that must be spent for each year of life saved that such screening would save.

• The cost includes giving the tests to women who prove healthy and treatment costs for those discovered to have cancer; but ignores potential earnings.

Economists who have studied how high wages have to be to induce people to take riskier jobs say people will trade $10,000 to $500,000 for a hypothetical year of life, on average.

But a woman worried about breast cancer would think getting a mammogram is worth the extra money, while a smoker who rides motorcycles might choose to skip a few. These differences help make the case against one-size-fits-all bureaucratic decision making.

For example, the original Clinton health care plan covered regular mammograms for women in their fifties, but not in their forties, implying an unwillingness to spend much more than $100,000 to save a year of life. Similarly, the administration decided to cover pap smears every three years. Most doctors recommend an annual test -- although the Harvard group says that annual tests for 20-year-olds costs almost $1.5 million per year of life saved.

Third-party insurance makes it difficult for individual patients to make their own decisions on mammograms, pap smears and other diagnostic test, since decisions about what to cover apply to everyone in the insurance pool. A solution is to let enrollees use deposits to Medical Savings Accounts (MSAs) to pay for services they choose to purchase, in the face of the risk and uncertainty inherent in the medical marketplace.

Source: John C. Goodman (president, National Center for Policy Analysis), "A Choice Not Offered for Mammograms," Wall Street Journal, February 3, 1997.