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Medical Savings Account Legislation: The Good, The Bad And The Ugly
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After years of bipartisan legislative proposals to create tax-free Medical
Savings Accounts (MSAs), months of partisan congressional wrangling over
whether to include MSAs in health insurance reform proposals and weeks of
discussion on various MSA demonstration projects, Congress passed a law
that includes a limited version of Medical Savings Accounts. The legislation
has some good and some bad points, but the future fight over who can have
an MSA likely will get ugly.
The Good. The good news is that Medical Savings Accounts have a foot
in the door. The agreed-upon demonstration project is short of what most
MSA proponents wanted, but it is a start. The agreement permits:
- An annual tax-deductible contribution to the MSA - up to 65 percent
of the policy's deductible in the case of individual coverage and 75 percent
of the deductible for family coverage - when combined with a health insurance
policy with an annual deductible of $1,500 to $2,250 for an individual and
$3,000 to $4,500 for a family.
- Tax-free buildup of money in the MSA and tax-free distributions of
MSA funds for medical expenses.
- Maximum out-of-pocket expenses of no more than $3,000 under an individual
policy and $5,500 under a family policy.
- Funds withdrawn and used for nonmedical expenses to be considered
as income and subject to income taxes, plus a 15 percent penalty - unless
such withdrawals are made after age 65 or the onset of a disability.
- At death, any remaining MSA balance would be includible in the decedent's
gross estate, under rules similar to those applicable to Individual Retirement
Account (IRA) funds.
- No "sunset" provision for MSAs; those who have them will get to keep them.
The Bad. The bad news is that the restrictions Congress imposed on MSAs not only limit the number of people who can buy them, but also will make their purchase and maintenance very complex.
- Only employers with 50 or fewer employees, along with the self-employed
and the uninsured, will be permitted to obtain a tax-free MSA.
- The demonstration project is limited to four years and 750,000 policies.
Fortunately, there is no limit on the numbers of dependents covered or the
numbers of uninsured who may apply. However, once the 750,000 cap has been
reached for employees and the self-employed, no more uninsured may get an
MSA.
- Small businesses that switch to an MSA plan may grow to 200 employees within the four-year demonstration project; additional employees could force the company to switch policies.
What this concern ignores is that, except in the state of Hawaii, employers are not required to offer their employees any health insurance. Further, they may set the deductible at any amount, with any combination of reimbursement and copayment they choose. The only force driving these "amazing" employers to provide their employees with health insurance is their desire to attract good workers.
In fact, the evidence shows that almost all employers who have already switched to an MSA plan (which currently does not enjoy the tax advantage made available in the legislation) have lowered their employees' out-of-pocket exposure.
In addition to the above-mentioned restrictions, the legislation:
- Requires the Treasury Department to evaluate and report to the Congress
on the adequacy of high-deductible policies purchased in conjunction with
MSAs.
- Mandates appointment of an independent health policy organization to study and report on the impact of MSAs in the small group market, examining such issues as the impact of MSAs on health care spending, adverse selection and preventive care.
By limiting the demonstration to employers with 50 or fewer employees, Congress has virtually guaranteed that the answer will be no. In order for adverse selection to occur, employees would need to have a choice between two or more employer-provided health insurance policies. Almost all small employers who offer health insurance offer only one plan. Without the ability to switch at will, the adverse selection problem is barely existent.
The Ugly. Unfortunately, only 750,000 policyholders - roughly determined on a first-come-first-served basis - will get to have an MSA during the four-year pilot program. Everyone else will continue in the current system.
As a result, those who get an MSA will be those lucky enough to work for an employer who already has an MSA plan or swift enough to get a plan before the cap is reached. The ensuing rush to get an MSA could get ugly and result in legal challenges, since some people will believe they have been financially and perhaps medically harmed because they were unable to get an MSA.
Many insurance companies that might have offered an MSA product will be discouraged from doing so, fearing there will not be enough time to create the product or to gain sufficient market share to make the effort worthwhile. Ironically, as a result of this short-sighted attempt to limit MSAs, the few companies that already sell MSA plans may get most of the new market.
Conclusion. Despite its problems, the MSA legislation is a good beginning. Indeed, it is one of only a few beneficial provisions in the otherwise problematic Kassebaum-Kennedy health insurance reform legislation. The Congressional Budget Office estimated that the health insurance provisions in Kassebaum-Kennedy could help some 150,000 people gain insurance. Medical Savings Accounts could help millions, but the Congress limited their benefit to 750,000. (See graph)
However, once some people have them, others likely will demand access. Thus will begin a new era in which patients and their doctors - not faceless bureaucrats - determine the kind of medical care Americans receive.
This Brief Analysis was prepared by NCPA Vice President of Domestic Policy Merrill Matthews Jr.
Give MSAs A Better Chance
Little more than 100,000 Medical Savings Accounts have been opened since Congress created an MSA demonstration project in 1996. Onerous rules and limits have discouraged sales, analysts say, and should be removed to give the system a fair try.
MSAs utilize high-deductible medical insurance policies, coupled with savings accounts purchased from the insurance savings to pay for routine medical services throughout the year.
What needs to be done to allow MSAs to live up to their potential?
- The present cap of only 750,000 MSAs allowed should be eliminated to
encourage more insurers to offer them and families to purchase them.
- With the demonstration phase scheduled to end in only two more years,
the program should be made permanent -- thereby assuring both buyers and
sellers that the accounts will be viable for years to come.
- The restriction which allows only the self-employed and businesses
with 50 or fewer workers to purchase MSAs should be removed so that firms
of any size can take advantage of them.
- Restrictions which keep MSA plan deductibles above $1,500 for individuals and $3,000 for families should be lowered to at least $1,000 for individuals and $2,000 for families so as not to discourage middle-income Americans from taking part.
At present, MSA tax-free deposits are limited to 65 percent of the individual deductible and 75 percent of the family deductible. Analysts propose letting people deposit the entire deductible in their MSA account.
Currently any money withdrawn for nonmedical reasons is subject to personal income tax plus a 15 percent penalty -- unless such withdrawals are made after age 65 or because of a disability. Experts are asking Congress to lift the 15 percent penalty if the full amount of the deductible remains in the account.
Source: Merrill Matthews Jr. (National Center for Policy Analysis), "Patient Protection? Try Medical Savings Accounts," Investor's Business Daily, July 27, 1998.
Removing Restrictions Would Raise Medical Savings Accounts' Appeal
More than 100,000 qualified Medical Savings Accounts (MSA) policies have been sold since 1996, when Congress created a four-year demonstration project permitting small employers and the self-employed to establish up to 750,000 tax-free MSAs.
However, restrictions have led to a number of problems that have discouraged MSA sales, say experts, and Congress should correct the problems in the original legislation and also expand the availability of MSAs to all Americans, including federal employees.
Currently, certain individuals or their employers may make annual tax-deductible contributions to an MSA to cover some -- but not all -- of the deductible in a health plan, which is usually some kind of managed care. Money not spent during the year may be left in the account to grow tax free. Funds may also be used to pay health insurance premiums when people are between jobs.
Experts recommend a number of reforms (see figure):
- Remove the cap on the total number of MSAs, restrictions on the size
of firms that can offer MSAs to their employees and make the program permanent
-- thus encouraging large insurers to offer MSAs.
- Reduce the minimum deductible required for MSA policies, allow deposits
to MSAs to cover the full amount -- so families' exposure to out-of-pocket
expenses are reduced or eliminated -- and eliminate the 15 percent tax
penalty for nonmedical withdrawals from the account.
- Allow enrollees in the Federal Employees Health Benefits Program to choose an MSA option.
Experts say many FEHBP plans provide unintentional incentives to overutilize health care. MSAs would eliminate those incentives, curtail overutilization and save taxpayer dollars.
Source: Source: Merrill Matthews Jr.(NCPA vice president of domestic policy ) and Jack Strayer (NCPA vice president of external affairs), "Real Patient Protection: Expanding Medical Savings Accounts," Brief Analysis No. 275, July 16, 1998, National Center for Policy Analysis, 12770 Coit Rd., Suite 800, Dallas, Texas 75240, (972) 386-6272.
For text go to http://www.ncpa.org/pub/ba/ba275/