Medical Savings Accounts: Only for the Lucky and the Swift

Commentary by John C Goodman

First the good news. After being stalled for three months in the Senate because Senator Edward Kennedy (D-MA) and the Democratic leadership opposed them, Medical Savings Accounts (MSAs) have arrived. Republicans and Democrats have reached an agreement on MSAs as part of health insurance reform legislation just passed by Congress.

Now the bad news. Only those companies with 50 or fewer employees (along with the self-employed and the unemployed) will be eligible for MSAs. Even among this group, only 750,000 taxpayers - roughly determined on a first-come-first-served basis - will actually get to have an MSA during a four-year pilot program. Everyone else will have to continue in the current system.

The fortunate few who get an MSA will be able to make tax-deductible contributions to an account to pay routine medical expenses. The accounts are coupled with high-deductible insurance that pays catastrophic expenses. Premiums are lower for high-deductible policies, so the premium savings can provide some or all of the money for the account.

Those with MSAs will enjoy two advantages not available to others. First, if they consume health care prudently, they get to keep any funds they do not spend, and those funds grow tax free. Second, when spending money from their account they will be able to make their own choices and decisions in the medical marketplace - unencumbered by managed care bureaucracies.

Republicans, who generally preferred to make MSAs available to everyone, had to make a number of other concessions to those in Congress who see MSAs as the death knell to their attempts to socialize American medicine. For example, the amount of the tax-free contribution is limited to 65 percent of the deductible for an individual policy, and 75 percent for a family policy - despite the fact that there is no limit on tax deductible premiums employers can pay to other health plans with zero deductibles.

In addition, the legislation limits the total out-of-pocket expenses (above and below the deductible) to no more than $3,000 for an individual and $5,500 for a family - completely ignoring the fact that the federal government has never limited out-of-pocket expenses for any other type of health insurance. Fortunately, most of the MSA plans currently being marketed fall within these limits.

A more serious problem is created by the limit on the number of participants. Critics originally charged that MSAs would appeal only to the healthy and wealthy. After they realized almost everybody would want one, they pressed to limit access to them. 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 during the first four months of next year - since the IRS will be monitoring the number of participants beginning in April 1997 to see if the cap has been reached.

Because of this limit, many insurance companies that would have considered offering an MSA product may 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 have been selling MSA plans may get almost all of the new market.

Despite its problems the MSA legislation about to become law is a good beginning. Once some people have them, others will likely demand access also. Thus will begin a new era in which patients and their doctors - not faceless bureaucrats - determine the kind of medical care Americans receive.