Solving Problems with Medical Savings Accounts

Commentary by Pete du Pont

For the most part, the tradition of employer-provided health insurance began burgeoning during World War II. Because of government wage and price controls, employers couldn't hire vital workers away from other companies with more money. But they could compete using health insurance and other fringe benefits, which weren't covered by the controls. And they did.

Today nearly 90 percent of all Americans under the age of 65 who have private health insurance get it through an employer -- either their own or a family member's -- and in too many instances neither the employer nor the insured person is particularly satisfied.

As employers' health care costs have skyrocketed in recent years, they have turned more and more to managed care of one kind or another to hold down costs. About 160 million people are in managed care plans. Most people are healthy, and managed care works pretty well until they get sick. Then it's often another matter, since sick people are a challenge to a system specifically designed to hold down costs. There are plenty of horror stories about people being denied care or getting low-quality care. As for the managed care plans themselves, those that attract too large a percentage of sick people lose money and leave the market or go out of business.

In the past, people who might want to buy their own health insurance have been thwarted by the tax law. If the employer furnishes the employee's health insurance, it's a deductible business expense and is excluded from the employee's taxable income. But if, say, the employer provides the same amount to an employee to provide his or her own health care, the money is taxed as income. Thus employer-provided health insurance is subsidized.

That's why most people still get their insurance through an employer. It's also why the concept of high-deductible health insurance and medical savings accounts (MSAs) has not been more widely adopted.

Health insurance with a high deductible is much less expensive than a low-deductible policy. Putting that premium difference into an MSA would give the insured person money to use for smaller medical expenses. Insurance would only come into play for catastrophic expenses.

This concept has the advantage of letting people decide for themselves, in concert with their doctor, how and whether to spend money for health care. It also gives them an incentive to be careful about incurring health care expenses, because they can keep anything left in the MSA at the end of the year.

In the last two years Congress finally enacted two pilot tax-advantaged MSA programs, one for the elderly on Medicare and the other for employees of small businesses and the self-employed. But these still don't answer the challenge of dealing with managed care. For one thing, if an individual has money left in the MSA at the end of the year, the money is taxed and penalized if it's withdrawn and spent on something other than health care. So much for the financial incentive for the MSA holder to control expenses.

Now NCPA President John Goodman, the foremost proponent of MSAs, has proposed a different approach -- one that would also take managed care into account. Those who chose this approach could deposit after-tax money into an MSA designed to wrap around their managed care plan. Like the new Roth IRA, these deposits could be withdrawn tax-free at any time (which would require a change in the current tax law for the MSA deposits).

Goodman explains that this would give more flexibility to people enrolled in managed care plans. For example, they could use the MSA to pay doctors not in the managed care network or to buy health care services not covered by the plan.

It would also give more flexibility to employers and insurers. Their plans might, for example, provide first-dollar coverage for some services like preventive tests that have a proven payback and continue the high deductible for other services. Or there could be a special type of fee-for-service plan, which paid fixed fees for medical services and procedures but allowed MSA funds to pay the difference if the scheduled fee wasn't sufficient.

Managed care is evolving. The Goodman MSA would be a logical step in ensuring that the next phase of the evolution gives the health care consumer greater control of personal health care costs and encourages more concentration by providers on the quality of care, rather than its cost.