Misplaced Criticism

Medical Savings Accounts (MSAs) give people the opportunity to move from a traditional low-deductible health insurance plan to one with a high deductible (say $2,000 to $3,000) and to deposit the premium savings in a personal savings account. They use the account to pay for routine and preventive medical care, and the high-deductible policy pays for major expenses. If they have money left over in the MSA at the end of the year, they can withdraw it or roll it over to grow with interest.

Opponents of current MSA legislative proposals offer several unfounded criticisms of them.

Bogus Criticism: MSAs would attract only healthy people, leaving the sick in a separate pool. MSAs would be attractive to people with high expected health care costs. The reason is that most MSA plans cap out-of-pocket expenditures at levels lower than does traditional health insurance, which imposes deductibles plus copayments. Thus sick people may pay more under a traditional health insurance policy than under an MSA plan. A Rand Corporation study concluded that 57 percent of the population would choose an MSA if given the opportunity.

Bogus Criticism: MSAs would attract only wealthy people looking for a tax break. The MSA legislation before Congress caps the annual tax-free deposit at $2,000 for an individual and $4,000 for a family. The MSA legislation also permits either the employer or the employee to make the deposit, but not both. Thus an individual with extra money cannot "top up" the account above the employer's contribution just to get some tax-free savings.

The Rand study, comparing employee-funded MSAs, employer-funded MSAs, traditional health insurance and health maintenance organizations (HMOs), found that the average income of employees who would choose an employer-funded MSA (the most common MSA option) was $29,000. This was only slightly higher than the income of those choosing fee-for-service plans ($28,000) and well below the income of those choosing an HMO ($43,000).

Bogus Criticism: MSAs are being promoted by special interests. MSAs let people keep some of the money they or their employer currently give to insurance or managed care companies. Not surprisingly, many managed care companies and insurers oppose MSAs. Yet MSA opponents and the media are accusing supporters - who are working to let people keep more of their health care dollars, rather than giving them to insurers - of being controlled by special interests, while those who want insurers and managed care companies to keep all the money portray themselves as patients' advocates.

Bogus Criticism: MSAs will never provide enough money for people to pay their health care bills. The vast majority of people spend little money on medical expenses in any given year, so most would have a significant balance in their MSAs at year's end. Since the proposal before Congress imposes penalties for withdrawing those funds for nonhealth expenses, most people would roll over the balance. This makes MSAs a powerful incentive to save. Suppose a 20-year-old or his employer placed $1,800 a year in an MSA.

• If medical expenses averaged $250 a year, the individual would have $9,821 in the account after five years and $647,010 at retirement, after 45 years of deposits.

• If medical expenses averaged $1,000 a year, he would have $5,068 after five years and $333,941 at retirement.

Source: Merrill Matthews Jr., "Misplaced Criticism of MSAs," NCPA Brief Analysis No. 203, May 6, 1996, National Center for Policy Analysis, 12770 Coit Rd., Suite 800, Dallas, TX 75251, (972) 386-6272; and Emmett B. Keeler, Jesse D. Malkin et al., "Can Medical Savings Accounts for the Nonelderly Reduce Health Care Costs?" Journal of the American Medical Association, June 5, 1996.