Medical Savings Account (MSA) proposals in the budget passed by Congress last fall would allow employers to make tax-free deposits to employees' MSAs, permit the self-employed to make tax-deductible deposits to an MSA and give seniors covered by Medicare the option of an MSA plan.

MSAs allow people to select a high-deductible insurance policy for catastrophic expenses and put the premium savings into an account they can use to pay small medical bills.

MSA plans concentrate out-of-pocket spending on the gap between the MSA deposit and the deductible. For example, with a $1,500 MSA deposit and a $2,000 deductible, patients spend the first $1,500 from the MSA and the next $500 out of pocket, then rely on catastrophic insurance to pay all expenses above $2,000.

Critics assert that Medical Savings Accounts are good for the healthy and bad for the sick, because only the healthy would choose MSAs, thus draining funds from the general insurance pool needed to pay for others' care.

But the sick would benefit as well. Using the figures above, someone with an MSA who had $10,000 in medical expenses would pay only $500 out of pocket. Under a conventional insurance policy with a $500 deductible, that person would pay $1,500 out of pocket - $500 toward the deductible and $1,000 for a 20 percent copayment on the next $5,000.

The people who gain the least financially by switching to an MSA are patients with chronic conditions generating medical bills in the range of $2,000 to $5,000 per year. However, they would also likely find MSAs attractive.

• Given proper incentives, patients and their doctors may be able to lower the cost of care for the chronic condition.

• Even under traditional insurance, the chronically ill are increasingly hassled by bureaucrats, and many believe that if they could manage their own health care dollars they would get better care at less expense.

What is true of the nonelderly applies in spades to seniors. Among Medicare recipients, for example:

• More than 400,000 seniors face out-of-pocket expenses in excess of $5,000 every year for Medicare-covered services.

• Currently, about 70 percent of the elderly purchase supplemental (medigap) insurance at a cost of about $1,200 a year.

A study for the National Center for Policy Analysis by the actuarial firm Milliman & Robertson calculated that the same amount spent on Medicare could purchase catastrophic insurance with a $3,000 deductible and still pay $2,100 into an MSA for all seniors who chose the plan. This means that the most a senior would pay out of pocket would be $900.

Thus Medical Savings Accounts are a good prescription for both the sick and the well.

Source: John C. Goodman, "Are Medical Savings Accounts Good for the Sick?" NCPA Brief Analysis No. 182, October 17, 1995, National Center for Policy Analysis, 12770 Coit Rd., Suite 800, Dallas, TX 75251, (972) 386-6272.