Medicare is probably the only large health insurance plan in the country that has not undergone fundamental change over the past decade. Deductibles for Part A (hospital insurance) have not changed in real terms, and for Part B (other medical expenses) they have actually gone down. Moreover, in most places, Medicare is still a wide open, fee-for-service plan in which patients can see almost any doctor for any service.

Current law already allows some Medicare beneficiaries to withdraw from Medicare and join a health maintenance organization (HMO). We should build on this precedent and allow each Medicare beneficiary to stay in Medicare or to have two private insurance options: a private catastrophic plan coupled with a Medical Savings Account or membership in an HMO. The private health plan would be required to cover services now covered by Medicare and would receive 95 percent of the actuarial value of Medicare spending.

Under the Medicare MSA option:

• Individuals would obtain catastrophic insurance covering all expenses above a high deductible (say, $2,000 to $3,000) and a Medical Savings Account to pay expenses below the deductible.

• Any unspent MSA funds could be withdrawn at year-end, saved for future expenses or used to obtain long-term care benefits.

• Investment returns on MSA funds would be tax free.

• Average per capita Medicare spending in 1996 is expected to be about $5,900 (including both Parts A and B). Here's how a Medicare MSA option would work if the program began then and if, for example, half of all Medicare beneficiaries chose the option:

• A beneficiary could receive 95 percent of the $5,900 - or $5,605 - for the private plan.

• Based on preliminary analyses by actuaries, the National Center for Policy Analysis estimates that a beneficiary could have catastrophic coverage (with a $3,000 deductible) and still have more than $3,000 in an MSA.

• This would mean the beneficiary would have no out-of-pocket exposure and no need to buy supplemental insurance.

Currently, Medicare pays many small medical bills that the elderly could easily pay on their own, while leaving them exposed for catastrophic expenses. For example, Medicare does not cover prescription drugs or, in most cases, long-term care expenses. This proposal would allow the elderly to use their MSA funds to buy whatever services and care they preferred from any doctor or hospital they chose. If they wished, they could add to their MSAs the funds they currently used to pay Medigap premiums and out-of-pocket medical expenses.

Source: Peter J. Ferrara, "Medical Savings Accounts for Medicare," Brief Analysis No. 160, April 17, 1995, National Center for Policy Analysis, 12770 Coit Rd., Suite 800, Dallas, TX 75251, (972) 386-6272.

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