Medical Savings Accounts

NCPA Brief Analysis: More Patient Power (SUMMARY) (TEXT)

Congress has authorized two Medical Savings Account (MSA) pilot programs -- one for Medicare beneficiaries and the other for small businesses and the self-employed. For the nonelderly, however, tax-advantaged MSAs must be combined with high-deductible health insurance and used to pay small expenses not covered by the plan (see figure).

Economist John C. Goodman, president of the National Center for Policy Analysis, says this makes MSAs inadequate to deal with the challenge of managed care for three reasons:

  • Contributions to tax-free MSAs can be made only by people with qualified high-deductible plans, thus excluding Health Maintenance Organization (HMO) enrollees and many others in managed care plans.

  • The MSA deposit is mainly designed to pay deductible expenses and in most cases is exhausted at the point where third-party (often managed care) payment takes over.

  • Withdrawals from the MSA are taxed and penalized unless they are used to purchase medical care or health insurance, forcing the MSA to operate less like real self-insurance and more like prepayment for the consumption of medical care.

To make the tax law more neutral with respect to the use and withdrawal of health savings, Goodman proposes the creation of Patient Protection Accounts. With a PPA:

  • Individuals could make aftertax deposits to the account, regardless of the type of health insurance they have.

  • Employers could make PPA deposits on behalf of their employees.

  • PPAs would be designed to wrap around any third-party insurance plan, including an HMO, Preferred Provider Organization (PPO), Point of Service (POS) plan or a traditional indemnity plan -- providing funds with which to pay medical expenses not paid by the plan.

  • Like the new Roth IRA, deposits to PPAs would be made with aftertax dollars, and after a 12-month insurance period withdrawals could be made for any reason without taxes or penalties.

People in managed care plans could use the PPA for doctors visits, diagnostic tests and other services not paid for by their health plans, or to pay the (often higher) fees charged by nonnetwork physicians. Health plans could be designed more flexibly. For instance, they could provide first-dollar coverage for some services such as preventive tests and high deductibles for others without jeopardizing the ability of the insured to have a PPA.

Source: John C. Goodman (president, National Center for Policy Analysis), "Patient Protection Accounts: Personal, Portable and Affordable," Brief Analysis No. 271, June 16, 1998, National Center for Policy Analysis, 12770 Coit Rd., Suite 800, Dallas, Texas 75251, (972) 386-6272.

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