National Center for Policy Analysis

MONTH IN REVIEW

Health Care
August, 1996

MEDICAL SAVINGS ACCOUNTS FOR the Lucky and the Swift

The Medical Savings Account (MSA) provision in the Kassebaum-Kennedy health care bill approved by Congress Friday "will lead to a major transfer of money and power from large institutions to individuals, and allow people to gain control over their own health care," said the economist whose Dallas-based think tank developed and promoted the MSA concept over the past 12 years.

"The bill is a major step in the right direction," said John C. Goodman, president of the National Center for Policy Analysis. "The cap on the number of people who can have an MSA is the most important drawback of the bill.

"Critics originally charged that MSAs would appeal only to the healthy and the wealthy. After they realized everybody will want one they asked for strict limits on access. As a result, those who get an MSA will be the lucky and the swift."

The MSA provision calls for a four-year pilot project to test the idea with a limit of 750,000 MSA policies. Massachusetts Senator Edward Kennedy, a major sponsor of the bill, sought to exclude MSAs altogether, but finally acceded reluctantly to the pilot project after blocking action for weeks.

"Senator Kennedy would prefer socialized medicine, but failing that, he would rather have health care in the hands of managed care bureaucracies and HMOs than under control of the patients themselves," Goodman said. "He is really afraid that Medical Savings Accounts will appeal to millions of people. That's why the limits are so strict."

One of the major aims of the Kassebaum-Kennedy bill is to make it easier for people to keep health insurance coverage if they lose or leave their jobs. But Goodman noted that the Congressional Budget Office estimates only 150,000 people will be affected by these "portability" provisions in any given year.

"Even with the limits of the pilot project, MSAs will involve five times as many people as the portability provisions," Goodman said. "MSAs are the revolutionary part of this bill, not portability." However, MSAs will help make portability a reality, "because people will be able to use their MSA funds to pay insurance premiums when they are between jobs."

The MSA provision allows workers or their employers to make tax-deductible contributions to an account to pay routine medical expenses. The accounts are coupled with a high-deductible insurance policy to pay for catastrophic expenses. Premiums are lower for high-deductible policies, so the premium savings can provide some or all of the money for the account. MSAs encourage people to consume health care prudently because they get to keep any funds they do not spend.

The MSA plans will be available only for people who work for companies with 50 or fewer employees, are self-employed or do not have health insurance now.

Hundreds of companies and municipalities already offer MSAs to their employees, but unlike health insurance premiums, MSA deposits are currently taxed. The legislation will allow tax-free deposits and tax-free growth.

The health insurance reform bill was sent to President Clinton, who has announced he will sign it into law.

For complete information on MSAs, visit the NCPA's Health page at http://www.public-policy.org/~ncpa/pi/health/hedex.html

BUDGET TIME COMES TO EUROPEAN WELFARE STATES

Western Europe's welfare states can no longer afford the vast amounts now required to pay for unlimited health care benefits, according to overseas reports. So in country after country, health care administrators are turning to the same kinds of market-oriented cost-control measures used by for-profit managed care companies and health maintenance organizations in the United States.

Hospitals are being encouraged to compete with each other in offering value for money.
Doctors are being pressed to follow the most cost-effective treatment methods and order expensive tests only when necessary.
Managers are using computers to monitor their compliance.

Here are some developments in various European countries:

In Britain -- where the government will spend $61.8 billion this year to provide health care to all citizens -- 50,000 nursing jobs and 60,000 hospital beds have disappeared since 1990, accompanied by an increase of 20,000 senior managers in the Health Service, according to undisputed Labor Party data.
In France -- where the government requires virtually everyone to subscribe to a health insurance system that has been in red ink since the early 1990s -- the government plans to impose limits on patients' freedom to bypass general practitioners and consult specialists directly, and it is putting heavy pressure on doctors to cut back on the amounts and costs of the medicines they prescribe.
In Germany -- where 850 state-regulated, non-profit "sickness funds" cover 92 percent of the German population legally required to join them -- the system was $4.7 billion in the red last year and the government is pressing doctors and hospitals to lower their costs by prescribing less medicine and making it generic, at that.

Source: Craig R. Whitney, "Rising Health Costs Threaten Generous Benefits in Europe," New York Times, August 6, 1996.

MSAs FOR D.C.

Employees of the city of Washington, D.C., have several health insurance options, but not one being used in some other municipalities.

Plans cover a wide range:

At the cheap end is an HMO option with an average total monthly premium of $140 per individual (($360 per family) of which the employer pays 75 percent.
Those who want doctor choice through a traditional plan will pay for it: a maximum premium of $590 for an individual and $1500 per family in out-of-pocket expenses after the deductible has been met.
The cost-of-the-choice plan is high: adding the city's and employee's contribution, the annual cost for the family policy is $18,190.

Analysts point out, however, that D.C. employees could have the choice they want without the big ticket price for themselves and the city: Medical Savings Accounts.

MSAs give people the chance to move from a conventional, low-deductible health insurance plan to one with a high deductible (say $2,000-$3,000) and to put the premium savings in a personal savings account.

These accounts are used to pay for routine and preventive medical care, and are combined with a high-deductible health insurance policy that pays for major expenses. Employees and their families pay all medical bills up to the deductible from their MSAs and out -of-pocket funds. Catastrophic insurance pays all expenses above the deductible. Money left over in the MSA at the end of the year can be withdrawn or rolled over to grow with interest.

MSAs are already being used by cities around the country. Jersey City, New Jersey offered a traditional plan with a $200 deductible and 20 percent co-pay up to $2,000 for each member of the family. Thus, a family could pay $600 per person per year out of pocket. But the city switched to the Blue Cross MSA. Now:

Employees get a $2,000 deductible and an $1,800 contribution to their MSA from the city.
A family's total out-of-pocket exposure is $200 (compared with $1,900 in D.C.)
Any part of the $1,800 an employee doesn't spend during the year belongs to the employee, not to the insurance company.
The average refund after the first year of the Jersey City MSA plan was $1,000.

Finally, MSA proponents say, Jersey City is saving taxpayer's money. The cost of the traditional policy for a family is $6,776. The MSA contribution and catastrophic policy is $6,505.

Source: Merrill Matthews (National Center for Policy Analysis) and Carrie Jablonski (Harvard University), "Bring MSAs to D.C," Washington Times, August 7, 1996.

For complete information on MSAs, visit the NCPA's Health page at http://www.public-policy.org/~ncpa/pi/health/hedex.html

INSURANCE AVAILABLE FOR LONG TERM CARE

The cost of long-term care is the principal reason for poverty among the elderly, reports the American Health Care Association, a group of nursing home care providers. An AHCA study points out that insurance is available for nursing and home health care, but many people fail to insure against the need.

Yet two out of five Americans will need nursing home care at some point in their lives, and one in five Americans over age 50 is at risk of needing such care during the next 12 months.
A full 55 percent of those who enter nursing homes will stay at least one year, and 21 percent will remain five years or longer.
Nursing home care is cheap compared to the cost of a hospital stay -- an average of $105 a day versus $900 in 1993.
But the average American man can expect to spend $56,895 on long term care; while the average woman will spend $124,370.

Many people mistakenly assume Medicare or their health insurance plans will pay for long term care. But Medicare pays only for limited nursing home stays after hospitalizations and requires a substantial copayment.

Two out of three nursing home residents, about one million people, now rely on Medicaid to pay for their care. However, in order to qualify for Medicaid, patients must first spend themselves into poverty, and then the benefit per day is limited. Instead, elderly Americans are increasingly purchasing long-term care insurance.

By the end of 1994, more than 3.8 million people had purchased long-term care policies, and 1,028 employers offered such insurance plans to their employers.
A 1995 study found that 61 percent of long-term care insurance purchasers have annual incomes of less than $35,000 and about one-third have assets valued at less than $30,000.
Typically, policies purchased by people age 65 pay an average $86 daily nursing home benefits and $80 daily home care benefit, cover 5.1 years and cost an average of $93 per month.

Source: "Long Term Care Insurance: Debunking the Myths," Background, July 17, 1996, American Health Care Association.

For the full text of the NCPA Brief Analysis on Nursing Home Care go to http://www.public-policy.org/~ncpa/ba/ba190.html

MORE CARE MAY NOT BE BETTER

Seriously ill white heart patients are more likely to undergo intensive care procedures than black patients; yet the black patients have better outcomes, according to a nationwide study by Beth Israel Hospital. The study of 9,000 older adults with congestive heart failure found:

White heart patients are one-and-a-half times more likely than blacks to undergo surgery, dialysis, pulmonary artery catheterization, endoscopy and bronchoscopy.
The use of specialists is linked to increased resource use, and blacks are less likely than patients of other races to have a cardiologist as an attending physician.
However, patients cared for by cardiologists do not have better survival rates than other patients, and black patients do better than the white ones.

The study's author suggests that routinely used intensive medical procedures may not be as important to survival and may create complications, resulting in poorer outcomes. Or it may be that the black patients were healthier to begin with.

Source: "Service Utilization: Blacks Get Fewer Services, Fare Better," American Health Line, July 30, 1996.

HEALTH CARE COSTS

Third-party payments are one of the primary causes of rapid growth in Medicare expenditures, according to Guy King, former chief actuary of the Health Care Financing Administration. When people must pay their own medical bills, they avoid unnecessary expenditures and seek the best deal for their dollars. But they have much less incentive to do so when the government picks up the tab.

The establishment has responded to this problem by trying to force seniors into managed care, thereby allowing insurance companies to ration care. Thus any reduction in costs is achieved by limiting access to treatment.

But according to a report by the Department of Health and Human Services inspector general:

There are pervasive quality problems throughout managed care programs.
Managed care programs are significantly less likely to use diagnostic tests -- such as MRI and CAT scans -- than are fee-for-service plans.
Doctors report that managed care organizations pressure them to save money, even at the cost of quality.
One-third of doctors surveyed by the American Medical Association in 1988 stated that patients were harmed by delays or non-treatment as a result of managed care.

In Europe, where health care is run by the government, rationing is extensive. Now, according to reports, the European welfare states of Britain, France and Germany are limiting access even more in the face of rising health care costs.

Experts in the field recommend that reliance on third-party payments be replaced by incentives for consumers to save -- by allowing them to choose Medical Savings Accounts.

Source: Michael Tanner (Cato Institute), "Hard Lesson on Socialized Care," Washington Times, August 14, 1996.

For more information on Managed Care and its problems, visit the NCPA Health page at http://www.public-policy.org/~ncpa/pi/health/hedex.html

BLOCKING REFORM THE FDA WAY

Congress reportedly will consider reform of the Food and Drug Administration this fall. Critics say the major issue is whether the FDA, as presently structured, is helping or hindering the practice of American medicine.

Some analysts say the evidence of the need for reform is clear:

Although the agency sees its mission as protecting the public from unsafe or harmful drugs, it has too often denied Americans important drugs with proven track records overseas -- such as new drugs to treat strokes and heart attacks.
While FDA defenders say other countries are often forced to withdraw drugs after they have gone on the market, the percentage of withdrawals for drug safety in the U.S. and the United Kingdom over a 20-year period has been virtually identical.
The FDA objects to third-party review of drug applications because "user fees" paid by manufacturers -- which are a great source of FDA funding -- would go instead to outside parties.
Over two-thirds of doctors in a recent poll opposed FDA restrictions on off-label use of drugs -- prescribing drugs approved for one purpose to treat another ailment -- saying that it hurts their ability to practice medicine.

Source: Julie Defalco (Competitive Enterprise Institute), "Advocacy, Politics and Reforming the FDA," Washington Times, August 15, 1996.

TRIAL RUN FOR MEDICAL SAVINGS ACCOUNTS

The health reform bill Congress passed includes a limited version of Medical Savings Accounts. The legislation has some good points and some bad points; but the future fight over who can have an MSA will likely get ugly.

The new law allows an annual tax-deductible contribution to the MSA -- up to 65 percent of the deductible for individual coverage and 75 percent for family coverage -- combined with a high-deductible health insurance policy.
Money in the MSA can build up tax free, or be for most medical expenses tax free.
Funds withdrawn and used for nonmedical expenses will be considered as income and subject to income taxes, plus a 15 percent penalty -- unless such withdrawals are made after age 65, death or disability.
Maximum out-of-pocket expenses of no more than $3,000 under an individual policy and $5,500 under a family policy.

The bad news is that Congress imposed a number of restrictions on MSAs that will limit the number of people who will have the opportunity to enroll in one.

Only employers with 50 or fewer employees, along with the self-employed and the uninsured, will be permitted to obtain a tax-free MSA.
The demonstration project is limited to four years and 750,000 policies --fortunately, there is no limit on dependent coverage and the uninsured.
However, once the 750,000 cap has been reached for employees and the self-employed, no more of the uninsured may get an MSA.
Small businesses that switch to an MSA plan may grow up to 200 employees within the four-year demonstration project; additional employees could force the company to switch policies.

Ironically, the unusual restrictions on the MSAs ensure that the demonstration project won't tell us if MSAs result in "adverse selection" -- in which healthy people move into one plan while the sick remain in another -- because it limits the demonstration to employers with 50 or fewer employees, who typically offer only one plan.

Those who get an MSA will be those lucky enough to work for an employer who already has an MSA plan, or swift enough to get a plan before the cap has been reached. Once some people have MSAs, others will likely demand access also.

Source: Merrill Matthews Jr. (National Center for Policy Analysis), "MSAs: The Good, the Bad and the Ugly," Washington Times, August 21, 1996.

For more information on Medical Savings Accounts, visit the NCPA Health page at http://www.public-policy.org/~ncpa/pi/health/hedex.html

HOSPICE CARE MAY NOT SAVE HEALTH CARE DOLLARS

There is no definitive evidence that caring for terminally ill patients in hospices is any less expensive than conventional care, or that the use of advance directives ("living wills") to limit medical interventions reduces costs, concludes a report in the Journal of the American Medical Association. If there are savings, they may be comparatively small.

Some recent studies have claimed that hospice care can produce significant cost savings, while others have found no savings at all. Hospice care and advance directives were developed to provide patients more control and better care at the end of life. They have received more attention recently as care alternatives that might reduce health care costs at the end of life.

Ezekiel J. Emanuel, a researcher from the Dana-Farber Cancer Institute, analyzed the studies that have been conducted and found the evidence of savings inconclusive:

Medical care at the end of life consumes 10 percent to 12 percent of total health care spending and 27 percent of the Medicare budget.
Three randomized trials showed no savings from hospice care or advance directives, but the design of the studies was flawed.
Nonrandomized trials of hospice care and advance directives have found a wide range of savings, from 68 percent to none.

The studies on cost savings contain serious flaws, says Emanuel, such as "selection bias" -- the failure to fully adjust for the characteristics of the groups of patients studied. More important, when studies found savings from hospice care compared to conventional treatment , the savings are mostly in the last two months of life, but disappear completely when medical expenses during the last 12 months of life are compared.

In fact, most studies have found that the longer patients stay in hospices, the more expensive their care becomes, and for patients that stay for more than two months before their deaths, monthly expenditures are greater for hospice users. Overall, the data indicate that patients who enter hospices use more medical services prior to enrollment than nonhospice patients.

Source: Ezekiel J. Emanuel, "Cost Savings at the End of Life: What Do the Data Show?" Journal of the American Medical Association, June 26, 1996.

For more information on health care, visit the NCPA's health page at http://www.public-policy.org/~ncpa/pi/health/hedex.html