Congressional Health Care Briefing Book |
Controlling Health Care Costs
"The private sector is already using Medical Savings Accounts, and they work."
" Medical Savings Accounts could reduce the nation's annual health care bill by as much as $300 billion." |
Health care costs are rising in the United States for the same reason they are rising in every other developed country: most of the time when we consume medical services we are spending someone else's money. Currently, about 95 percent of all hospital bills and 83 percent of physicians' fees are paid by private and public third-party payers. On the average, every time a patient spends a dollar in the medical marketplace, 79 cents is paid by someone else. When health care is virtually "free," there is almost no limit to how much we can spend on it — even if we are not sick. In recognition of this fact, other countries limit access to technology and force hospitals and doctors to ration health care. In the United States, we are moving in the same direction, as third-party payers attempt to limit physician choice and hospital access, increasingly dictate the practice of medicine and interfere in other ways with the doctor-patient relationship. Yet experience shows that no country has succeeded in controlling health care costs from the top down without severely reducing the quality of patient care. If we want to solve the problem of rising costs without decreasing the availability or quality of care, we must change the government policies that have bureaucratized the medical marketplace and impeded market competition. Medical Savings Accounts, also called Medical IRAs and Medisave Accounts, are the most important part of this solution. [See below for Questions and Answers on MSAs.] How Medical Savings Accounts Work. Under most proposals, individuals and their employers could make regular, tax-free deposits to MSAs, which would be the property of the individuals. They could withdraw money without penalty only to pay medical expenses or health insurance premiums. Money they did not spend would grow with interest, and they could use it for medical expenses after retirement, roll it over into an IRA or pension plan or leave it as part of their estate. Medical Savings Accounts would give individuals a new way to pay for health care. Under traditional health insurance, people make monthly premium payments to an insurer such as Blue Cross, and the insurer pays medical bills as they are incurred. Under the new system, people could confine health insurance to catastrophic coverage (say, expenses above $3,000), reduce their monthly insurance premium payments and make deposits to a Medical Savings Account instead. Insurance would pay for expensive treatments that occur infrequently, while individuals would use their MSA funds to pay small bills covering routine services. Employer Experiences With MSAs. Even without a tax break, a number of employers have adopted the MSA philosophy. For example, this year the United Mine Workers accepted a plan with a $1,000 deductible. In return, each employee receives a $1,000 bonus at the beginning of the year and employees get to keep whatever they don't spend. If UMW employees are similar to other employees around the country, they will cut back on their health care spending. For example:
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Questions and Answers About Medical Savings Accounts |
1. How would Medical Savings Accounts be administered?
MSAs would be administered by qualified financial institutions in much the same way as Individual Retirement Accounts (IRAs). Individuals could exercise choice over the investment of account balances, with the same restrictions on the type of instruments the accounts could own as now apply to IRAs. 2. How would funds from Medical Savings Accounts be spent? The simplest method would be by a debit card. Patients would use their debit cards to satisfy payment at the time medical services were rendered. At the end of each month, the account holders' statements would show recent expenses and account balances. No more paperwork would be needed than with any other credit card. 3. What about low-income families who cannot afford to make Medical Savings Account deposits? If low-income families can afford to buy health insurance, they can afford to make MSA deposits — since the primary purpose of the MSA option is to allow individuals to divide their normal health insurance costs into two parts: self-insurance and third-party insurance. Currently, the tax law discriminates against people who have their own health insurance by denying them the tax advantages of employer-provided insurance. Health insurance would become more affordable for the currently uninsured if they could deduct some or all of their premiums from their taxable income. It would become even more affordable through a system of refundable tax credits, which would give greater tax relief to low-income families. 4. What types of services could be purchased with Medical Savings Account funds? In general, any type of expense considered a medical expense under current IRS rules would qualify, including postretirement health insurance and COBRA health insurance payments during periods of unemployment. 5. What tax advantages would be created for Medical Savings Account deposits? MSA deposits would receive the same tax treatment as health insurance premiums. Thus, under employer-provided health insurance plans, MSA deposits would escape federal income taxes, FICA taxes, state and local income taxes. If the opportunity to receive a tax deduction or a tax credit were extended to individuals who purchase their own health insurance, their deposits to MSAs would receive the same tax treatment. MSA balances would grow tax free and would never be taxed if the funds were spent on medical care. 6. What would prevent fraud and abuse?
In order to receive MSA funds, a provider of medical services would have to be "qualified" under IRS rules. Qualifying should be a simple procedure, involving little more than filing a one-page form. But if IRS auditors discovered fraud, the provider would lose the right to receive MSA funds and might face criminal penalties. 7. How could individuals build up funds in their Medical Savings Accounts?
One way would be to choose a higher deductible insurance policy and deposit the premium savings in an MSA account. For most people, a year or two of such deposits would exceed the amount of their insurance deductible. An alternative (which tends to be revenue neutral for the federal government) is to allow people to reduce the amount of their annual, tax-deductible contributions to IRAs, 401(k) plans and other pension plans and deposit the difference in an MSA. 8. What if medical expenses not covered by health insurance exceeded the balance in an individual's Medical Savings Account? One solution would be to establish a line of credit so that individuals could effectively borrow to pay medical expenses. Repayment would be made with future MSA deposits or other personal funds. Another solution would be to adopt the Singapore practice of allowing family members to share their MSA funds. This would become much less of a problem as MSA balances grow over time. 9. How would members of the same family manage their Medical Savings Accounts? Since family members often are covered under the same health insurance policy, it seems desirable to allow couples to own joint MSAs and for parents to own family MSAs. In these cases, more than one person could spend from a single account. But even if family members maintained separate accounts, this should not preclude the pooling of family resources to pay medical bills. 10. Are there circumstances under which individuals could withdraw Medical Savings Account funds for nonmedical expenses prior to retirement? Nonmedical withdrawals would be fully taxed. Under some proposals, they would face an additional 10 percent tax penalty, under rules similar to those for premature withdrawals from IRAs and 401(k)s. 11. What would happen to Medical Savings Account balances at retirement?
People should be able to roll over their MSA funds into an IRA or some other pension fund so that money not spent on medical care could be used, after taxes, to purchase other goods and services. Alternatively, MSA balances could be maintained to pay postretirement health care expenses not covered by employers or by Medicare, or to purchase long-term care or long-term care insurance. 12. What would prevent wealthy individuals from misusing Medical Savings Accounts to shelter large amounts of tax-deferred income? An individual's total tax-advantaged expense for health insurance plus MSA deposits could not exceed a "reasonable" amount. One definition of "reasonable" is an annual MSA deposit that equals the deductible for a standard catastrophic health insurance policy. 13. What about people who join HMOs? They would have the same opportunities as those who join conventional, fee-for-service health insurance plans. Because many HMOs are now instituting deductibles, HMO members have new incentives to acquire Medical Savings Accounts. Their HMO premiums plus their deposits to MSAs could not exceed a reasonable amount, however. 14. Under employer-provided plans, would employees have a choice of deductibles? Allowing employees to make individual choices makes sense. Over time, different people will have different accumulations in their MSAs and thus will likely have different preferences about health insurance deductibles. However, under current law, employers have the option of fashioning employee benefits plans, and it is in their self-interest to create a plan that pleases their employees. As a practical political matter, it seems wise to continue that feature of the current system. 15. What would happen to the Flexible Spending Accounts now available to some employees? MSAs would replace FSAs under employee benefits law. Currently, employees who make deposits to FSAs must "use it or lose it," typically within 12 months. Similar deposits made to MSAs would have no such restrictions. Advantages of MSAs: Lower Costs. Primarily because of perverse incentives created by federal tax law, most Americans are overinsured. People use health insurance to pay for nonrisky medical episodes, including diagnostic tests and routine checkups. They also use health insurance to pay small medical bills they could pay more economically from personal funds. As a consequence, patients and their physicians are often wasteful, and the administrative costs of the U.S. health care system are much too high. If people used Medical Savings Accounts:
Advantages of MSAs: Higher Quality. Even without health care reform, people are increasingly finding their choice of doctors restricted, and bureaucracies are interfering with doctor-patient relationships. MSAs would give power and money to patients; doctors would become their agents rather than agents of bureaucracies; and people could exercise choice in the medical marketplace. Advantages of MSAs: More People Insured. Most proposals would allow people to use their tax-favored MSA funds to continue coverage with a previous employer or to purchase a new policy while they are between jobs. Other Advantages. Medical Savings Accounts would also help solve other problems. By restoring the doctor-patient relationship, MSAs would allow patients to make the tough choices between health care and other uses of money. By assuring that people have available funds, MSAs would make it easier for families to obtain preventive medical care. And by putting money into the hands of consumers, MSAs would be a powerful positive force for competition in the medical marketplace.
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