MSA's Can Be a Windfall for All
Table of Contents
- Types of Health Spending Accounts
- A Drumbeat of Criticism
- Are Cost Savings from Raising Deductibles Exaggerated?
- Do MSAs Change Patient Behavior?
- Will MSAs Attract "the Healthy And the Wealthy" at the Expense of Everybody Else?
- Do MSAs Encourage People To Avoid Needed Preventive Care?
- Will MSAs Pull the Best Risks from "the Insurance Pool," Raising Costs for Those Who Remain?
- Can MSAs Help Control Costs over the Deductible, Where the Need Is Greatest?
Types of Health Spending Accounts
There are currently several models of MSA design available. Not all of them are tax advantaged, and none of them are widely available in the market as of this writing. Curiously, they all face vehement political opposition from certain factions who disagree with the core concept of empowering patients. But the idea of consumerism in health care has become widely accepted in the past few years, especially among health care providers and employers.
High Deductible MSAs.
In 1996, Congress passed the Health Insurance Portability and Accountability Act (HIPAA),1 which authorized a four-year demonstration project of Medical Savings Accounts. Unfortunately, the legislation was severely limited and has had minimal impact on the health insurance market. The limitations came from two sources, proponents of MSAs and opponents of MSAs.
"The most common plan has a high across-the-board deductible."
Proponents limited the program by using an illustration of how MSAs work that was ultimately turned into law. The illustration was not supposed to be the final word on benefit design, but was only intended to explain the concept. In 1992, the National Center for Policy Analysis first explained the concept by proposing a high, across-the-board deductible plan with an MSA to pay expenses below the deductible.2 To numerically illustrate the concept, the chairman of Golden Rule Insurance Company said an employer currently paying $4,500 in premium could switch to a $3,000 deductible policy and lower his premium to $1,500.3 The Congressional Budget Office took this illustration literally, however. Sure enough, what finally became law was a requirement for across-the-board deductibles ranging from $1,500 to $2,250 for singles and $3,000 to $4,500 for families.
Opponents also weighed in with concerns that ended up written into law. As enacted, the MSAs allowed under HIPAA included the following restrictions:
- MSAs are available only to the self-employed and employers with 50 or fewer employees.
- No more than 750,000 MSAs are allowed.
- Deductibles must range from $1,500 to $2,250 for individuals and $3,000 to $4,500 for families (with adjustments for inflation).
- No coverage is allowed below the deductible, even for preventive service, unless mandated by state law.
- MSA contributions are limited to 65 percent of the deductible for individuals and 75 percent of the deductible for families.
- MSA contributions are allowed only by the employer or the employee, but not both in a single year.
- Total out-of-pocket costs cannot exceed $3,000 for singles and $5,000 for families.
- Non-medical withdrawals are subject to a 15 percent penalty as well as income taxes.
- The pilot program originally was scheduled to last for only four years and recently was extended for only two more years.
These rigid design restrictions have prevented the MSA concept from being reliably tested under the HIPAA provisions. But the underlying concept remains valid. By choosing higher health insurance deductibles, people can reduce their premium payments and put the money saved into an MSA to help cover expenses below the deductible. A pioneering national survey by John Goodman and Gerald Musgrave found that raising deductibles leads to substantial savings in health insurance premiums.4 In fact, the premium savings may be greater than the increase in the deductible.5
This concept works for other kinds of insurance as well. The Bollinger Insurance Agency estimates that raising an auto insurance deductible from $200 to $500 could reduce the cost of comprehensive coverage by 15 percent to 30 percent. Similarly, homeowners can save 12 percent of premiums by raising the deductible on homeowners' coverage from $250 to $500, 24 percent by raising it to $1,000, 30 percent by raising it to $2,500, and 37 percent by raising it to $5,000.6
"Under a flexible MSA, the deductible varies, depending on the type of expenditure."
There is another model of MSA design that has become popular in South Africa and has recently become available in the United States. Rather than using an across-the-board deductible, these plans distinguish between "discretionary" and "non-discretionary" spending. They offer first dollar coverage for non-discretionary health care services, such as acute care hospitalizations, but apply a deductible to discretionary services such as physician office visits and outpatient care. The plans may also provide first dollar coverage for medications required to treat chronic conditions such as asthma, diabetes and hypertension. South Africa has been able to develop this plan because it provides the same regulatory and tax treatment to this benefit design as to all others. It has been extremely popular in that country, currently serving about one-half of the privately insured population.7 The largest company offering these products in South Africa, Discovery Health, has recently opened an American subsidiary, the Illinois-based Destiny Health, which is marketing a similar product design, but without the tax advantage that is available to HIPAA-qualified MSAs alone.8
Flexible Spending Accounts.
Another approach to achieving MSA-like benefits is Flexible Spending Accounts (FSAs). FSAs are allowed under Section 125 of the Internal Revenue Code and were first enacted by Congress in 1978.9 They enable workers to set aside tax-free money to spend on health care expenses not otherwise covered by their insurance, or to pay for health insurance premiums. FSAs are exactly like MSAs with one essential difference - money not spent by the end of the calendar year is forfeited with an FSA, but may be rolled over into the next year with an MSA.
The FSA provides exactly the wrong incentive: it forces workers to spend needlessly at the end of the year to avoid forfeiting their own money. The MSA encourages workers to be thrifty in their health care spending because they may keep unspent funds. This drawback could be changed under a proposal by President Bush to allow $500 in unspent FSA funds to roll over into an MSA or other form of trust account at year's end. Such a provision would enable all workers to have an MSA-type program, regardless of the underlying insurance plan they had.
Other Types of MSAs.
"MSA's are increasingly popular among employers."
Now that MSAs have been around for a few years, the idea is no longer seen as exotic. Many employers, benefits consultants and entrepreneurs who were focused on the growth of managed care in 1996 are now exploring ways of making MSA-type programs available to parts of the market that do not qualify for HIPAA-enabled MSAs. These efforts usually start with an insurance plan that is supplemented by a cash account of some kind. Some examples:
- Definity Health, based in Minneapolis, perhaps the most prominent. It features a "Personal Care Account" that is described as "an account where consumers choose how to spend their health care dollars. Consumers select providers and care options, including alternative medicine. Funds remaining in the account at the end of the year rollover and stay with the consumer." Some of Definity's accounts include Medtronics, Textron, Raytheon, Dade Behring and the University of Minnesota, none of which qualify for a traditional MSA program.10
- MyHealthBank, based in Portland, Ore. It uses the slogan, "your money, your health, your choice," and features a "Health Freedom Account" which can roll over from year to year. In partnership with Regence Blue Cross and Blue Shield, MyHealthBank had enrolled 1,500 members in Oregon by April 2001, and has since expanded into Washington, Utah and Idaho.11
- Lumenos, based in Alexandria, Va. It also has a rollover account that it calls a "Health Savings Account." Lumenos describes the account exactly like an MSA: "You can use your HSA as you choose, you don't need a referral to receive care and you can use any licensed doctor." Also like an MSA, Lumenos has a "bridge" of out-of-pocket responsibility between the HSA and the insurance coverage. Lumenos, too, is marketing mostly to large employers who are not eligible for HIPAA-MSAs.12
These programs may or may not be tax-advantaged. An employer is always free to provide high-deductible coverage and make an after-tax cash account available to cover expenses below the deductible, and some employers have done just that.13 But more recently firms have discovered that they can establish a tax-favored cash account even though they might not be eligible for a HIPAA MSA.14 The funds are allocated to, but not actually owned by, the employee, and the company doesn't pre-fund the account except as a bookkeeping notation. The firm can take medical expenses as a business deduction as they are paid, but may not deduct unused allocations. Because there is no "constructive receipt" of the money, it is tax-free to the employee. The employee can see the funds build up over time, but cannot cash out balances until terminating employment, at which time the balances may be used to prepay continuation coverage or for long-term care insurance.