Medical Savings Accounts: Obstacles to Their Growth and Ways to Improve Them
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In 1996 Congress created a demonstration project permitting small employers and the self-employed to establish up to 750,000 tax-free Medical Savings Accounts (MSAs). However, lawmakers imposed a number of restrictions that limit who can purchase MSAs and thwart the ability of MSAs to work properly. As a result, only some 100,000 to 150,000 MSA plans have been purchased so far. Why have they been slow to catch on? How can their use be increased?
MSAs are personal savings accounts that must be combined with high-deductible health insurance. Account holders typically use their MSA funds to pay small and routine health care bills, while relying on health insurance to pay more costly ones. Under the demonstration project passed by Congress, certain individuals or their employers may make annual tax-deductible contributions to an MSA of up to 65 percent of the policy's deductible for individual coverage and 75 percent of the deductible for family coverage. Qualified deductibles range from a minimum of $1,500 to a maximum of $2,250 for an individual and from $3,000 to $4,500 for a family.
Money not spent during the year may be left in the account to grow tax free. In addition to medical expenses, MSA funds may be used to pay health insurance premiums when people are between jobs.
The MSA legislation has restrictions that are not applied to other health insurance plans. For example, the current pilot program permits only 750,000 MSA account holders, and restricts those to the self-employed and businesses with 50 or fewer employees. Major insurers are reluctant to enter so small a market, concluding that its size does not warrant the marketing of a new product. Insurers are also deterred because the demonstration project only lasts four years, with no certainty it will be continued beyond that time.
The range of allowed deductibles is not wide enough to justify offering several different options, so a number of companies offer only one option - for example, $2,000 for individuals and $4,000 for families. Furthermore, while these deductibles are not unusual among standard high-deductible plans, they are intimidating to many middle-income Americans, especially those used to low deductibles.
Another problem is that MSA tax-free deposits are limited to 65 percent of the individual deductible and 75 percent of the family deductible. The remaining gap could leave individuals and families exposed to significant out-of-pocket expenditures.
Current law limits cost-sharing (out-of-pocket expense) to $3,000 for individuals and $5,500 for families, including the deductible. But that restriction created another problem. Traditional insurance also typically limits total out-of-pocket exposure, but exceptions may be made for services such as psychiatric care. However, the MSA cost-sharing limit does not allow for this exception. Therefore the law discourages coverage of services such as mental health and prescription drugs that frequently have a high coinsurance requirement.
Explaining the MSA concept is quick and easy, but it takes time for an insurance agent just to outline the deductible limits and other restrictions to a prospective client. As a result, many insurers are reluctant to offer MSA plans and purchasers don't understand them.
MSAs also face regulatory problems. For example, confining MSAs to the small-group market exposes them to all the onerous regulations state governments have imposed on this market during the past 10 years. In addition, health insurance in the small group market must include state-mandated benefits that may not be compatible with MSAs.
The final MSA bill was the result of a number of political compromises, and had very little to do with health policy, economic research or market demand. Congress needs to make a number of reforms.
- Allow a wider range of deductibles. Removing the limits on deductibles would give insurers more flexibility to create MSA products that meet the needs of consumers rather than the desires of bureaucrats.
- Allow unlimited cost-sharing. There is no reason for Congress to dictate the out-of-pocket exposure in MSA plans. Most insurance policies already include a cap on an insured person's out-of-pocket expenses. While such caps will likely be more for MSA plans with high-deductible policies than for a low-deductible policy, the market, not Congress, should make that decision.
- Allow the deductible to be fully funded at any time of year and by any combination of employer/employee contributions. People who begin coverage in January need to be able to protect themselves in case something happens early in the year; those who enroll later in the year need the same protection. Permitting both employer and employee contributions and allowing MSAs to be fully funded at any time during the year will help account holders set aside the money to pay their deductibles.
- Lift the group size limit. Congress could keep the enrollment cap of 750,000 accounts, but should allow larger employers to become part of that total.
- Fix the state mandate problem. Congress could preempt all state mandates for MSA plans, or at least allow plans to be adjusted to comply with a state's mandates.
These simple amendments would go a long way towards correcting the problems in the current MSA program. They also would demonstrate that Congress is serious about including MSAs among options for health care financing.