Appendix A:
Twenty Questions and Answers About Medisave Accounts

1. How would Medisave accounts be administered?

Medisave accounts 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, but with the same restrictions on the type of instruments the accounts could own as now apply to IRAs.

2. How would funds from Medisave 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 would prevent fraud and abuse?

In order to receive Medisave funds, a provider of medical services would have to be "qualified" under IRS rules. Qualifying should be a simple procedure, involving little more than the filing of a one-page form. But if IRS auditors discovered fraudulent behavior, the provider would lose the right to receive Medisave funds and might be subject to criminal penalties.

4. What types of services could be purchased with Medisave 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 Medisave deposits?

Medisave deposits would receive the same tax treatment as health insurance premiums. Thus, under employer-provided health insurance plans, Medisave deposits would escape federal income taxes, FICA taxes, and state and local income taxes. If the opportunity to receive a tax deduction or a tax credit for the purchase of health insurance were extended to individuals, their deposits to Medisave accounts would receive the same tax treatment. Medisave balances would grow tax free and would never be taxed if the funds were spent on medical care.

6. What about low-income families who cannot afford to make Medisave deposits?

If low-income families can afford to buy health insurance, they can afford to make Medisave deposits - since the primary purpose of the Medisave 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 do not have employer-provided insurance by failing to subsidize those who purchase health insurance on their own. 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 grants greater tax relief to low-income people.

7. How could individuals build up funds in their Medisave accounts?

One way would be to choose a higher deductible insurance policy and deposit the premium savings in the Medisave account. For most people, a year or two of such deposits would exceed the amount of their insurance deductible. Young people and people in low-cost areas might be allowed to make even larger deposits. 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 pensions and deposit the difference in a Medisave account.

8. What if medical expenses not covered by health insurance exceeded the balance in an individual's Medisave 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 Medisave deposits or other personal funds. Another solution would be to adopt the Singapore practice of allowing family members to share their Medisave funds. This would become much less of a problem as Medisave balances grew over time.

9. How would members of the same family manage their Medisave accounts?

Since family members often are covered under the same health insurance policy, it seems desirable to allow couples to own joint Medisave accounts and for parents to own family Medisave accounts. 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. What about people who are already sick and have large medical obligations at the time the plan is started?

These people might be harmed by a sudden increase in the health insurance deductible unless transitional arrangements are made. Most would benefit from a high deductible in the long run but suffer financially at the outset. One solution is for employers to extend credit to employees who are especially disadvantaged, with the loan to be repaid from future Medisave contributions. Another solution is for employers to bear part of the burden of these expenses (in the case of special hardship) during the transition period.

11. What about people who have a catastrophic illness with large annual medical bills that last indefinitely into the future?

Most of these people would be disadvantaged if they have an annual deductible. A better form of health insurance is one with a per condition deductible, in which case the deductible would be paid only once for an extended illness.

12. Are there circumstances under which individuals could withdraw Medisave funds for non-medical expenses prior to retirement?

A reasonable policy is to apply the same rules that now apply to tax-deferred savings plans (e.g., IRAs, 401(k), etc.) Thus, non-medical withdrawals would be fully taxed and would face an additional 10 percent tax penalty.

13. How do we know people would not forego needed medical care (including preventive care) in order to conserve their Medisave funds?

We don't. The theory behind Medisave accounts is that people should have a store of personal funds with which to purchase medical care. But since the money they spend is their own, they have strong incentives to make prudent decisions. Undoubtedly some of these decisions will be wrong. But many decisions made under the current system also are wrong.

Since we cannot spend our entire GNP on health, health care has to be rationed in some way. Under the current system we are moving toward the European solution - with rationing decisions made by a health care bureaucracy. The alternative is self-rationing, with individuals making their own choices between money and medical services.

14. Given the increasing complexity of medical science, how can individuals possibly make wise decisions when spending their Medisave funds?

One thing people can do is solicit advice from others who claim to have superior knowledge. For example, most large employers and practically all insurance companies have cost management programs in which teams of experts make judgments about whether, when and where medical procedures should be performed.

These experienced professionals might play an important role in helping patients make decisions about complicated and expensive procedures. But the professionals' role as advice-givers should not include decision-making power. We should let the experts advise and the patient decide. Moreover, the fact that individuals maintain Medisave accounts does not preclude their taking advantage of employer-negotiated price discounts from providers or managed care programs.

15. Given the problems large employers and insurance companies have in negotiating with hospitals, how can individual patients possibly do better?

The reason large institutions have so much difficulty negotiating with hospitals is precisely because the institution is not the patient. And the reason why patients spending their own money would wield effective power is the same reason consumers wield power in every market - they can take their money and go elsewhere. In the field of cosmetic surgery, for example, consumers can obtain package prices that are well below the prices charged for comparable procedures at institutions dependent on third-party reimbursement. Moreover, the fact that individuals maintain Medisave accounts does not prevent them from using employers as bargaining agents.

16. What would happen to Medisave account balances at retirement?

People should be able to roll over their Medisave funds into an IRA or some other pension fund. Thus, money not spent on medical care could be used, after taxes, to purchase other goods and services. Alternatively, Medisave balances could be maintained to purchase postretirement health care, long-term care or long-term care insurance.

17. What would prevent wealthy individuals from misusing Medisave accounts to shelter large amounts of tax-deferred income?

An individual's total tax-advantaged expense for health insurance plus Medisave deposits could not exceed a "reasonable" amount. One definition of "reasonable" is an annual Medisave deposit which equals the deductible for a standard catastrophic health insurance policy.

18. What about people who join HMOs?

They would have the same opportunities as those who join conventional, fee-for-service health insurance plans. Note that because many HMOs are now instituting deductibles, HMO members will have additional incentives to acquire Medisave accounts. Their HMO premiums plus their deposits to Medisave accounts could not exceed a reasonable amount, however.

19. 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 Medisave accounts and, thus, will likely have different preferences about health insurance deductibles. However, under current law, employers have the option of fashioning employee benefit plans, and it is in their self-interest to create a plan that is most pleasing to employees. As a practical political matter, it seems wise to continue that feature of the current system.

20. What would happen to the Flexible Spending Accounts now available to some employees?

Medisave accounts would replace Flexible Spending Accounts (FSAs) under employee benefits law. Currently, employees who make deposits to FSAs must "use it or lose it," typically within twelve months. Similar deposits made to Medisave accounts would have no such restrictions.

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