MSAs With Managed Care

Current law already allows some Medicare beneficiaries to withdraw from Medicare and join an HMO instead. When they do, Medicare is supposed to pay the HMO 95 percent of the average per-person cost to the program.⁸ While no one should be forced to leave Medicare, we should build on this precedent and offer each Medicare beneficiary private insurance options.

The private health plan should cover services now covered by Medicare and receive 95 percent of the actuarial value of Medicare spending. People could add the funds with which they now pay supplemental Medicare (Medigap) premiums (about $1,200 per person per year) and out-of-pocket medical expenses (about $1,500 per person per year).⁹ The additional premiums plus cost savings could finance such extra benefits as long-term home health care, complete catastrophic coverage and prescription drugs.

The Milliman & Robertson analysis shows that the most cost-effective way to control Medicare spending would be to combine MSAs with managed care. Under this option, part of the funds withdrawn from Medicare would be used to purchase catastrophic coverage from a managed care institution. [See the sidebar on MSAs With Managed Care.] This coverage would reimburse all expenses over a certain deductible. Under the proposal, the elderly could choose any deductible level they preferred, but this analysis assumes a deductible of $3,000 for the first year, 1996, increasing yearly to $4,388 in 2002.

Each year the Medicare funds left over after purchasing the high-deductible policy would be deposited in an MSA to pay medical expenses below the deductible. Milliman & Robertson calculated how much would be left for the annual deposit to the MSA. As Table III shows, in 1996, $4,848 would be available for each Medicare participant. After deducting the cost of a $3,000 deductible policy and administrative costs,¹⁰ $2,108 would be left for the MSA. [See Figure II and Appendix A.] The most an elderly beneficiary would have to pay out of pocket, therefore, would be $892, the difference between the $3,000 deductible and the $2,108 in the MSA.

In addition, Medicare beneficiaries could "top up" their MSAs with funds they are currently spending. For example, about 70 percent of the elderly now buy private (Medigap) insurance. With the MSA, they would not need supplemental insurance because the catastrophic policy would not leave them exposed for major expenses, and they would pay smaller expenses from their MSA. The funds they now spend for supplemental insurance could go into the MSA.

Under the existing Medicare program, the average premium for a Medigap policy would be $1,178 in 1996. If this were contributed to the MSA in addition to the funds placed there by Medicare, the beneficiary would have $3,286 in the account to cover the $3,000 deductible, leaving him at least $286 better off than under the current program.

Now look at the year 2002, when the deductible would be $4,388 and the MSA deposit $2,452. The most an elderly beneficiary would have to pay out of pocket in that year would be $1,936.¹¹ Adding the average Medigap premium of $1,719 to the funds from Medicare would leave $4,171 in the account to meet the $4,388 deductible. The beneficiary's maximum out-of-pocket expense for the year would be only $217.

It is unlikely that most beneficiaries would spend all of the money in their MSA in any given year. With funds left from one year carrying over to the next, beneficiaries would have no out-of-pocket expenses in future years. For example, suppose a person is healthy and spends only half the funds in the MSA in each of the first two years. After those two years, the retiree would have more than enough in the account to cover all expenses below the deductible, with no need to add the equivalent of a Medigap premium.

This MSA option is better than traditional Medicare in at least five ways:

• The MSA plan provides complete catastrophic coverage for expenses over the deductible, while Medicare leaves seniors exposed to catastrophic expenses that could devastate their savings.

• The MSA plan provides an annual cap on out-of-pocket expenses equal to the difference between the catastrophic insurance deductible and the amount in the MSA. In the above example, the cap ranged from $892 to $1,936 per year. Medicare, by contrast, has no cap on out-of-pocket expenses. With the MSA, out-of-pocket exposure can be virtually eliminated simply by encouraging the 70 percent of the elderly now paying for private Medigap insurance to contribute their Medigap premiums to their MSA.

• The MSA funds could be used to pay for health expenses such as prescription drugs, which are not covered by Medicare.

• At the end of the year, the beneficiary could withdraw unspent MSA funds and use them for any purpose, subject to normal income taxes. This enables people to share directly in the reward for keeping Medicare costs down.

• People with MSAs plus catastrophic coverage would be free from Medicare rationing restrictions and from concerns about quality of and access to care.