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Saving the Medicare System With Medical Savings Accounts
How MSAs Work
MSAs are very effective in reducing costs because they contain powerful
cost control incentives, which in turn stimulate powerful cost-reducing
competition. Since beneficiaries would be able to spend whatever MSA funds
they did not use for health care for any purpose they chose, they would
tend to avoid unnecessary health care spending. For example, they would
most likely avoid excessive doctor visits and tests, look for doctors and
hospitals that would provide the best values and weigh the worth of potential
health care services against the costs. Perhaps most importantly, their
increased concern would lead doctors and hospitals to compete on price in
order to attract consumers with MSAs.
Several studies predict that such incentives and competition would produce
savings more than sufficient to hold costs within the 6.4 percent per year
growth rate targeted under the budget for Medicare. For example, from 1974
to 1982 the Rand Corporation conducted a rigorous scientific study of the
health expenditures of 2,500 families. Each family was provided with one
of four different insurance plans, ranging from a zero deductible and all
health expenses paid to 5 percent of the first $1,000 in expenses paid and
100 percent after that. The families with no deductible incurred 53 percent
more in hospital expenses and consumed 63 percent more in doctor visits,
drugs and other health services than the families with the highest deductible.
Yet the study found no difference between these families' health outcomes.13
The Rand study suggests that families today with a deductible of about $3,000
would consume 30 percent less health care than families with no deductible
- and would be equally healthy.
In addition to the findings of the Rand study:
But for employees with families who choose an MSA instead, Golden Rule purchases
a catastrophic policy paying all expenses over $3,000 per year and deposits
$2,000 in an MSA. This leaves the family with a maximum annual out-of-pocket
cost of $1,000 (the $3,000 deductible minus the $2,000 in the savings account).
For individuals, Golden Rule purchases a catastrophic policy covering all
expenses over $2,000 per year and deposits $1,000 in an MSA, again leaving
a maximum annual out-of-pocket cost of $1,000. The MSA funds can be used
to pay health expenses below the deductible, and funds remaining at year's
end can be withdrawn for any use.
About 80 percent of the company's employees chose the MSA option in 1993,
the first year it was offered. Each of them withdrew an average of $600
in remaining MSA funds at the end of the year. In 1994, about 90 percent
of workers chose the MSA and each withdrew on average about $1,000 in remaining
MSA funds at the end of the year. The MSA plan had no cost increases in
either of the first two years.
Golden Rule has now sold similar plans to dozens of small businesses across
the country, which have reported similar or even better results. Other examples
include:20
Another recent Cato Institute study examined the experience of employers
across the country who had already adopted MSAs.18 In this study, the employers
all reported greater cost reductions with MSAs than are targeted for Medicare
in the congressional budget. Perhaps the best example is Golden Rule Insurance
Company in Indianapolis, Ind., which offers MSAs to its 1,300 employees.19
The employees can still choose traditional insurance with a $500 annual
deductible and 20 percent copayment on the next $5,000 in expenses. This
leaves an individual with a maximum out-of-pocket cost each year for health
care of $1,500 (the $500 deductible plus 20 percent of the next $5,000),
or $4,500 for a family of three.
In fact, more than 1,000 employers across the country have adopted
MSAs for their employees, with similar results.
Such effective cost control incentives and competition are the reason
the MSA benefits described above can be financed while still staying within
the Medicare budget limits. Moreover, with MSAs the elderly would be able
to share directly in the cost savings they achieve, as remaining MSA funds
at the end of the year will be theirs to use as they choose. Because of
these factors, MSAs will be a highly popular component of the Medicare reform
plan.