HOME / DONATE / ONE LEVEL UP / ABOUT NCPA / CONTACT
Medical Savings Accounts: Obstacles to Their Growth and Ways to Improve Them
July 1998
Addressing Problems with the MSA Legislation
|
|
|
"The demonstration project restricts the number who can have an MSA." "Only markets can fine-tune deductible levels." "The deductibles do not recognize geographic differences in medical costs." "MSA opponents limited the amount of cost-sharing, marking premiums higher." "Employers and employees often share the cost of traditional insurance -- but not MSAs." |
Analyzing the MSA demonstration project is not easy for several reasons. For one thing, it is extremely difficult to conduct research on a program that is spread so wide and thin. While the legislation allowed for a total of 750,000 previously insured account holders over a four-year period, perhaps only 100,000 to 150,000 MSA plans have been purchased so far. The law also allowed uninsured persons to obtain accounts without being included in the tally, making it even more difficult to know how many MSA policies are in effect.
The legislation also included certain "enrollment thresholds" that spread permissible enrollment over the four-year period. If more signed up for an MSA than the enrollment threshold permitted, additional MSA enrollment would be stopped before the end of the demonstration project in 2001. As it has turned out, far fewer accounts have been opened. And even the maximum number of MSAs would amount to less than three-tenths of 1 percent of the population of the country, making it difficult for insurers or the government to get a large enough survey sample to know how people are responding to the incentives inherent in MSAs. 3
However, close examination of the MSA legislation and conversations with Health Care Financing Administration (HCFA) officials, employers, insurers and account holders provide a fairly complete picture of the impediments to MSA purchase and expansion.
Complexity. While explaining the MSA concept is quick and easy, it
takes time for an insurance agent just to outline the deductible limits
and other restrictions to a prospective client, either an individual or
a small employer. Imagine a presentation that goes something like this:
An MSA is a tax-free savings account with a high-deductible
health insurance plan. In order to qualify, the high-deductible plan must
have a deductible of between $1,500 and $2,250 for an individual and between
$3,000 and $4,500 for a family, with an out-of-pocket limit of $3,000 for
an individual and $5,500 for a family. Once you have a plan like that, you
can open a Medical Savings Account and contribute 65 percent of your deductible
if you are an individual or 75 percent of your deductible if you are a family.
Only the self-employed or companies with 50 or fewer employees may participate.
If you get the MSA from your employer, only you or your employer, but not
both, can contribute to the MSA in a single year.
Even a knowledgeable health policy analyst's eyes would glaze over with that explanation, which does not even include the penalty for nonmedical withdrawals or the prohibition on other coverages.
Deductibles. Deductible levels are precisely the kind of issue that can be fine-tuned only in the market. No one can predict ahead of time what the optimal deductible level will be for different market segments and population groups. Yet the MSA legislation dictates the size of deductibles, and it has driven some insurers and individuals out of the MSA market.
The range of allowable deductibles - between $1,500 and $2,250 for an individual policy and $3,000 and $4,500 for a family policy - is not wide enough to justify offering several qualified policies or explaining the pluses and minuses of, say, a $1,500 vs. a $2,000 deductible. As a result, a number of companies have stopped offering a choice of deductibles. Rather, they provide one deductible option within each category, e.g., $2,000 for singles and $4,000 for families.
Another problem is that deductibles do not reflect geographic differences in medical costs. For example:
- According to the American Hospital Association, the cost per day of
a hospital stay in 1995 ranged from more than $1,300 in California, Alaska
and the District of Columbia to $476 in South Dakota. 4 [See Figure IIa.]
- According to 1993 claims data from the Metropolitan Life Insurance Company, the cost of a vaginal childbirth ranged from more than $8,000 in New York and New Jersey to $2,700 in Wisconsin. 5 [See Figure IIb.]
A deductible of $2,000 per person in New York City does not go nearly as far as the same deductible in Lincoln, Neb. Insurers thus look for an average within the limits permitted by the MSA legislation that will meet the widest possible demand. However, deductibles of $5,000 to $10,000 are not uncommon in the individual market, especially in higher-cost areas. Consumers wanting such high deductibles actually have to lower their deductible amounts to purchase an MSA plan under the current legislation.
By contrast, many people still retain low-deductible programs of $100 or $250. For these people, a $1,500 deductible may be too big. They might be more comfortable moving first to a $500 deductible, then to $1,000, then to $1,500 and so on. This would give them time to build an account balance in their MSA to protect themselves against sudden exposure.
Cost-Sharing. MSA opponents were successful in limiting the amount of cost-sharing (that is, the out-of-pocket expense) to $3,000 for individuals and $5,500 for families. These numbers include the cost of the deductible. However, no other health insurance program in America has similar federal restrictions on cost-sharing. HMOs, PPOs and traditional fee-for-service plans have no such restrictions. The limit on cost-sharing makes it difficult for managed care to encourage the use of network providers. Indeed, some patients may choose nonparticipating providers because the sooner they reach the out-of-pocket limit, the sooner they receive 100 percent benefits. The consequence is simple - when cost-sharing is lower, premiums are higher. So the MSA program cannot control costs and utilization after the account holders meet their deductible.
Coverage Limits. The cost-sharing restriction can lead to another anticonsumer consequence by discouraging coverage of services such as mental health and prescription drugs that frequently have a high coinsurance requirement. If the plan pays 50 percent of the cost of these services and the patient pays 50 percent, the cost-sharing limit is reached very quickly. But if the plan does not cover the service at all, and the patient has to pay 100 percent of the cost, none of that counts towards the cost-sharing limit. Thus, a provision intended to protect consumers from high out-of-pocket costs can force carriers to provide no coverage at all for some important benefits.
MSA Contributions. The 65 percent allowable contribution for individuals and 75 percent for families again makes the program needlessly complex and hard to explain. It is also difficult to imagine the rationale for such a provision. If 75 percent is good enough for a family, why isn't it good enough for an individual?
In fact, why should people be prohibited from fully funding their MSA in the first year? As it is, an individual who purchases a $2,250 deductible policy may contribute only $1,462.50 to the MSA, leaving $787.50 as an unfunded deductible. No other program requires deductibles of that magnitude, or any deductible at all. Before switching to the MSA, the same person might have had a policy with a $250 deductible, but Congress did not object to that. Legislators never complain when all but $250 (or $100 or $0) of an individual's health expenses are covered by tax-free premiums. Why should they object when the same person funds the MSA with tax-free dollars to cover all but $250 (or $100 or $0) of out-of-pocket costs?
The inability to fully fund the MSA is one of the greatest obstacles in the market. People worry that they will purchase an MSA in January and get sick in February, without sufficient money in the account to cover them.
End-of-year Sales. Allowable contributions to the MSA are prorated for the number of months an account holder is in the program during each calendar year. For example, if someone purchases an MSA in October, he is allowed to contribute only 25 percent (3/12ths) of the allowable annual contribution, but he is still subject to 100 percent of the deductible. Thus if a person buys a policy with a $2,000 deductible in October, he may contribute only $325 to the MSA ($2,000 x .65 = $1,300/12 = $108.33 x 3 = $325) even though he is subject to the full $2,000 deductible if he gets sick. This makes third- and fourth-quarter sales almost impossible.
Employer/Employee Contributions. That only the employer or the employee, but not both, may contribute to the MSA in a calendar year makes very little sense, especially when the total allowable contribution is capped. There is no similar restriction on contributions to health insurance premiums. Employers and employees often share the cost of traditional insurance. And by using a Section 125 (Flexible Spending Account) plan, the employee premium contribution is tax-free. Employers are free to increase the employee share of the premium payment so that the employer can make the maximum contribution to the MSA, and neither the employer nor the employee is paying more than before. This can and does happen today. For instance, one midwestern company with 12 employees has always paid 75 percent of the cost of employee health insurance and the employees have paid the other 25 percent. The employee contribution is tax-free due to the use of a Section 125 Premium Only Plan (POP). When this company switched to an MSA, it faced a dilemma. Because only employers or employees could contribute to the MSA in a given year, it could not extend the 75/25 ratio to the MSA contribution. The company realized that it could reduce its share of the premium payment to 50 percent and use the savings to fully fund the MSA on a tax-free basis. Employees then paid the other 50 percent of the premium through the tax-free POP. Neither side paid more; they reapportioned the money to maximize the tax advantages.
Still, the employer had to make the decision, so the worker's well-being was left to the whims of the boss.
Enrollment Limits. The current MSA law limits enrollment in two ways, each of which restricts the market differently.
- The program is available only to small groups and the self-employed.
- The total number of enrollees is limited to 750,000.
Although the 750,000 limit has not been approached, its presence has restricted the program in important ways. It has kept the biggest players such as Chase Manhattan Bank and Prudential Insurance out of the market. They chose not to develop products for so limited a market. While this has been a blessing for smaller and newer insurance companies, they have less market presence and clout than the big companies. Public awareness has suffered as a result.
The small group market is the toughest and most volatile in the health insurance business. For example:
- Small employers are not innovators when it comes to employee benefits.
- They lack the time and expertise to evaluate new benefits.
- They lack the human resources staff needed to look for ways to make their benefits more efficient or to explain a new program to employees.
Limiting sales to 750,000 and to small companies or individuals is doubly damaging. It restricts the program to the hardest-to-serve market segment - and the one with the fewest resources. Plus, it is redundant. If the program is restricted to 750,000 account holders, why should it also be restricted to small employers?