MSAs for Everyone

Commentary by John C Goodman

Medical Savings Accounts (MSAs) give patients direct ownership and control over a portion of their health care dollars. There are two main advantages. First, when people spend their own health care dollars, they become more careful and prudent consumers of care than when they spend other people's dollars. The result is lower health care costs and better value for the money spent. Second, when the patients pay the bills, doctors and other providers are more likely to act as their agents rather than agents of a third-party payer. The result is care that better meets the needs of the patient.

Unfortunately, MSAs are discriminated against under the tax law. Whereas employer payments for third-party insurance are excluded from employees' taxable income, MSA deposits are fully taxed. The exception is a MSA pilot program Congress created in 1996 for the self-employed and small businesses with fewer than 50 employees. Under the program, MSAs deposits are tax-free. But these MSAs must be combined with high-deductible health insurance. Under this arrangement, the MSA is used to pay small and routine health care bills, while patients rely on health insurance to pay more costly ones. 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.

While the pilot program was a major step forward in national health policy, Congress saddled MSA plans with so many restrictions that their popularity and growth has been disappointing. For example, current law permits the sale of only 750,000 MSA policies over a four-year period. Thus in contrast to our experience with Roth IRAs, the MSA market is too small to induce large insurers to aggressively market an MSA product nationwide. The law also requires tax-advantaged MSAs to be combined with a minimum across-the-board deductible of $1,500 for individuals and $3,000 for families - levels that are judged too high for many families of modest means. Further, health plans cannot vary the deductible by type of health service, charging higher deductibles for discretionary services and lower deductibles when no discretion is exercised. These restrictions also mean that 75 percent of the people with employer-provided health insurance cannot have a MSA because they are enrolled in an HMO.

In contrast to the U.S. experience, MSAs flourished during the 1990s in Nelson Mandela's South Africa. In fact, MSA products have captured more than half the market for private health insurance in that country. Thanks to a favorable ruling from the South African equivalent of our IRS, employer deposits to an MSA have been given the same tax treatment as employer payment of insurance premiums. This means that MSA products have been competing on a level playing field with other forms of insurance, including Preferred Provider Organizations (PPOs) and HMOs.

But since the South African government never passed a law dictating what an MSA plan had to look like, MSA plans were allowed to develop in a relatively free market. Moreover, these "free market MSAs" are different, and in some ways more attractive, than the U.S. version. For example, one of the most popular MSA plans has first-dollar insurance coverage for most hospital procedures - on the theory that within hospitals patients don't have much opportunity to exercise choices anyway. On the other hand, a high deductible (about $1,200) applies to "discretionary expenses," including most services delivered in doctors' offices.

South Africa's more flexible approach also allows more sensible drug coverage. While the high deductible applies to most drugs for ordinary patients, a typical plan pays from the first dollar for drugs for diabetes, asthma and other chronic conditions. The theory: It's not smart to encourage patients to skimp on drugs that prevent more-expensive-to-treat conditions from developing.

How can Americans get access to the same kinds of MSA products routinely available in South Africa? Surprisingly, the answer may lie in Patient's Bill of Rights legislation, now in conference committee on Capitol Hill. Under the legislation, MSAs would be made permanent and available to everyone. However, they would still have to be combined with an across-the-board minimum deductible, which would be lowered to $1,000 for individual policies and $2,000 for families.

Of course, even these lower deductibles are a barrier to HMO enrollees. However, one answer to that problem may be in the Senate version of the Patient's Bill of Rights. Currently employees with cafeteria plans may make pretax contributions to a Flexible Spending Account (FSA) to pay health expenses not paid by the employer's plan. But because these accounts are governed by a use-it-or-lose-it rule (anything left in the account by year-end is forfeited), the financial incentives are the opposite of those created by MSAs. The Senate bill, would change these incentives by allowing $500 to be rolled over at year end - into an IRA, 401(K), MSA or left in the FSA. This provision, in effect would turn a use-it-or-lose-it account into a use-it-or-save-it account. In other words, FSAs could become MSAs, at least partially.

Note that the $500 figure is much too low. A $2,000 or $3,000 limit would make more sense. Still, it's a foot in the door and opportunity to enlarge the amount will no doubt occur in the future.

The FSA/MSAs would solve a number of the problems people currently face in the health care system. First, the account would be completely flexible - in effect wrapping around any third-party insurance plan, including an HMO, PPO, Point of Service (POS) plan or a traditional indemnity plan - providing funds with which to pay medical expenses not paid by the plan. Second, unlike employer-based health insurance, these accounts belong to the individual, not the employer. Thus the funds in a FSA/MSA would be personal and portable, moving with the individual from job to job and available to pay health expenses when the individual is between jobs. Third, the wraparound feature will assist people in exercising the increasingly popular activity of purchasing services outside of their health plan. For example, enrollees in HMOs and other managed care plans would be able to use the funds to pay for doctor visits, diagnostic tests and other services not paid for by their health plan. Participants in POS plans could use their funds to pay fees charged by non-network physicians, which are often considerably higher. Fourth, contributions to these accounts would be strictly voluntary, and could easily be integrated with the employee's personal savings plans.

Fifth, contributions could be made by employers as an alternative to spending more for third-party insurance. As a result, employers and insurers would have much more flexibility in designing plans. For example, they could provide first-dollar coverage for some services like preventive tests and high deductibles for others without jeopardizing the ability of the insured to have an MSA. Also, a casualty insurance approach - one that paid fixed fees for treatments - would become more viable because if the fee proved insufficient, the patient could use an MSA to pay the difference.

But what about employees who don't have access to a cafeteria plan? If Congress makes one small change in the legislation, it could solve this problem too. Instead of rigidly requiring a $1,000 across-the-board deductible in order to qualify for an MSA, the Patient Bill of Rights should require $1,000 worth of "exposure." Most HMOs, for example, provide some mental health care, but limit the number of visits or impose a dollar maximum on the plan's benefits. These restrictions, in effect, leave the insured at risk for much more than $1,000 out-of-pocket. Substituting "exposure" for "deductible" therefore would allow almost everyone to qualify for an MSA with his or her current health plan.

Congress, therefore, could very easily give patients more power and more rights - not by encouraging everyone to have high deductible health insurance, but by making small changes in existing legislation to allow a savings account to be combined with any health plan. Making these changes would give every American the opportunity to own an MSA. This would fundamentally change the way the health care marketplace works. It would give people more access to health care, more choice and better protection than any other bill of rights "protection" currently before Congress.