Medical savings accounts are law, but ultimate value is still debated

The Outlook

August 25, 1996|By M. William Salganik

THE HEALTH Insurance Reform bill signed last week by President Clinton, in addition to helping people keep their insurance when they change jobs, contains a provision to experiment with medical savings accounts (MSAs).

MSAs allow a person or employer to deposit money, income-tax free, into a savings account that can be used to pay medical expenses. Participants also would buy catastrophic medical insurance to cover costs above the amount in the account. Partisan debates over MSAs -- Congressional Republicans favored them, President Clinton was opposed -- delayed and threatened to derail the health legislation.

Are MSAs a good alternative to traditional insurance or managed-care plans for consumers? Or would they make paying for medical care more difficult for many people?

Merrill Matthews Jr.

Vice president of domestic policy, National Center for Policy Analysis, Dallas

Medical Savings Accounts allow individuals to move from a conventional, low-deductible health insurance plan to one with a high deductible -- say, $3,000 -- and put the premium savings in a personal savings account [for medical expenses]. Individuals who have money left over in the MSA at the end of the year can withdraw it or roll it over to grow with interest.

Since money in the MSA belongs to the individual, rather than an employer or insurance company, consumers have a financial incentive to be prudent shoppers in the health care marketplace.

Most people are healthy and spend very little money on health care in any given year, so MSA balances would grow over time. One study revealed that an $1,800 annual contribution over a person's working life, growing at 8 percent, would result in a retirement balance of $300,000 -- and that's with average annual medical expenses of $1,000.

Unfortunately, the agreed-upon demonstration project -- which limits MSAs to small employers (50 or fewer employees) and the self-employed -- is more restrictive than MSA proponents wanted, but it is a good start.

Donald M. Steinwachs

Chair, health policy management, Johns Hopkins School of Public Health

The plus of an MSA is its flexibility for the individual. If you're lucky enough to be healthy, you can actually accumulate some money, so it becomes attractive -- perhaps seductively so.

People may enter into an MSA who cannot afford to pay all the deductibles.

And it runs totally counter to managed care. Managed care emphasizes first-dollar coverage. Since they will be paying directly, people with an MSA may be less inclined to go in for preventive and routine primary care. The system ought to have disincentives for using high-cost services, but with an MSA, once you're using care, you might as well use as much as you can.

Len Nichols

Senior research associate, Urban Institute, Washington

MSAs present a classic trade-off. The relatively healthy many would gain at the expense of the relatively sick few. Since the healthy could get sick some day, this choice is not a simple one.

Because most people are healthy in any given year, roughly three-quarters of workers would gain financially if required to switch into MSA/catastrophic arrangements. The financial winners from switching would be younger and healthier than the losers.

Workers are likely to be able to predict if they would gain from MSAs, leading to favorable selection into MSA/catastrophic plans in the long run. Comprehensive indemnity premiums would increase. Our scenarios suggest that comprehensive premium increases in the neighborhood of 60 percent will not be surprising. This will make it hard for firms to continue to offer comprehensive indemnity plans alongside MSA/catastrophic plans.

Iris J. Lav

Associate director, Center on Budget and Policy Priorities, Washington

One of the things I'm concerned about is that employers -- especially small, marginal employers -- are likely to see this as a way to cut costs or to benefit their employees. They will start out putting money into the accounts, but the first time we have a recession, [reducing or eliminating] those deposits would be more attractive than laying people off or making other cuts.

Also, wealthier people will find they benefit from the tax break, so there may be a larger drain on the treasury than has been projected.

But there was a powerful lobby in favor of MSAs insisting that the research was wrong and that the adverse effects would only happen in mathematical models. The only way to enact health care portability was to have some kind of demonstration project.

The demonstration is not a classic experiment with a control group, so it will be difficult to disentangle the effects of MSAs from other things that are going on in the market.

Pub Date: 8/25/96

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