Special Report

Medical Savings Accounts -- An Idea Whose Time Has Come. Part II — The Concerns

Charles P. Hayes, Jr., M.D., Chairman, Ad Hoc Committee on Medical Savings Accounts

After reviewing most of the 5,682 search results on the Internet involving Medical Savings Accounts (MSA), the basic premise laid out by the National Center for Policy Analysis (NCPA) continues to hold true. The NCPA premise is that an individual MSA that is tax deductible, which would accumulate if not spent and roll into an individual's retirement plan, will encourage its users to closely monitor their health care costs. This represents true "managed care" while substantially lowering health care expenses.

Rather than taking time to list what groups are for and what groups are against MSAs, I have elected to outline for you the basic concerns of the critics and how these concerns are addressed by the proponents of MSAs.

Response: The idea that individuals are so mindless that they are unable to make decisions about their own health is insulting to the American people. The same proponents of this theory are the ones who have mislead the American people into believing that someone else is paying for their health insurance. The late 1970s RAND Corporation research study of 2,500 families showed that over a three to five year period, the use of medical services responds to changes in the amount paid out-of pocket. Those companies who have MSA style insurance plans (Golden Rule Insurance Company, Dominion Resources, Forbes, Inc., Quaker Oats, and Indresco Corporation) have all realized major savings because of changed individual employee behavior.

Response: This is the "spin" that President Clinton has placed on MSAs. He wants to compel the middle and upper classes to pay for the medical care of the poor and elderly through health care premiums or taxes. In a New York Times article on December 24, 1997, David Rosenbaum responded to this criticism by saying, "MSAs horrified him (Clinton) because they went around all of the third party control. It left control in the hands of the doctors and patients and took it away from government and insurance company bureaucrats".

Michael Tanner, Director of Health and Welfare Studies at the Cato Institute, in his article Medical Savings Accounts: Answering The Critics points out the tremendous savings that can be realized by society because of MSAs. He states "It is traditional low-deductible insurance that is driving up the cost of health care. If such policies become unsustainable and most Americans move to an MSA plus catastrophic coverage, the result will be lower health care costs. The market will merely have provided an incentive for a socially beneficial change in behavior". This argument is supported by many of the proponents who point out that currently third party administrative costs are 20% to 25% of the spending for health care. Over half of the claims submitted to insurance companies for processing are for expenses below $3,000. If we just eliminated the expenses associated with processing such low-dollar claims, administrative costs would be reduced by as much as $33 billion dollars a year. This is just one example of the savings that can be realized as a result of MSAs.

Others claim that it costs an employer more than $5,400 to provide health insurance for a typical family of four. Since 90% of Americans spend less than $3,000 per year on health care, the vast majority of American workers _ including the poor and uninsured _ would in a very short period of time have money available for the future. Even if it took some time for individuals to build up their MSA, they still would have a program that they directed and with limited out-of-pocket expenses.

The impact of MSAs on the poor is that the poor would benefit most from the lower health care prices that the MSAs are designed to create. Proponents claim that MSAs work for both low-income workers and those in poor health, because with an MSA they would know what their maximum out-of-pocket expenses would be during any given year. Those in poor health will have the option of shopping for the best medical care at the best price.

Expanding MSAs to Medicare recipients will provide them with better benefits than the Medicare program. They would receive complete catastrophic coverage over $3,000 that Medicare does not offer. They could cover health expenses not covered by Medicare, such as prescription drugs, and they would have a broader choice of doctors, services and treatment. A study for the NCPA, done by the actuarial firm of Milliman and Robertson (notoriously critical of the waste in the current health care system), found that if a full range of private options including MSAs, was available to the elderly Medicare spending would be reduced by almost $200 billion over seven years. Milliman and Roberts estimated that over half of the elderly who would choose the private alternatives to Medicare would choose MSAs.

Proponents are quick to say MSAs will increase rather than decrease the likelihood of preventive care. The rational is that under current insurance an individual receives no reimbursement until the deductible is met. The poor, young, and lower wage earners face a spending disincentive in meeting the first health expenditure of each year. This is what keeps these individuals from preventive care. MSAs spread the spending over the entire $3,000 rather than concentrating on the first health expenditure of the year. Tanner points out that a survey of the Golden Rules employees with MSAs found that 20% used their MSAs for medical services they would not have purchased with a traditional plan.

Response: Those companies who have experience with using MSA-style health plans report no significant problems with adverse selection. Golden Rule and Forbes report employees with chronic illnesses have chosen MSAs nearly as frequently as healthy employees.

The National Center for Policy Analysis points out that with its limit on physician choice, treatment, and restrictions on access to specialists, managed care is very unpopular with the chronically ill, and it is these people who are dissastisfied. Therefore, it is anticipated that MSAs will become a popular alternative for the chronically ill.

An interesting point brought out by Michael Tanner is the issue of individuals using MSAs when healthy and shifting to traditional insurance when they become sick would exist primarily in an environment where insurance was not properly risk rated. If insurers were permitted to base premiums on an individual's health status and to refuse coverage to individuals with preexisting conditions, it would not be possible to game the system in this manner. Therefore, this criticism becomes an argument against community rating and "guaranteed issue" -- not against MSAs.

MSA are designed to reduce out-of-pocket expenses for the vast majority of health care recipients. They actually work to limit adverse selection because they reduce out-of-pocket expenses since many more things are covered by the MSA than all but the most comprehensive insurance plans e.g. prescription drugs, dental care, etc.

Several of the proponents for MSAs pointed out that if adverse selection should occur and the cost of low-deductible insurance increased that this would not necessarily be a bad thing. They go on to point out it is the cost of low-deductible policies that is driving up the cost of health care. If most Americans shifted to MSAs plus catastrophic coverage, the result would be lower health care costs for everyone. The market would merely have provided an incentive for a socially beneficial change in the public's behavior, and lower health care costs are good for the poor, uninsured, elderly, and all Americans.

Response: Milton Friedman in an April 17, 1996 Op Ed in the Wallstreet Journal stated "We should recognize the managed care industry's opposition to MSAs for what it is: a special interest using government to limit rather than expand competition." A study done by Edward Wilson, Economic Counsel, Washington, D.C. reports that 2/3 of every dollar sent to an insurance company as a health insurance premium stays with the insurance company as profit, dividends, and cost of doing business. Therefore, if insurance could be downsized, vast savings can be realized. Of course managed care has increased overhead by adding the costs of health care management to the clerical / administrative costs.

One of the problems for insurance companies is how to integrate the MSA concept with the current managed care approach. Another problem for insurance companies is that MSA premiums are between 30% to 40% less than traditional premiums, resulting in a sharp decrease in the amount of money available for short term investment returns.

Insurance carriers appear to be reluctant to enter the MSA market for a variety of other reasons including the reality that the short lived nature of the MSA test does not lend itself to the lead-time required to develop a new insurance product line. Many carriers say they will begin to offer products during the second phase when the MSA is made available to all Americans.

Response: Commenting from an employers point of view, Steve Forbes is quoted as saying; "If you're an employer and you want health insurance for your people, you're not really buying insurance, you are prepaying next year's expenses. If they miscalculate, then you get a refund, or you get hit with a higher premium the following year."

If one works for a company that provides an all-inclusive first dollar coverage, the worker receives it tax-free. What about a small business owner, a waitress, a salesman, or a truck driver who may have to pay for health care out-of-pocket or purchase insurance and receive no tax break at all. Small business employees represent the majority of the United States workforce in an increasingly service oriented economy. They should have the same tax advantages as the larger company union employee. Any tax revenue losses resulting from extending this tax break to all workers would be made up by lowered costs and reduction in the number of uninsured which is already occurring.

Union sponsored employer mandates have simply shifted a portion of employee's wages to insurance companies. Unions have for years mislead their members into believing that someone else is paying for their health insurance and other fringe benefits. This is the employees' money, and they have little say over how the dollars are spent. There is no reward to the individual employee for being careful about how health dollars are used. MSAs offer individual freedom and direction on how their money will be used for health care.

Steve Forbes points out that "We put in a version at Forbes Magazine over four years ago. Expenses today are lower than they were four years ago, although we had catastrophic claims in the last couple of years -- people with major illness -- our expenses are still lower. And since we have a co-pay system, it means not only do we save, but our people save". The people who work for Golden Rule, Forbes, Quaker Oats are not all high-income people and some of them have chronic illnesses.

From a physician's standpoint the main advantage is that the MSA offers the greatest opportunity to restore the treasured traditional doctor-patient relationship.

These are some of the major arguments regarding the MSA. Only time will tell if the insurance industry, social planners, unions and others will allow the American people to have a choice regarding MSAs.