Fact Sheet on Medical Savings Accounts

FACT SHEET
MEDICAL SAVINGS ACCOUNTS

MEDICAL SAVINGS ACCOUNT PROVISION IN HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996:

Demonstration program limited to 750,000 MSA plans (combining tax deductible savings accounts with high deductible health insurance policies)
Individuals’ deductibles between $1,500 and $2,250 and family deductibles to be $3,000 to $4,500.
Maximum out-of-pocket expenses (for "allowed" costs) $3,000 for individuals and $5,500 for families.
Tax-advantaged contributions to MSAs (by employers OR individuals) limited to 65% of deductible for individuals and 75% of deductible for families;
Withdrawals from MSAs for non-health purposes subject to both income tax and an additional 15 percent tax, unless made after age 65, death, or disability.
Program limited to employees with 50 or fewer employees and the self-employed. Little information on impact to date, but appear to have been unsuccessful in the marketplace, with far fewer people enrolling than allowed under the demonstration.
The most recent Dept. of Treasury count of MSA participants, from June 30, 1997, was about 22,000; about 17 percent of these MSA enrollees were previously uninsured. Estimates of about 100,000 MSA enrollees now seem realistic, but are neither confirmed nor official.

SENATE GOP MSA PROPOSAL:

Removes restrictions on sale of MSAs by (1) lifting the cap on MSAs; (2) allowing the sale of MSAs to employers regardless of number of employees; (3) including MSAs in options available to federal employees; (4) allows the sale to individuals; and (5) eliminating the sunset date of 12/31/2000 (after which the sale of MSAs would not have been allowed.
Decreases the minimum deductible to $1,000 for individuals and $2,000 for families.
Increases the tax deductible amount that can be contributed to MSA to 100 percent of the deductible (so this means the maximum would be $2,250 for individuals and $4,500 for families).
Eliminates the 15 percent tax penalty on withdrawals from MSA (as long as enough is left in MSA to cover current year deductible).
Unconfirmed estimate of the cost to the U.S. treasury of this expansion of MSAs is $4 billion over 10 years, averaging $400 million per year.

WHAT SENATE GOP MSA PROPOSAL WOULD MEAN FOR CONSUMERS:

By changing the terms of MSAs (in particular by lowering the minimum deductible), this proposal is an acknowledgment of the fact that the initial MSA design was not popular with consumers. Consumers prefer comprehensive coverage to high-deductibles. By expanding MSAs broadly (before understanding the effects of MSAs in the marketplace), all of the initial concerns about fragmenting the marketplace (dividing it into healthy and sick) will be intensified because the number of MSA accounts is likely to grow. The key consumer concerns are:

This is not the best way to use limited tax dollars to expand health care coverage. The MSA expansion does not target funds to help working families or presently uninsured families. Consumers Union estimates that under the current demonstration program, it costs the federal government about $3,600 to insure each previously uninsured person who purchases an MSA. In contrast, it costs about $1,178 to cover each additional child enrolled in Medicaid. If an additional $400 million per year were used to expand Medicaid coverage of children, an additional 340,000 children could be covered.
Expanded MSAs will divide the healthy from the sick, fragmenting the risk pool. The key to making health care affordable – even to people with pre-existing health conditions such as high blood pressure, heart disease, and cancer – is to spread the costs as broadly as possible. MSAs do the opposite. By appealing disproportionately to people who are healthy (who expect to be able to build up large unspent balances in their MSA), they siphon off premium dollars that would have been used to pay health care costs of the sick. There is no assurance that MSAs will even be available to high-risk consumers, since the proposal does not include guaranteed acceptance (i.e., these policies need not be made available to all consumers) or fair pricing (e.g., through pooling insurance costs across all policies sold, community rating).
MSAs drive up prices for traditional insurance and shift costs to the sick. If people who enroll in MSAs get sick, they are likely to face high out-of-pocket costs because of unfunded MSAs and high deductibles. Research published prior to enactment of the MSA demonstration projected that if 25 percent of healthy people enrolled in MSAs, premiums for traditional (low-deductible) coverage would increase by 63 percent. If the percent of healthy choosing an MSA increased to 100 percent, premiums for traditional policies would increase by 335 percent. An expanded MSA program could mean that MSAs gain broad acceptance, and these fears of dramatically higher premiums for those seeking low-deductible coverage could well become a reality. Recent research confirms these concerns about higher out-of-pocket costs and higher premiums for the sick:

[S]elf-selection by low-risk families into the MSA/CHP [catastrophic health plan] leaves high-risk families with choosing between paying higher premiums for their comprehensive plans or enrolling in the MSA/CHP. In both cases high-risk families are worse off compared to their pre-reform well being, facing higher expected out-of-pocket medical expenses along with grater exposure to risk if they enroll in the MSA/CHP.
Expanded MSAs benefit higher income people at the expense of the poor. Higher income people benefit more from MSAs than do lower income people for several reasons. Higher income people are more likely to be able to afford high deductibles than are low income people. Higher income people are more likely to benefit from employer-paid premiums and MSA contributions than are lower income people. Higher income people receive larger tax benefits than lower income people (since marginal tax rates range form 15 percent at the lowest taxed income level to 39.6 percent at the highest). Concern about the poor losing out under MSAs is confirmed by recent research:

Many of these effects [gains and losses associated with MSAs] raise important concerns regarding equity, because our simulations suggest that the families losing the most from reform tend to be poorer as well as those families with children born during the year.
Expanded MSAs could lead to the demise of traditional low-deductible health insurance. Now is the time for careful debate about what could be a major change in the nation’s health insurance -- away from a system in which deductibles of $250 are the norm and toward a system in which family deductibles of $2,000 to $4,000 are the norm. Widespread MSAs will lead to premium spirals that could drive traditional policies out of the market. While MSAs are marketed as "increasing consumer choice," they could, in the long-run, eliminate the important choice of low-deductible policies.
Tax revenues should not be used to encourage the sale of flawed policies. There is no guarantee that high-deductible insurance policies that are linked with MSAs will have comprehensive benefits. Nor is there a guarantee that they will cover all medically necessary care, including conditions such as pregnancy and illnesses such as AIDS. Congress should not give favorable tax treatment to what could be flawed policies.

Gail Shearer
July 16, 1998

[ Health ] [ Finance ] [ Food ] [ Product ] [ Other ]
[ About CU ] [ News ] [ Tips ]
[ Home ]

FACT SHEET MEDICAL SAVINGS ACCOUNTS

FACT SHEET
MEDICAL SAVINGS ACCOUNTS