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This fact sheet was written by the Consumers Union Washington D.C. office.
The large-scale introduction of Medical Savings Accounts (MSAs) into the under-65 (non-Medicare) health insurance market poses major risks for consumers and taxpayers. MSAs will even have a negative effect on those who don't choose them since people enrolled in comprehensive low-deductible insurance plans will face higher premiums as a result of MSAs. Increased use of MSAs over time will shift the health care system away from achieving the goal of universal, affordable health care. Regrettably, the Budget Reconciliation bills passed in October 1995 by both the Senate and the House include proposals that allow an MSA option for everyone.
Congress should eliminate MSAs for the under-65 insurance market for the following reasons:
Risk Selection: All objective studies have concluded that risk selection could be a major concern with Medical Savings Accounts (MSAs). MSAs, combined with catastrophic insurance coverage, are likely to appeal primarily to individuals and families with better-than-average health.
Cost Shifting: It is difficult to separate the fragmentation of risks into "healthy" and "less healthy" segments from the impact of this selection on premiums. For people under 65, MSAs are likely to lead to substantially higher premiums for persons choosing standard, low deductible health plans. One estimate put premiums for standard coverage rising as much as 26 percent if MSAs are widely utilized.1 The American Academy of Actuaries estimated that because of the selection process in which relatively healthy individuals choose high deductible plans, the less healthy individuals remaining in a low-deductible plan could face premium increases of 61 percent.2
It is also important to note that those who choose MSAs run the risk of higher out-of-pocket costs. The report by the American Academy of Actuaries states that, "Since the increase in copayments is smaller than the premium reduction, some employees will have to pay more for health care than under the current program."3 Enrollees could also experience unexpected or catastrophic illnesses at any time may not be applicable to the deductible -- again leaving the enrollee vulnerable to higher health care costs.
Health Care Utilization: MSAs could encourage individuals to hold back seeking health care services. Under the proposal before Congress, MSA funds are tax-free and roll over at the end of the year if unspent. This could create an incentive for individuals to limit their medical expenses, especially in such important areas as preventive care.4 The bill allows individuals to withdraw money (without paying increased income taxes) from their MSA to pay for long-term care insurance. The high deductible catastrophic insurance plan is also likely to increase participants' desire to limit their health care spending, since there is likely to be a substantial gap between the money they have in their MSA and the deductible of their catastrophic insurance. Proponents of MSAs cite this phenomenon as a sure way to rein in health care inflation, but the high deductible could present a financial barrier to receiving needed health care.
Tax Expenditures: One of the key attractions for individuals of the proposed MSAs for people under 65 is the fact that the contributions (by employers or individuals) would be tax deductible. One analysis of current legislation on MSAs by the Joint Committee on Taxation estimates that if instituted, MSAs could reduce federal budget receipts by a total of $2 billion from 1996 through 2002.5 This figure is small in comparison with the current tax expenditure for health insurance premiums ($46 billion in 1995), but it represents an additional drain on limited federal revenues and contributes to the budget deficit. The figure could grow if MSAs increase in popularity.
Administrative Costs: Many proponents of MSAs highlight the fact that because enrollees would pay for their health care expenses from their own accounts, this would eliminate the need to file claims through third party insurers, therefore reducing administrative costs. But setting up MSAs could require setting up an entirely new bureaucracy to ensure proper implementation and utilization.
A Congressional Research Service analysis notes that MSAs would give the Internal Revenue Service (IRS) increased responsibilities since MSA funds would have special tax-free or tax deductible status. The analysis points out that currently very few health care expenses are deducted from individuals' income tax-- less than 30 percent of all returns have itemized deductions and only 17 percent of those are medical deductions. Under MSAs, the amount of medical deductions could dramatically increase requiring additional time and staff time to accurately review and audit tax returns.6
Implications for Low-Income Consumers: Most sources agree that MSAs would be of no benefit, and possibly detrimental to low-income consumers, for a variety of reasons. First, if enrollees incur unpredicted, catastrophic medical expenses, more than the amount set aside in their MSA, they could be forced to borrow from savings or divert monies from living expenses to pay their medical bills. Such a scenario is likely if the contribution to the MSA (by employer or individual) is less than the deductible amount on the catastrophic plan, placing those on a limited budget in financial jeopardy if forced to pay out-of-pocket. In some cases, low-income consumers with MSAs might be forced to forego care. The CRS study cites a Rand Health Insurance Experiment on patient cost-sharing, which showed that poor children in plans with coinsurance requirements were only one-third as likely as poor children without cost-sharing to be treated for acute sprains and strains, and they were only one-half as likely to be treated for acute upper respiratory infections.7 Catastrophic-level deductibles can only increase the deterrent to seeking medical care.
Low-income consumers can be harmed by MSAs indirectly as well. A significant increase in premiums for low-deductible health insurance is likely to force many low-income individuals and families to drop coverage altogether.
1 - Consortium for Citizens with Disabilities, "Written Testimony Submitted to the Subcommittee on Health of the House Ways & Means Committee for a Hearing on Medicare Revisions and Medical Savings Accounts," Washington, D.C., May 1995.
2 - Medical Savings Account Work Group, "Public Policy Monograph #1: Medical Savings Accounts- Cost Implications and Design Issues", (American Academy of Actuaries: Washington, D.C., May 1995), p. 9.
3 - American Academy of Actuaries, pg. 23.
4 - This attraction to limit health care spending would increase if the plans include a provision for the withdrawal of funds for non-medical purposes (such as retirement) after a certain amount of time.
5 - Joint Committee on Taxation, "Description and Analysis of H.R. 1818 (The "Family Medical Savings and Investment Act of 1995")," June 1995, pg 31.
6 - Bob Lyke, "Medical Savings Accounts," (Congressional Research Service/Library of Congress: Washington D.C., July 1994), pg. 10.
