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Bret Schundler Media Archives

Will Congress Put MSAs On Life Support?

Originally appeared in Business & Health, November, 1999
By Helen Lippman, Contributing Editor

Are medical savings accounts an idea whose time may never come? The 1996 Health Insurance Portability and Accountability Act authorized a pilot project in which 750,000 people could set aside pre-tax income for out-of pocket health care expenses and a catastrophic policy for major medical events. The response was underwhelming.

Last month, the IRS projected that fewer than 43,000 taxpayers contributed to MSAs in 1998. Interest in selling MSAs has been equally lackluster. Fewer than 50 insurers offer them, according to a December 1998 GAO report, and only a minority of those are "marketing them aggressively." A provision extending MSAs to Medicare beneficiaries never got off the ground because no insurer came forward to sell them.

Help may be on the way. In early October, two days after the Census Bureau reported that the number of uninsured Americans grew by 1 million last year, the House passed a bill intended to make health insurance more accessible. The measure would create tax breaks and other incentives -- including removal of what many see as unworkable limits on MSA sales-to encourage the purchase of coverage.

If it is signed into law, the bill would make tax-deferred medical savings accounts, which are now an option only for the self-employed and groups of two to 50, available to everyone, regardless of previous insurance status or group size. It would lower the deductibles on the catastrophic policies MSAs are paired with, thereby raising insurance agents' commissions and, it's hoped, their interest in selling them. For the first time, it would allow employer and employee to contribute to an MSA in the same year.

The National Federation of Independent Business hailed the bill as a "strong market-based solution... designed with small business owners and their employees in mind." Its passage should hearten "every entrepreneur in the United States," Dan Danner, vice president for federal public policy, said. Nonetheless, the bill's success is iffy.

President Clinton and most congressional Democrats staunchly oppose it, arguing that the tax relief it would bring would benefit only people at the highest income levels. A further complication is a procedural maneuver that tied final passage to that of patient rights legislation, which will go before the President when the House and Senate versions are reconciled.

Can MSAs make it in the real world, with or without a boost from tax breaks? A fair number of employers have concluded that the structure of the pilot project -- and not the MSA concept itself -- is flawed. They've pushed forward with MSA look-alikes that have no tax advantage.

Signs of success
Jersey City, N.J., is a case in point. The city got permission from the state to withdraw its management employees from the state benefit plan and enroll them in Blue Cross/Blue Shield of New Jersey for two and a half years. The purpose was to launch an MSA pilot. The program also gave the 200-plus managers a choice of a low-deductible fee-for-service indemnity plan, a PPO and an HMO, all mirroring the coverage provided by the state. Although the employees were apprehensive at first, more than half of those eligible ended up selecting MSAs.

The pilot ended in December 1997, but the city calculated proposed 1998 renewal rates based on claims experience: The MSA/catastrophic plan combo would have cost $3,535 per single employee, $1,000 less than the traditional indemnity coverage that had long been the gold standard.

Jersey City Mayor Bret Schundler hailed the pilot in a report titled, "Proof that Medical Savings Accounts Work" and urged the legislature to make MSAs available to all state employees, a move that has not happened yet. And, says Elinor Gibney, a management specialist in the business administrator's office, employees' attitudes were positive. "Everyone saw that the MSAs worked and that people got the level of care they needed."

The high satisfaction levels were not surprising, Schundler wrote: In comparison with the standard indemnity plan, the MSA package "reduced out-of-pocket health care expenses for major users of health care, gave money back to minor health care users, preserved absolute freedom of choice," and covered checkups and other wellness services, which none of the other options did.

Even when MSAs cost more than other coverage-in Jersey City, for instance, the '98 rates for a single PPO policy were $1,000 lower - some employers prefer to put a portion of the money in the hands of employees rather than spend it all on insurance premiums. As investment firms like Merrill Lynch, Dreyfus and Fidelity have entered the MSA trustee market, some employers have set up mutual funds or annuities in which their workers' remaining money is likely to accrue more rapidly than it would in a savings account. Some of these options, however, are open only to those with tax-deferred MSAs.

Not surprisingly, Golden Rule Insurance Co., the Indianapolis-based firm said to be the nation's top seller of medical savings accounts, offers its 1,000 employees an MSA plan that is not tax-deferred. Ninety percent of those with job-based coverage have chosen it over the company's indemnity plan, Media Specialist Joann Robinson says. A big draw is an 8 percent yield on unspent funds and no penalty for withdrawal.

Asked how employees like the MSAs, Robinson speaks from personal experience. A single mother, she used to have an indemnity plan with a $500 deductible for her and another $500 for each of her three kids. The MSA family plan, which she's had since the company began offering it in 1993, caps the deductible at $1,000.

Robinson, like other MSA boosters, emphasizes the personal responsibility the accounts are meant to engender. When she needed an outpatient diagnostic procedure, for instance, she checked prices at the three hospitals in which her physician had privileges. "I know that seems weird, but I saved $400," she says. A pregnant colleague shaved $1,200 off the cost of delivery by prepaying her hospital bill. She rejects the idea of MSAs as a deterrent, offering accountholders incentives to avoid getting care they really need. Compared to her indemnity coverage days, Robinson says, she now has money - she's depleted the fund only once - set aside for that purpose.

Bill Marsh, executive VP of the seven-employee Indiana Federal Community Defenders, shares her philosophy. "I think employees with MSAs make wiser choices than they would if the insurance company were picking up the tab," he says. Interestingly, though, a number of groups, including Golden Rule employees and King County (Wash.) Medical Society, which offers MSAs and an array of other options to its physician members, have found little difference in claims.

Employee responsibility wasn't the only reason Marsh selected MSAs when the nonprofit public defender agency opened its doors five years ago-"There weren't a lot of companies anxious to sell health insurance to a group our size," he says-but it was a big part of the attraction.

While some, like Marsh, found MSAs "the most economic option" before and after the 1997 demonstration project, others have been priced out of the market. In 1997, Richard McLain, president of Oklahoma City's Mull Corp., talked excitedly about the flexibility and considerable cost savings its MSA coverage offered. He has since dropped it, not because employees were unhappy but because the costs rose so much "I just couldn't justify it."

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