Savings Plan May Reshape U.S. Health Care Financing

Like many Idahoans, Don Bich is a rugged individualist who leads an active life. He plays basketball three times a week. He works out regularly at a health spa. He skis in the winter, plays golf and softball in the summer.

The gregarious manager of the Western Idaho Fair, in short, hardly seems like a revolutionary.

But by swapping his traditional, employer-provided health insurance for a tax-exempt medical savings account, Bich (pronounced Beek), like many other Idaho residents, has joined a little-noticed but fast-growing movement that could radically transform America’s health care financing system.

Both the promise and the perils of medical savings accounts are taking center stage as Congress wrangles over whether to make them part of a major health care reform bill that would make insurance more accessible for as many as 25 million Americans.

The Senate last week rejected an amendment by Majority Leader Bob Dole (R-Kan.) to include medical savings accounts in its reform bill, setting the stage for a potentially contentious House-Senate conference on the issue. A similar reform bill approved by the House last month contains the accounts and many House members may insist on retaining them in the final legislation.

Regardless of the immediate outcome in Congress, medical savings accounts are proliferating around the country. Their growth has been spurred in Idaho and 14 other states by laws exempting them from state and local income taxes.

The accounts are relatively new and there are scant data to allow an objective assessment of their full impact.

Still, a close look at the rapid growth of the accounts in Idaho, which is at the forefront of the movement, suggests that they are likely to live up to the predictions of both supporters and critics.

Proponents say medical savings accounts will save employers big bucks, instill cost-consciousness in consumers, create unprecedented competition among providers, grant unrestricted choice of doctors, evict bean counters from the physician-patient relationship and allow tightfisted consumers to accumulate long-term nest eggs.

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Opponents say the accounts will attract mainly the young and healthy, leaving sicker people with high-cost medical needs in traditional insurance pools, causing premiums to soar and forcing some into the ranks of the 41 million uninsured Americans. Critics also say such accounts amount to another tax shelter for the affluent and a potential windfall for insurers that write policies tailored for the accounts, especially one Indiana-based firm, whose owners have contributed heavily to Republican candidates.

There is no denying the powerful appeal of medical savings accounts to people like Bich, and perhaps even a majority of Americans, including those fed up with the restrictive nature of fast-growing managed-care networks and health maintenance organizations.

Here in Idaho’s capital, medical savings accounts are available to all 850 employees of Ada County. About 170 signed up immediately, bringing with them nearly 100 dependents.

Idaho’s 18,000 state employees are expected to be offered the account option Jan. 1.

The concept is not restricted to public employees. Under a 1994 state law passed unanimously by the predominantly Republican Legislature and signed by the Democratic governor, any Idahoan may open an account. Many older, wealthier people are doing just that.

Idaho’s law allows an individual to deposit up to $2,000 a year into a medical savings account, or $4,000 for a family. The account holder then claims a deduction equal to the contribution when calculating state income taxes.

Withdrawals are not subject to state tax if they are used for medical expenses--including eyeglasses, mammograms and even some less-than-mainstream treatments, such as acupuncture, that typically are not covered by health insurance policies.

Funds unspent at the end of a year remain in the account, where they can continue to earn interest. Money withdrawn for nonmedical uses is subject to state income tax and a 10% penalty.

Once an account holder reaches the age of 59 1/2, the penalty no longer applies. The money can then be used to supplement other sources of retirement income, much like an individual retirement account.

The driving notion behind the accounts is that holders will spend their money wisely because they stand to pocket the unspent dollars.

Idaho’s law does not require holders to buy a high-deductible catastrophic insurance plan. The House bill would impose such a requirement, as do many employers now offering the account option, including Ada County.

Critics contend that Republican enthusiasm for the accounts is attributable in part to aggressive lobbying by the Golden Rule Insurance Co., whose founding family is a major contributor to GOP causes. Golden Rule specializes in selling health insurance to individuals and small groups--the kind of policies that would be marketed to medical savings account holders.

For people like Bich, 46, the potential payoff of a medical savings account proved irresistible, even though he already had a generous indemnity plan provided by his employer.

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Before he switched, the county paid Bich’s $175 monthly premium for a standard Blue Shield plan with a $100 annual deductible. Once he passed the $100 mark, the policy kicked in, covering 80% of all costs until Bich’s out-of-pocket expenses reached $800, after which the plan covered 100% of expenses. In all, Bich’s maximum annual out-of-pocket exposure was $900.

Blessed by good health, Bich has virtually no medical expenses to speak of. So the premiums paid by his employer simply disappeared into Blue Shield’s coffers and were used by the giant insurer to cover the claims of sick people.

When the savings account option became available, Bich said he asked himself: “Why should I pay for them?”

He and many fellow Ada County employees saw the accounts as a way to divert a substantial chunk of the county’s health care spending straight into their personal bank accounts.

Under the medical savings account option, the county will spend $75 a month to buy Bich a catastrophic insurance plan with a $2,000 annual deductible. With the $1,200 in savings, it will deposit into Bich’s bank account $1,100 a year, on a prorated monthly basis.

Should Bich need medical care, he must pay for it with funds from the medical savings account. If he uses up the county’s $1,100 contribution, the next $900 will come from his own pocket. After that, the catastrophic plan kicks in.

“Quite frankly, I’m banking on the fact that my health will stay good,” Bich said.

Among the county employees who have signed up for medical savings accounts is Heather Mink, a 25-year-old computer technician.

“I haven’t been sick,” she said. “For me, a [medical savings account] will mean more than $1,000 a year, in addition to my salary.”

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Her boss, county Assessor Robert H. McQuade, said he was tempted to open an account. In addition to the potential windfall at year’s end, he liked that he would be able to see any doctor.

McQuade, though, decided to stay with Blue Cross. His 10-year-old son recently was found to have asthma, and McQuade didn’t want to leap into the unknown.

Bob Poland, a county commercial appraiser, did not vacillate. He rejected the medical savings account.

Now 68, Poland had bypass surgery four years ago; his wife suffers from diabetes and high blood pressure. They were especially worried about incurring costly medical bills before sufficient funds accrued in their medical savings account to cover those expenses.

“If I were 20 years younger and had no health problems, I’d probably go for it,” Poland said.

In all, according to Ada County Commissioner Gary Glenn, the county stands to save nearly $70,000 in the first year. Those savings would reach nearly $90,000 if Congress exempted medical savings accounts from federal income tax, reducing the county’s share of payroll taxes paid to Washington.

If the county offered only medical savings accounts, abandoning its traditional indemnity plan and an optional HMO, it would save more than $200,000 a year, Glenn said.

The potential savings are attracting interest among employers, said Greg Scandlen, a Washington-area health analyst who publishes a medical savings account newsletter.

Amid the growing interest, however, ominous signs are emerging.

According to a private study released last month, Ada County’s medical savings account employees averaged just $767 a year in claims per person over three years. That contrasts with more than $1,050 per person for the rest.

The discrepancy foreshadows what health analysts call “adverse selection,” a phenomenon in which the healthy opt out of large insurance pools, leaving behind a smaller, sicker pool of consumers whose premiums must increase to cover their higher expenses.

The Ada County trend could significantly affect the rates needed in the future on the Blue Shield traditional program, said Ron Osborne, vice president of Johnson & Higgins, a Boise health consulting firm that did the county analysis.

Critics note that medical savings accounts appear to undermine a fundamental principle of insurance coverage: the pooling of premiums from the healthy and the ill to subsidize those who become sick.

Roger Simmons, an Ada County commissioner who voted for medical savings accounts as “just another option,” is increasingly troubled by Osborne’s analysis, which points to the potential creation of a two-tiered system for county employees.

“We may end up having to spend more money on the other side” to cover the higher premiums for those not in medical savings accounts, Simmons said.

Medical savings accounts have been well received here in part because they are “a natural fit for the Idaho mind-set,” said Republican state Rep. Paul Kjellander, a co-sponsor of the medical savings account legislation.

“The phrase ‘individual responsibility’ has a real meaning for the people of Idaho,” he said.

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Once word begins to spread, accounts may enjoy broader appeal. Studies show that most Americans are healthy and spend less than $2,000 a year for health care. If allowed to set up a tax-exempt medical savings account of $2,000, a typical person stands to end up with something left over at the end of each year.

At Boise’s First Security Bank, nearly 1,500 medical savings accounts have been opened this year, according to trust officer Pat Duncan. “A lot of people look at it as a tax dodge,” she said.

The Home Federal Savings & Loan Assn. of Idaho has begun issuing medical savings account credit cards, as has a bank in northern Idaho.

In Washington, many Republicans want to exempt medical savings accounts from federal income taxes.

If that happens, predicted Tracy Andrus, vice president for public affairs at Blue Cross, “interest should go up dramatically.”