Insurers Set to Give Medical Savings Accounts Big Push
You’ve seen advertisements on the sides of buses for everything--from movies to political candidates to musical groups.
But health insurance?
As it happens, the municipal buses in Boise, Idaho, were festooned last year with portraits of George Washington sporting a stethoscope--a come-on for an exotic new form of health insurance that will soon be rolled out nationwide.
For with President Clinton’s signing of a major health-care bill last month, insurance companies and banks will be hustling to sell Americans on the virtues of newly tax-advantaged medical savings accounts. The new law allows the self-employed and workers at small firms (two to 50 employees) to sample a whole new way of paying for their health care--a new form of savings account that is tax-deductible to the extent that it is used to pay medical expenses.
Unlike the flexible-spending accounts offered by many employers to allow workers to cover certain medical bills with pretax dollars, the medical savings accounts, or MSAs, can be carried over year to year and accumulate interest tax-free. (In a flexible-spending account, money left unused at the end of a year is forfeited by the taxpayer.)
MSA deposits remain tax-exempt as long as they are used to cover medical or, after the taxpayer reaches 59 1/2, retirement expenses.
Under the law, the accounts must be paired with a high-deductible “catastrophic” health policy. That means users will pay their first few thousand dollars of health expenses from pretax dollars (the money in the savings accounts), cover the next several hundred from their own pockets, and receive 100% reimbursement for expenses exceeding a high threshold.
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As advantageous as the system may be to taxpayers--a conclusion that is still hotly debated--the MSA is viewed by the financial and insurance industries as a potential windfall. That is because financial institutions will be able to charge fees to manage what they believe may be a rapidly growing accumulation of tax-exempt capital.
Financial institutions “will be falling all over themselves to get hold of this money,” said Alan Katz, executive director of Centerstone Insurance & Financial Services, a Woodland Hills firm that specializes in providing coverage for small companies. As MSAs become better understood, their appeal for insurers and banks “could be like the mutual fund gold rush and the individual retirement account gold rush,” he said.
Insurers are also likely to scramble for what they view as a potentially broader market for health insurance policies, especially among small employers. That is because the MSA/catastrophic coverage package will probably be sold at far lower premiums than traditional health coverage.
“Most insurance companies have an MSA product in the development stage,” said Kelly McCarthy, public affairs manager for the Council for Affordable Health Insurance, which represents small- and medium-size insurance firms.
“There is a lot of curiosity and interest” in MSAs among customers, Katz said. Within days of Clinton’s signing of the new law Aug. 21, Katz said, he had received feelers from small employers interested in offering the coverage to their workers.
One farming firm told Katz that a low-cost, high-deductible policy might allow it to provide coverage for its employees, many of whom now return to Mexico for medical treatment because the company can’t afford to offer any insurance at all.
Blue Cross of California, with more than 4 million people insured in the state, is eager to accommodate any demands for the new product.
“We are going to try to have something out on the street as soon as we can,” said David Helwig, senior vice president for California consumer services. “Our goal is to maintain the existing bloc of business and grow even more business.”
As envisioned under the new law, MSAs have two elements. The high-deductible catastrophic insurance policy would cover 100% of all medical costs over a threshold set at $1,500 to $2,250 a year for individuals and $3,000 to $4,500 for families.
Policyholders would be permitted to deposit up to 65% of that deductible in a savings account (families would be allowed 75% of the deductible), and subtract that sum from their taxable income for the year. In other words, if a family bought a catastrophic policy with a $3,000 deductible, it could open an MSA with up to $2,250. For a family in the 28% tax bracket, the tax savings would be $630 a year.
Medical savings accounts are not entirely novel. Eighteen states already allow deductions from state income taxes for similar accounts. However, the new health-care bill provides a federal tax deduction for the first time. (California does not provide a state tax deduction, although a bill currently before the Legislature would provide it, possibly in time to match federal tax provisions going into effect in 1997.)
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But the idea has been highly controversial in Washington, in part because of aggressive lobbying on its behalf by an Indianapolis insurance company heavily involved in marketing MSAs.
That company, Golden Rule Insurance Co., has contributed more than $1 million to Republican political causes in the last six years and ranked among the top business contributors to the Republican National Committee in 1994, giving more than $400,000. Its political action committee has given more than $300,000 to congressional candidates, and top executives of the firm have contributed an additional $200,000 in the last six years.
Lee Tooman, the company’s assistant vice president for government relations, denied there was any connection between the political contributions and the legislative success of the MSA.
“It was just plain a good idea.” he said in an interview. “We believed in the idea and advocated it strongly.”
Indeed, Golden Rule promoted its MSAs as the epitome of free-market health care. Each patient could pick his or her own doctor and decide when and where to spend money for medical care.
However, opponents--including the Clinton administration and some consumer groups--have denounced the concept as a way of giving a new tax break to the wealthy and healthy, while concentrating sicker patients in the market for traditional health insurance. That trend, they argue, would eventually raise the cost of health care nationwide.
“Health insurance is about spreading the risk,” said Patricia Smith, health affairs lobbyist for the American Assn. of Retired Persons. “Unfortunately, the MSA allows the healthiest people to pull themselves out of the risk pool,” she said. “Then you are left with a sicker population and the costs go up.”
As it happened, it was partisan tussling over the MSA provision that held up passage of the health-care bill for weeks earlier this summer. In a compromise, the final bill authorizes the establishment of only 750,000 MSAs nationwide during an initial four-year test period.
In that time, researchers hope, the fiscal and demographic effects of MSAs will become more clear. Early studies suggest that the impacts will be heavily influenced by the design of the program.
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According to a forecast by Santa Monica-based Rand Corp., the MSAs anticipated by the federal bill “would have little or no impact on overall health-care spending,” in part because the deductibles in the catastrophic policies were set too low to affect users’ habits.
Rand did conclude that those who could benefit most would be the very healthy--whose medical expenses would largely be covered by the tax deduction and who would enjoy the accumulation of tax-free funds--and the very sick, because the system would provide them 100% coverage over a set deductible.
The people hurt by MSAs would be the moderately sick, whose spending might exceed the low deductibles on many of today’s standard policies but would fall within the higher thresholds established by the law--meaning they would pay for more of their own health care out of their own pockets, according to Emmett B. Keeler, one of the Rand researchers.
But the country’s overall health tab would be the same because, once the tax savings are included, costs for consumers are relatively unchanged. “In fact, for the sickest and healthiest people, it actually provides less spending discipline than current fee-for-service plans,” Keeler said.
The Rand researchers did find that users’ medical spending would drop sharply if the medical deductibles were set higher--say about $5,000 a year for individuals. At that level, however, MSAs would be chosen mainly by the healthy.
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How the Medical Savings Account Might Work
1. The Jones family, running a small grocery store, buys a health insurance policy with a $3,000 deductible.
2. They deposit $2,250 (75% of deductible) in the bank for an MSA.
3. Total medical expenses for the year are $1,000. The Jones family withdraws $1,000 from the MSA to pay medical bills.
4. On next year’s tax return, the $2,250 contributed to the MSA is listed as a tax deduction.
5. There is $1,150 left in the MSA at year-end. It can be used to pay future medical bills. Interest on the account is tax-free. MSA money can be withdrawn at any time to pay medical bills and is tax-free. Using the funds for any other purpose makes them subject to regular tax rates plus a 15% penalty.
