Kay Heine counted herself among the legions of uninsured Americans until she discovered one of the best-kept secrets in health care: medical savings accounts.
The accounts, known as MSAs, combine health insurance and a tax-free savings plan and are available to self-employed workers and employees of some small businesses.
The accounts are not a panacea for rising health-care costs. Coverage easily can cost $4,000 to $5,000 a year for a family of four--beyond the reach of many lower-income workers. MSAs are simply a more cost-effective option for catastrophic medical coverage, and they provide a way to budget and save regularly for routine medical costs, such as check-ups and prescription drugs.
MSAs were launched as a test program four years ago and were temporarily saved from extinction by last-minute legislation at the end of last year. Now, as Congress takes up the issue of patients' rights, so-called Archer MSAs may become a permanent and increasingly important fixture on the health-care landscape, experts say.
Several bills have been introduced in Congress to expand eligibility for these accounts and to make the attractive tax breaks a permanent part of the tax code. A coalition of small business, medical and insurance groups is pushing to add this legislation to the patients' bill of rights being debated in Congress as a way of ensuring greater access to health care.
Small-business owners such as Heine say it's about time.
"If it wasn't for the medical savings account, I wouldn't be insured. It just wasn't something I could afford," said the owner of Kay's Academy of Dance in Mukwonago, Wis. "It is a great alternative for people who are on their own when it comes to health insurance."
Here's the scoop on medical savings accounts:
Question: What are MSAs?
Answer: They are a combination of a high-deductible health insurance policy and a tax-free savings account. (A deductible is that portion of the medical bill the consumer must pay before insurance coverage pays the rest.)
Each MSA has two parts: Catastrophic insurance coverage that kicks in after the deductible has been paid, and a savings account that can be tapped to pay the deductible and any uncovered medical expenses, such as dental work.
Question: What happens if you don't spend all the money in the savings account each year?
Answer: Unspent savings are carried over to the next year. If you never need the MSA to pay medical bills, it can be used to supplement your retirement savings later.
Question: What's the main advantage of these accounts?
Answer: Lower premiums. For example, a traditional health insurance policy for a family of four would cost about $500 a month, with a $500 deductible, said Brian McManus, vice president of Golden Rule Insurance in Lawrenceville, Ill. However, the monthly premium for an MSA for the same family would be less than $200--a difference of about $3,600 a year.
Question: How high is the deductible?
Answer: The deductible ranges from $1,600 to $2,400 for single coverage to $3,200 to $4,800 for family coverage.
Question: Doesn't that mean that if you had large medical expenses in a given year, you'd pay almost as much for the MSA as the traditional insurance--your $3,200 deductible, plus the $2,400 annual premium?
Answer: Yes, except that in addition to the premiums you'd pay for the traditional insurance plan, you're responsible for a $500 deductible. In this case, the total cost of the MSA would be $5,600; the total cost of the traditional insurance plan would be $6,500--the $6,000 in annual premiums, plus the $500 deductible.
There's also a tax advantage to the MSA. Contributions to the savings portion of the plan are taken out before taxes are computed, which reduces the income tax you pay.
Question: How does that work?
Answer: The second part of the MSA is a tax-deductible savings account dedicated to paying medical expenses. The maximum allowable savings varies based on the insurance deductible you choose and whether you are buying individual or family coverage.
For individual coverage, you can save 65% of the deductible amount, now $1,040 to $1,560. If you're buying family coverage, you can save as much as 75% of the deductible amount, making the maximum tax-deductible savings $2,400 to $3,600.
For example, a family with a $3,200 deductible could save as much as $200 a month, or $2,400 a year, in the MSA. Because those contributions are tax deductible, this family would pay $720 less in income tax by saving for their own health-care costs, assuming they pay 30% of their income in tax.
Question: Why haven't I heard about these before?
Answer: Probably because they're available to a very small number of people. Only those who are self-employed or work for companies with 50 or fewer workers qualify for MSAs. And no more than 750,000 MSA policies can be sold nationwide. There are only 100,000 MSA policies in force, covering about 250,000 people.
Those restrictions may be lifted this year, said Karen Kerrigan, chairwoman of the Small Business Survival Committee and of the Coalition for Patient Choice, which is fighting for expansion of the MSA program. Legislation introduced in the House would eliminate the restriction on selling no more than 750,000 policies and would open these accounts to all workers--uninsured or otherwise.
Although this may be a longshot, there appears to be a bipartisan support for somewhat less aggressive expansion of the program. Kerrigan expects Congress to expand MSA eligibility to all companies that have 100 or fewer workers and to get rid of the arbitrary 750,000 policy cap.
Question: When does the current MSA program expire, and what happens if you have an MSA when (or if) the law does expire?
Answer: If it is not extended, the MSA program will expire at the end of 2002. However, existing MSA policyholders would be allowed to continue the coverage, said Allen Wishner, chief executive of Flexible Benefit Service Corp., an MSA provider. Those policyholders would be able to buy insurance and save in the MSA plan as they did before, but no new accounts could be opened, he said.
Times staff writer Kathy M. Kristof, author of "Investing 101" (Bloomberg Press, 2000), welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof @latimes.com. For past Personal Finance columns visit The Times' Web site at http://www.latimes.com/perfin.