How well would Individual Retirement Accounts work if they were available only to employees of businesses with fewer than 50 people? What if Section 529 College Savings Plans could be started only by the self-employed? Suppose Sec. 215 Cafeteria Plans were available only to employees whose last name began with a Q?
In each of these cases, artificially limiting demand for the tax-favored plans means fewer companies are willing to supply them. That means fewer opportunities for consumers.
Current MSA Dynamics
The same market rules apply to medical savings accounts (MSAs), which allow consumers to save pretax dollars in an account for out-of-pocket medical expenses. The account must be combined with a qualified high-deductible health insurance plan for protection against catastrophic medical expenses.
The general theory is that the premium savings realized by purchasing a less expensive, high-deductible insurance plan can be placed in the savings account and used for qualified medical expenses, or rolled over from year to year if the holder doesn’t use the funds.
The best part of this arrangement is that the consumer owns the account. As the owner of the account, the consumer has an incentive to comparison-shop for medical services based on quality and price. The consumer is in control.
MSAs are also more portable than most health insurance plans. Because the consumer owns the account, the account follows him or her from job to job. The money saved in the account stays there, earning interest.
Account balances can be withdrawn tax-free at any time to pay routine medical expenses up to the plan deductible, co-payments and coinsurance after the deductible, or other qualified medical expenses like dental services and vision care. The account also can be used as an investment vehicle for retirement, since account balances can be withdrawn after age 65 without penalty. Before age 65, funds can be withdrawn from the account, but the consumer pays taxes and a 15 percent early withdrawal penalty if the funds are not used for medical purposes.
MSAs reward consumers who shop wisely for health care and encourage a more efficient allocation of resources in health spending. The consumer with an MSA knows insurance isn’t paying all or most of his medical bills, so he doesn’t have an incentive to over-spend on health services.
Fixing the Flaws
|MSA Expansion Checklist
While MSAs are ideal from an economist’s standpoint because they “get the incentives right,” they have been less than ideal in practice because of the heavy restrictions placed on them by Congress in the enabling Health Insurance Portability and Accountability Act of 1996.
But 2003 offers a unique opportunity for Congress to correct the flaws in the MSA legislation.
MSAs are a demonstration project originally set to expire in five years. In 2001, the expiration date was extended to December 31, 2003. Congress will decide again this year whether to kill the project, extend it again as a demonstration … or make the program permanent. It is during this reauthorization process that Congress can correct the problems with MSAs to make them a more viable option.
The biggest problem with MSAs is that the population allowed to purchase them is quite limited. Under current law, only the self-employed and small businesses with fewer than 50 employees are allowed to purchase tax-advantaged MSAs. This is a relatively small market segment meant to test the effectiveness of the plans, not to encourage broad consumer participation.
Because MSAs are available to only a small portion of the population, many insurers have been hesitant to offer MSA products. State regulations that effectively prohibit high-deductible health plans by loading health insurance with coverage mandates also effectively prohibit MSAs in some states. Market forces cannot function properly in such an environment.
Due to over-regulation and the resulting relatively small number of companies offering MSAs, even some employers and self-employed persons who would qualify find MSAs are not available to them. And even when an MSA provider is willing to offer a plan, the applicant may be disqualified by the insurer’s rules and restrictions. While such rules may not be unique to MSAs, they nevertheless inhibit access to the plans.
More insurers would offer MSAs if the demonstration project were made permanent and all employers and individuals were allowed to purchase MSAs. The 750,000 cap on enrollment placed on MSAs at inception should also be removed. A demand exists for MSAs, if only all of the people who could benefit from them could gain access to them. A recent Zogby poll found 89 percent of those polled wanted the option of purchasing an MSA.
Expanding MSAs to make them available to all employers and individuals would help millions of uninsured citizens. A recent Council for Affordable Health Insurance analysis of IRS data found 73 percent of those who had purchased MSAs to date were previously uninsured.
Easing Other Restrictions
Another step Congress can take to make MSAs function better would be to allow both employers and employees to contribute to the account. Currently one or the other can fund the account, but not both. Allowing both to contribute would encourage funding the account to the greatest extent allowable by law: 65 percent of the deductible for individual account holders and 75 percent for families. Increasing the funding possibilities for the account promotes saving for future medical events.
The savings account element of the MSA program is not the only aspect that is heavily regulated. The insurance plans, too, are subject to legislative restrictions. The MSA law mandates that insurance plans offered in conjunction with MSAs must have deductibles between $1,700 and $2,500 for individual policies and between $3,350 and $5,050 for families.
Requiring such narrow deductible ranges reduces the ability of insurers to offer a variety of MSA plans at different premium costs. By allowing flexible deductibles, Congress could give individuals and families the opportunity to purchase plans better tailored to their needs.
Critics say the current MSA demonstration project has resulted in far fewer participants than anticipated, and that this is a reason to believe MSAs don’t work. But MSAs have been regulated to fail.
Once legislators liberate the MSA from its shackles, individuals and employers will find it is a winning concept that encourages wise health care decisions by consumers and reduces health spending. Members of Congress would be remiss in letting this opportunity pass by without action.
Joe Moser is a health policy analyst at the Galen Institute and a regular contributor to Health Care News. The views expressed are the opinions of the author and do not necessarily reflect the views of the Galen Institute.