Chapter 8: Health and Human Services
Encourage the Federal
Government to Expand the
Use of Medical Savings Accounts
Summary
Tax-free Medical Savings Accounts (MSAs) make health insurance policies
affordable for those who are uninsured or underinsured. Expanded use of MSAs
would allow such persons to purchase affordable health insurance policies with
high deductible amounts, while setting aside tax-free money to pay for minor or
routine medical care. The federal government should make it easier to qualify
for and use these accounts.
Background
Persons who are not covered by employer-financed health insurance generally
have to purchase individual health insurance policies that can be very
expensive. Unlike employer-sponsored health insurance, individual policies are
not tax-deductible and do not benefit from the reduced prices large groups can
receive. Those buying individual policies often opt for policies with relatively
high deductibles, which have more affordable monthly payments.
MSAs are designed to allow their users to set up tax-deferred savings or
investment accounts in conjunction with high-deductible catastrophic health
insurance policies. The tax-deferred funds then are used to pay for most minor
or routine medical care, while major health care expenses are covered with the
high-deductible health insurance policy.[1] Money
contributed to an MSA is exempt from taxable income in the same way as money
contributed to an individual retirement account. A tax-free MSA gives people an
incentive to be economical in their use of medical services, because people with
employment-based insurance often are insulated from the true cost of their
health care.
Preliminary research indicates that MSAs could help reduce the nation’s
number of uninsured. When Congress authorized an MSA demonstration project in
1996, it found that about 40 percent of the people buying MSA plans were
previously uninsured.[1] As of September 2000,
however, only 100,000 accounts had been established under the pilot project,
even though its cap is 750,000 accounts.[1]
At least one observer has attributed this low response to overregulation by
the federal government.[2] The demonstration
program included many restrictions that made it confusing to everyone involved,
including potential applicants, insurance companies, and employers. MSAs are
restricted to individuals who work for a company with 50 or fewer employees, or
are self-employed.
Other problems that inhibit the growth of MSAs are the law’s inflexible
requirements for deductibles. Workers who already had basic insurance plans with
different deductibles, either higher or lower, could not get medical savings
accounts.
Another confusing part of the law was not permitting contributions by both
employers and employees. Most benefit plans involve employers and workers
sharing the cost.
Federal law could encourage the expansion of the MSA program by allowing a
wider range of deductibles, eliminating limits on contributions and allowing
greater participation. Other changes that could make the program more appealing
to consumers and insurance companies include permitting large corporations to
offer such programs and eliminating financial limits in the program that
discourage coverage of mental health services and prescription drugs.
Some lawmakers would like to see the federal MSA pilot program go beyond its
current end date of December 31, 2000, and become permanent. They also would
like to lower the minimum deductible for accompanying catastrophic health plans
to $1,000 for an individual and $2,000 for families.
Opponents to MSAs counter that their widespread use would primarily attract
healthy people and pull them out of the regular insurance market. They contend
that, under the present insurance system, this group subsidizes coverage for
people who incur higher medical costs; their departure could drive up health
care costs for others. Comments from some users of MSAs, however, indicate that
this notion may be oversimplified at best. Bret Schundler, Mayor of Jersey City,
New Jersey, has said that some city employees with health problems were
attracted to MSAs when the city began offering them because the program gave
them greater flexibility in accessing health
care.[3]
MSAs, moreover, may be combined with high-deductible individual policies to
offer an alternative for employers who could not afford to offer conventional
health insurance.
Recommendation
A state resolution encouraging the US Congress to
extend the Medical Savings Account (MSA) option and remove barriers in current
legislation to allow greater use of MSAs should be enacted.
Fiscal Impact
Savings to state and local governments cannot be estimated. To the extent
that businesses offer this benefit to their employees, federal government tax
revenue could decline as a result of this recommendation, but the amount cannot
be determined at this time.
[1] John
C. Goodman and Gerald L. Musgrave, “Controlling Health Care Costs with
Medical Savings Accounts,” National Center for Policy Analysis Report
No. 168 (January 1992) (http://www.ncpa.org/studies/s168/s168.html).
(Internet document.)
[2] Merrill Matthews, Jr. and
Jack Strayer, “Making Medical Savings Accounts Better,” National
Center for Policy Analysis Report No. 295 (June 11, 1999)
(http://www.ncpa.org/ba/ba295.html).
(Internet document.)
[1 ] “Medical Savings
Plan Misses Its Potential,” New York Times (September 17,
2000).
[2 ] National Center for Policy
Analysis President John Goodman in “Will Medical Savings Accounts Stay or
Go?” Medical Industry Today (May 11, 2000), p. 45.
[3] Telephone interview with
Bret Schundler, Mayor of Jersey City, New Jersey, October 27, 1999.
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