With the creation of the Medicare+Choice program (M+C), the Balanced Budget Act of 1997 (BBA) instituted one of the largest changes to Medicare managed care since Medicare's inception. The Medicare+Choice program encompassed a variety of measures designed to increase Medicare beneficiaries' healthcare choices and to expand Medicare managed care offerings to more of the Medicare eligible population. One of the newly created offerings was the Medicare+Choice Medical Savings Account (M+C MSA) program. MSA plans combined a high deductible M+C plan with a contribution from the Centers for Medicare and Medicaid Services (CMS) to an MSA for the enrolled beneficiary. (1) The Department of Health and Human Services (HHS) Federal Register stipulated that any state-licensed risk-bearing entity would be permitted to offer an M+C MSA plan. This would include among others, private sector companies currently offering MSAs in the under-65 commercial market, and the newly created M +C organizations (M+COs)." (2)
Various studies have analyzed the profitability of M+C MSAs for private companies. (3) The November 2000 Medicare Payment Advisory Commission's report (MedPAC) concluded that the private sector would not offer Medicare MSAs because of low beneficiary demand and the expense and difficulty of marketing the new offering (MedPAC 2000: v). It is not clear whether HHS anticipated M+COs would offer MSAs or if companies currently offering MSAs to the non-Medicare population would enter the M+CO MSA market. It is logical to suppose that the latter would incur higher expenses entering the government program from the private sector, so the MedPAC findings seem credible. However, given that M+COs were already part of the Medicare system and were not subject to the same increase in initial expenses, their lack of participation is curious.
The primary purpose of this article is to examine formally the structure of the MSA program and to identify the incentives of both M+COs who might choose to offer an MSA plan, and beneficiaries who might choose to enroll in such a plan. Because the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) reauthorized the MSA program under the newly named Medicare Advantage, understanding the program's shortcomings is critical to ensuring the success of the Medicare Advantage (MA) MSA program. (4) As late as January 2005, HHS was still uncertain as to why the M+C MSA program had been unsuccessful. The Federal Register notes, "With regard to MSA plans, we remain uncertain, as noted in the proposed rules, about participation and enrollment in MSAs.... We are unable to determine whether the MMA provisions will result in such plans being introduced and the extent to which beneficiaries might enroll in such plans" (HHS Federal Register 2005: 4693). This analysis will illustrate that the incentives of M +COs and beneficiaries to participate in the MSA program were incompatible, and that an M+CO would always earn at least as much profit per enrollee by offering an M+C plan as it would by offering an MSA plan. The model suggests that given self-interested seniors and insurers, the MSA program was almost certain to fail, and given the similarity of the new MA MSA plan to the M+C MSA, success under the new program is unlikely. The empirical evidence that no MSA plans were implemented or even proposed during the demonstration project period supports this theory.
Structure of the Medical Savings Account Program
In the BBA, Congress authorized a limited number of beneficiaries to participate in an MSA program demonstration. The M+C MSA plans were designed to be a combination of a high deductible M+C plan (health insurance policy) and a medical savings account. Medicare was to pay the beneficiary's premium for the M+C plan and to make a monetary deposit into a Medicare savings account for the beneficiary. (5) The beneficiary would use the money in the account along with his own personal money as necessary to pay for healthcare services until the deductible was met. …