Academic journal article Public Personnel Management

Medical Savings Accounts: A Health Insurance Option for the Public Sector?

Academic journal article Public Personnel Management

Medical Savings Accounts: A Health Insurance Option for the Public Sector?

Article excerpt

Rising health insurance costs have forced both private and public sector employers to search for innovative methods to restrain the growth rate of insurance costs. The development of Health Maintenance Organizations (HMO), Preferred Provider Organizations (PPO), and Point of Service (POS) plans are changes in the delivery of healthcare that employers have adopted as a reaction to this pressure. Requiring employees to pay more of the cost of insurance by increasing the employees' share of premium costs, and raising deductibles and co-payments has been another response. In this article, data are examined on a relatively new healthcare innovation, the Medical Savings Account (MSA). MSAs are promoted as a way of reducing employer health insurance costs that lower employees out-of-pocket (oPc) health expenses and provide many employees with surplus funds at the end of each year At the present time, MSAs are more widely used in the private sector than in the public sector. This is not due to special difficulties that lessen the proposed advantages of MSAs for public employers and employees. Instead, the fact that MSAs are a relatively new innovation, and have different tax treatment than traditional health insurance, has more likely deterred their use in the public sector. If Congress enacts legislation to give MSAs the same tax treatment as other forms of health insurance, this barrier will be removed. Public employers may give MSAs closer scrutiny when they have more information about, and have a better understanding of, how this insurance instrument operates. This article examines the major features of MSA plans and analyzes evidence to compare the costs of MSA and traditional health insurance plans for public employers.

Medical Savings Accounts

An MSA is a type of health coverage that is generally established in the following manner An employer will purchase a high deductible health insurance plan of, say, $2,000 for a family. This type of coverage will cost the employer significantly less than a traditional plan with a low deductible and co-pay. The employer deposits all or some of the premium savings into an MSA for the employee. The funds in this account may be used to pay the employee's healthcare costs. For example, assume the employer purchases employees' catastrophic health insurance that has a $2,000 deductible and places $1,000 into each employee's MSA. The first $1,000 of family health expenses would be paid from the MSA while the next $1,000 in health expenses are paid by the employee out-of-pocket. The $2,000 deductible has now been reached which initiates the catastrophic insurance coverage for all additional medical expenses. If the employee's health expenses are less than $1,000, the remaining funds in the MSA belong to the employee. This provides a strong incentive for those individuals and families to carefully use their MSA balances.(1)

The difference between the catastrophic plan deductible and the MSA amount is referred to as the corridor. This amount is also the employee's maximum OPC with the MSA plan. In most MSAs, the corridor or employee OPC is positive, but has been zero at some companies.(2) To avoid creating an incentive for adverse selection, the MSA corridor should not be above the maximum OPC under a traditional plan. Adverse selection occurs when healthy employees choose an MSA plan expecting to receive MSA funds that are not used during the year, while employees who anticipate significant health expenses opt for HMOs or traditional plans: the healthy gravitate to MSAs and the sick to traditional plans. If the MSA corridor is set above the maximum OPC of the traditional plan, high claim employees have an incentive to stay with the traditional plan since they would have higher OPCs under the MSA. Premiums for the traditional plan would escalate since a disproportionate number of high claim employees would flow to this plan, while low claim individuals abandon it for the MSAs with their potential cash surpluses. …

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