Medical Savings Accounts: The Antidote to Managed Care?
Crane, Mark, Medical Economics
Who needs three-letter health plans? Patients across the country may start asking that question if Congress approves a plan to let individuals own and control tax-free medical savings accounts combined with high-deductible catastrophic insurance policies. This incremental reform is no magic bullet for the nation's healthcare woes, its proponents concede. Still, it could revolutionize the way most medical purchases are made.
It's hardly news that most patients pay very little of the cost of their medical care. Nearly 95 percent of hospital bills and more than 80 percent of physician fees are covered by health insurance. Insulated from the full costs of treatment, consumers have little incentive to shop for the best price, say MSA proponents.
Under most MSA proposals, patients would spend their own money for the first $2,000 to $3,000 of medical bills per year. They'd get to keep whatever money wasn't spent--in a portable tax-free account similar to an individual retirement account. It would be theirs even if they lost or changed their jobs. Since about 90 percent of Americans spend less than $3,000 per year on medical costs, the need for insurance--except for catastrophic care--would evaporate.
For that reason, several large insurers and managed-care organizations are mounting a vigorous campaign against MSA proposals. By removing young healthy people from insurance pools and leaving mostly the old and sick, MSAs could bankrupt the health-care system, goes an argument from Blue Cross and Blue Shield of Ohio. MSA supporters, including the American Medical Association, counter that such dire predictions are scare tactics and self-serving rhetoric.
"MSAs are a direct threat to the managed-care industry, especially the more restrictive types such as staff-model HMOs," says Merrill Matthews Jr., health-policy director of the National Center for Policy Analysis, a think tank in Dallas. "The only reason managed care is so widespread is that employers provide health insurance and have been looking for ways to cut costs. If MSAs received the tax break that traditional health insurance and managed care receive, many employers would turn to MSAs to control health-care spending. That's why these organizations are fighting so hard against MSAs."
Putting patients in control of health spending
Employers started offering health insurance during World War II. Wages had been frozen, notes economist John C. Goodman, NCPA president, so businesses turned to health insurance to attract skilled workers, who were in short supply.
The Internal Revenue Service granted companies a tax deduction for the premiums and excluded the fringe benefit from employees' income. As labor unions bargained for greater benefits, the concept of first-dollar coverage for routine care took hold--along with ever-increasing costs.
This tax policy not only favors the financing of medical services via insurance, but offers a larger tax break to companies that buy the most expensive coverage, say Goodman and Mark V. Pauly, a senior fellow at The Wharton School in Philadelphia and a member of the Physician Payment Review Commission.
The full tax deduction isn't available to the self-employed. The employer-based system can distort an individual's choice in the labor market, often creating "job lock," where a worker is afraid to quit a job he dislikes for fear of losing coverage, the economists note.
It now costs about $5,400 to provide health insurance for a typical worker and his family. Under one MSA proposal, the employer could buy a catastrophic policy with a $3,000 deductible for approximately $2,400 and pay the worker the $3,000 difference, which would be deposited tax-free in an MSA. Any money that wasn't spent would roll over to the next year, to grow tax-free. In a short time, the worker could develop a substantial safety net for himself, notes the Cato Institute, a libertarian Washington think tank. …