December 1998 Bulletin

The plan that links patient physician

'I benefit my doctors benefit-the only loser is my old insurance company'

MSAs have many benefits but sales are slow

By Sandra Lee Breisch

By physicians "taking the lead and opening up" Medical Savings Accounts (MSAs), Edward Toriello, MD, believes that they will become "the vehicle that will reestablish the patient-physician relationship that was lost when the insurance companies forced themselves between us."

He explains, "I can spend my health care dollars any way I choose, with any doctor I choose. I benefit, my doctor benefits-the only loser is my old insurance company."

As a matter of economics, Dr. Toriello's switch from his previous indemnity premium for a family of five coverage was a good move; he was paying $11,000 a year, with a $1,200 per person deductible. "And I never saw that money again," he says.

His cost for an MSA catastrophic health insurance policy is $4,500 a year, with maximum out-of pocket expenses, including the deductible, of no more than $5,550 a year for the entire family policy.

Dr. Toriello's pre-tax MSA dollars can be used for almost any health-related expense, including dental work, eye glasses, prescriptions-all of which he says were not covered by his previous plan.

"I can't think of any reason why a physician would not want this product," says Dr. Toriello. "It's an excellent health care vehicle and a way of adding to your pension. I'm allowed to put in 75 percent of my deductible per year into my MSA because I've a family. Individuals are allowed to put away up to 65 percent of the policy's deductible. I can also invest into any number of vehicles such as mutual funds. He'd "love" to insure his employees, because as an employer he would receive pre-tax benefits too, but his employees are covered under other plans.

Endorsed by the Academy and the American Medical Association, MSAs became effective in January 1997. An MSA is a tax-free savings account with a high deductible health insurance plan. MSAs allow individuals to set aside, tax-free, money to pay out-of-pocket expenses. An individual can contribute 65 percent of the deductible to the MSA and a family can contribute 75 percent of the deductible. Money that isn't spent for health care expenses can roll over year after year making it similar to an Individual Retirement Account that can be tapped after retirement.

Funds withdrawn and used for non-medical expenses are considered income and subject to taxation, plus a 15 percent penalty-unless the withdrawal is made after age 65 or the onset of a disability. At death, any remaining MSA balance goes to the descendant's estate. Employers with under 50 workers can buy-into the MSA plan and reap tax-savings benefits too.

The goal of supporters of MSA legislation was to control health care expenses while preserving patient choice and the autonomy of the patient-physician relationship is key. "This allows the doctor to be an agent of the patient, instead of an agent of a third party payer bureaucracy," says John C. Goodman, PhD, president and founder of the National Center for Policy Analysis, who advised Congress on this issue. "The idea behind MSAs is that they would put individual self-insured and third party insurance on a level playing field. A deposit to an MSA would get just as much tax subsidy as the payment of an insurance premium."

According to Bill Archer (R-Texas), Chairman of the House Ways and Means Committee, who authored the bill, "MSAs put you in the driver's seat when spending your health care dollars. The less you spend, the more you keep. Individuals will become better consumers of health care and help keep costs down."

Various studies also support the feasibility of MSAs. RAND researchers say MSAs would be attractive to those who expect high health-care costs, because out-of-pocket expenses under traditional health insurance, which requires deductibles plus co-payments, are higher than under MSAs. A study for the Cato Institute indicates MSAs would lower the nation's annual health care bill by $300 billion and reduce administrative costs by $33 billion.

"MSAs are a win-win for the consumer, the medical profession and the insurance companies," says Karl A. Deavers, president of the Medical Savings Fund Group, Inc., whose MSA sales are mostly to large medical groups. "It's one of the most ideal products we've seen down the pike in many years."

Yet, in spite of its advantages of MSAs, sales have been slower than predicted.

Congress limited MSAs to 750,000 individual accounts and many people thought that it would be reached before year 2000 when the test period ends. Their predictions fell short of expectations, as shown by an Internal Revenue Service report that found only 26,160 taxpayers filed 1997 tax returns that were eligible to be counted under the law. Only 50,000 such returns are expected in 1998, the IRS reported.

Because MSAs are really two separate products-not just health insurance, but a financial/tax planning instrument, too, policy research analyst Thomas F. Wildsmith for the Health Insurance Association of America, says selling MSAs can be "a long educational process" for agents and sales commissions are "razor thin."

"Very few agents sell both," he says. "If the product hadn't been so confusing and different, I'm sure it would've been easier for agents to sell."

One of the first problems with MSAs, says Goodman, is that "no one who's in an HMO can have a tax-free MSA. And most people in other managed care plans also cannot have a tax-free MSA because of the deductible; these plans pay first dollar for a great many of these services. So that means three-quarters of all the employees in the country that have health insurance are automatically disqualified for this product."

Another problem with the MSAs, Goodman says, is that "they appeal to people who are healthy-there's no question of that. Sick people do not usually choose high deductibles."

Goodman says some state laws that may be in conflict with the new federal law. For example, some states require that an insurance company must provide certain services with no deductible or require a maximum deductible of $100. "If states have not conformed to the new law, such as Connecticut, then the state's residents may not participate in the MSA program," he said.

Other factors that stifled MSA growth in the marketplace include businesses that switch to an MSA plan and experience growth within the four-year pilot program. A firm would be forced to drop its MSA program or place new employees in another plan if the number of employees exceeds 200 within that period. Another factor is the cost and delay for approval of the MSA policy by each state's regulatory insurance commissions when only 750,000 policies may be sold in the entire country.

As Deavers puts it, "While the MSA rules and regs are not perfect, they are overall, very positive for self-employed individuals and small employers who usually are not on a level playing field with large employers."

Goodman would like to see MSA reforms to allow a wider range of deductibles, unlimited cost-sharing and an expanded permitted group size. Indeed, efforts to change MSAs were introduced in Congress and will probably be offered again next year.

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