October 1995 Bulletin

Position Statement - Medical Savings Accounts

The rapid escalation of health care expenditures in the United States during the past several years has resulted in a multitude of proposals to reform the nation's health care delivery system. Many of these proposals are regulatory in nature, and physicians may feel an ethical conflict between pressures to act in the perceived best interests of society at large (i.e., controlling costs) and the desire to act in the best interests of the patient.

One reason for the increase in health care expenses can be traced to current insurance arrangements. With traditional employer-based insurance, consumers (patients) are insulated from prices and do not perceive the true costs of health care services. Therefore, there is little, if any, incentive for patients to make cost-conscious purchasing decisions or pressure providers for greater economic efficiency.

The American Academy of Orthopaedic Surgeons believes that the adoption and implementation of the medical savings account (MSA) concept would help to accomplish the goal of controlling health care expenses while preserving patient choice and the autonomy of the patient-physician relationship.

Medical savings accounts, which are sometimes referred to as health IRAs or "Medisave" accounts, ordinarily consist of two compatible components. They combine a high-deductible catastrophic insurance policy with an individual savings account. Therefore, an individual is personally responsible for payment of smaller medical bills, but he or she will have insurance coverage if expenses reach a high deductible level.

The premium for a catastrophic health policy is far less expensive than the premium for low-deductible coverage. Under the MSA plan, an employer would use the savings on premiums to set up an individual savings account for the employee. Contributions to the account would be tax deductible. Amounts not expended on health care during a given year could be rolled over and accumulate over time. In theory, the employee would then no longer perceive health insurance as a free benefit and would be motivated to make more cost-conscious purchasing decisions.

MSAs are already available in a limited fashion in the private sector.

However, under current federal law, unspent MSA balances are taxable, but health insurance premiums paid by an employer are not. Thus, the government subsidizes third-party insurance, but penalizes self-insurance. In order for MSAs to become widely available, changes to the tax laws must be made which would grant federal and state tax exemptions for deposits made to MSAs and/or for the interest earnings on these accounts.

The MSA concept offers several advantages over the current insurance system:

Reduction in total health care spending. Giving patients direct control and responsibility for their health care spending would provide them with an incentive to be cost-conscious consumers.

Reduction in the cost of health insurance. MSAs would re-direct the role of the insurance industry towards providing high-risk, catastrophic policies by allowing individuals to self-insure for routine medical care. The corresponding reduction in premium costs would allow more employers to provide health insurance to their workers.

Fewer uninsured Americans. More than half the nation's estimated 37 million uninsured people are between jobs and lack insurance for a period of several months to two years. If an individual lost his or her job, an MSA would provide a source of funds to pay for medical expenses and/or the purchase of insurance during that period.

The primary argument against MSAs is that they would encourage people to neglect or postpone health problems or physician visits until they would require more expensive emergency or hospital care. There also are concerns that widespread use of MSAs by younger and healthier employees would increase the potential of adverse selection and could be disadvantageous for older and sicker employees. These concerns should be addressed in any MSA legislative proposal.

The MSA concept alone does not represent comprehensive health care reform. The American Academy of Orthopaedic Surgeons believes, however, that MSAs offer an opportunity to attain savings on health care expenditures while preserving patient freedom and the patient-physician relationship. MSAs encourage personal responsibility and true market competition among providers on the basis of value. The Academy urges federal and state legislators to include MSAs in health care reform legislation and make the necessary changes to the tax code in order to encourage their use.

August 1995


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