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A comprehensive, thorough briefing by Greg Scandlan.
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Outside of Washington policy circles, Medical Savings
Accounts (MSAs) are no longer controversial.
They stirred up a fuss when the concept was first introduced some 10 years
ago. But at the time, most of the attention in Washington and across the
country was on the promise of managed care to deliver optimal health care
and control costs at the same time.
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"Medical Savings Accounts enable patients
to pay directly for medical expenses not paid by insurance." |
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Ten years later, managed care has proven to be of limited
value. It has generated a widespread "backlash" by patients,
physicians, employers, and politicians. After 10 years of experience,
patients believe that managed care saves money by depriving them of
services they want and need. Physicians believe managed care prevents them
from providing the care that is best for their patients. Employers are
realizing that managed care has not actually saved them any money; it just
delayed cost increases for a few years. And politicians are sensitive to
the discontent of their constituents.
All of these parties have come to realize that the reasons managed care
has not worked as a national policy in addressing the concerns of cost,
access, quality and patient satisfaction are the same reasons Medical
Savings Accounts and other consumer-driven programs are attractive:
 | MSAs work to restore the patient to a position of influence in the
health care system, while managed care leaves the patient as a passive
recipient of other people's decision-making. |
| MSAs reduce the influence of third-party payers in the health care
system, while managed care makes the third-party payer the predominant
actor. |
| MSAs help reduce costs by lessening the administrative burden on
everybody, while managed care greatly increases the amount of health
care dollars that are devoted to administration. |
| MSAs help to restore the patient/physician relationship, while
managed care weakens those relationships. |
| MSAs encourage innovation and excellence in health care, while
managed care encourages "cookbook" medicine. |
| MSAs allow people to seek out alternative ways of maintaining and
improving their health, while managed care either forbids or
discourages alternative medicine. |
| MSAs encourage competition, while managed care encourages monopoly. |
| MSAs facilitate portability for workers between jobs, while managed
care locks workers into their current jobs. |
| MSAs help assure continuity of care when patients change health
insurers, while managed care disrupts continuity. |
| MSAs enable people to seek the preventive care services best
tailored to their own needs, while managed care covers only those
services the bureaucracy prefers. |
| MSAs increase quality by allowing patients to pay more to see a
better doctor, while managed care tends to pay all participating
doctors the same, regardless of their skill. |
| MSAs allow people to build-up a source of funds to pay for future
health care needs, including long-term care and insurance premiums
while unemployed, while managed care concentrates solely on the
current year's expenses. |
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"MSA's help restore the doctor-patient
relationship." |
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None of this is to say that managed care programs are not
attractive for some people, or that MSAs are the best solution at all
times. The question is rather what should be the thrust of national
policy? Should it be reliance on empowered consumers making informed
decisions through market mechanisms? Or should we rely instead on
third-party bureaucrats allocating resources according to their
preferences? The latter strategy has been tried and has failed. It is well
past time to empower the patient.
Medical Savings Accounts are a broad term for the notion that much of
health care can be paid directly by the consumer, and that government
policy should be neutral as to whether such expenses are paid through an
insurance mechanism or directly by the patient. [See Figure
I.] To the extent contributions to health insurance premiums are
tax-advantaged, so should be contributions to an account that is dedicated
to paying for health care expenses.
Once this concept is understood and adopted, consumers will be free to
determine for themselves how best to allocate their resources between
insurance coverage and direct payment. Some consumers may continue to
prefer first-dollar insurance coverage, and they will put all their
resources into premiums. Others may rather have a high-deductible health
plan that covers only very expensive conditions, and pay for lower-cost
services from an MSA. Still others may prefer a mix, with insurance
coverage that pays for "non-discretionary" spending combined
with an account for "discretionary" services. Plans might
develop that cover physician and hospital services with insurance, but use
a cash account for dental, vision, pharmaceutical and alternative
services.
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"By choosing higher health insurance
deductibles, people can reduce their premium payments and put the
money saved into an MSA." |
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The specific benefit design can vary substantially, and
policy makers cannot know ahead of time what the optimal mix will be in
terms of efficiency and popularity. This is precisely what markets are
superb at determining. Some designs will be tried and rejected in the
market. Others will succeed and become the standard for future
enhancements.
The failure of managed care and the movement towards privatization in
those countries with nationalized health care systems have combined to
create a new imperative - one that relies on the consumer of health care
services as the ultimate judge of the value of those services. MSAs and
other consumer-centered models of financing are essential for allowing
these consumers to make those judgments.
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There are currently several models of MSA design
available. Not all of them are tax advantaged, and none of them are widely
available in the market as of this writing. Curiously, they all face
vehement political opposition from certain factions who disagree with the
core concept of empowering patients. But the idea of consumerism in health
care has become widely accepted in the past few years, especially among
health care providers and employers.
High Deductible MSAs.
In 1996, Congress passed the Health Insurance
Portability and Accountability Act (HIPAA),
which authorized a four-year demonstration project of Medical Savings
Accounts. Unfortunately, the legislation was severely limited and has had
minimal impact on the health insurance market. The limitations came from
two sources, proponents of MSAs and opponents of MSAs.
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"The most common plan has a high
across-the-board deductible." |
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Proponents limited the program by using an illustration
of how MSAs work that was ultimately turned into law. The illustration was
not supposed to be the final word on benefit design, but was only intended
to explain the concept. In 1992, the National Center for Policy Analysis
first explained the concept by proposing a high, across-the-board
deductible plan with an MSA to pay expenses below the deductible.
To numerically illustrate the concept, the chairman of Golden Rule
Insurance Company said an employer currently paying $4,500 in premium
could switch to a $3,000 deductible policy and lower his premium to
$1,500.
The Congressional Budget Office took this illustration literally, however.
Sure enough, what finally became law was a requirement for
across-the-board deductibles ranging from $1,500 to $2,250 for singles and
$3,000 to $4,500 for families.
Opponents also weighed in with concerns that ended up written into law. As
enacted, the MSAs allowed under HIPAA included the following restrictions:
| MSAs are available only to the self-employed and employers with 50
or fewer employees. |
| No more than 750,000 MSAs are allowed. |
| Deductibles must range from $1,500 to $2,250 for individuals and
$3,000 to $4,500 for families (with adjustments for inflation). |
| No coverage is allowed below the deductible, even for preventive
service, unless mandated by state law. |
| MSA contributions are limited to 65 percent of the deductible for
individuals and 75 percent of the deductible for families. |
| MSA contributions are allowed only by the employer or the employee,
but not both in a single year. |
| Total out-of-pocket costs cannot exceed $3,000 for singles and
$5,000 for families. |
| Non-medical withdrawals are subject to a 15 percent penalty as well
as income taxes. |
| The pilot program originally was scheduled to last for only four
years and recently was extended for only two more years. |
These rigid design restrictions have prevented the MSA
concept from being reliably tested under the HIPAA provisions. But the
underlying concept remains valid. By choosing higher health insurance
deductibles, people can reduce their premium payments and put the money
saved into an MSA to help cover expenses below the deductible. A
pioneering national survey by John Goodman and Gerald Musgrave found that
raising deductibles leads to substantial savings in health insurance
premiums.
In fact, the premium savings may be greater than the increase in the
deductible.
This concept works for other kinds of insurance as well. The Bollinger
Insurance Agency estimates that raising an auto insurance deductible from
$200 to $500 could reduce the cost of comprehensive coverage by 15 percent
to 30 percent. Similarly, homeowners can save 12 percent of premiums by
raising the deductible on homeowners' coverage from $250 to $500, 24
percent by raising it to $1,000, 30 percent by raising it to $2,500, and
37 percent by raising it to $5,000.
Flexible MSAs.
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"Under a flexible MSA, the deductible
varies, depending on the type of expenditure." |
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There is another model of MSA design that has become
popular in South Africa and has recently become available in the United
States. Rather than using an across-the-board deductible, these plans
distinguish between "discretionary" and
"non-discretionary" spending. They offer first dollar coverage
for non-discretionary health care services, such as acute care
hospitalizations, but apply a deductible to discretionary services such as
physician office visits and outpatient care. The plans may also provide
first dollar coverage for medications required to treat chronic conditions
such as asthma, diabetes and hypertension. South Africa has been able to
develop this plan because it provides the same regulatory and tax
treatment to this benefit design as to all others. It has been extremely
popular in that country, currently serving about one-half of the privately
insured population.
The largest company offering these products in South Africa, Discovery
Health, has recently opened an American subsidiary, the Illinois-based
Destiny Health, which is marketing a similar product design, but without
the tax advantage that is available to HIPAA-qualified MSAs alone.
Flexible Spending Accounts.
Another approach to achieving MSA-like benefits is
Flexible Spending Accounts (FSAs). FSAs are allowed under Section 125 of
the Internal Revenue Code and were first enacted by Congress in 1978.
They enable workers to set aside tax-free money to spend on health care
expenses not otherwise covered by their insurance, or to pay for health
insurance premiums. FSAs are exactly like MSAs with one essential
difference - money not spent by the end of the calendar year is forfeited
with an FSA, but may be rolled over into the next year with an MSA.
The FSA provides exactly the wrong incentive: it forces workers to spend
needlessly at the end of the year to avoid forfeiting their own money. The
MSA encourages workers to be thrifty in their health care spending because
they may keep unspent funds. This drawback could be changed under a
proposal by President Bush to allow $500 in unspent FSA funds to roll over
into an MSA or other form of trust account at year's end. Such a provision
would enable all workers to have an MSA-type program, regardless of the
underlying insurance plan they had.
Other Types of MSAs.
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"MSA's are increasingly popular among
employers." |
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Now that MSAs have been around for a few years, the idea
is no longer seen as exotic. Many employers, benefits consultants and
entrepreneurs who were focused on the growth of managed care in 1996 are
now exploring ways of making MSA-type programs available to parts of the
market that do not qualify for HIPAA-enabled MSAs. These efforts usually
start with an insurance plan that is supplemented by a cash account of
some kind. Some examples:
| Definity Health, based in Minneapolis, perhaps the most prominent.
It features a "Personal Care Account" that is described as
"an account where consumers choose how to spend their health care
dollars. Consumers select providers and care options, including
alternative medicine. Funds remaining in the account at the end of the
year rollover and stay with the consumer." Some of Definity's
accounts include Medtronics, Textron, Raytheon, Dade Behring and the
University of Minnesota, none of which qualify for a traditional MSA
program. |
| MyHealthBank, based in Portland, Ore. It uses the slogan, "your
money, your health, your choice," and features a "Health
Freedom Account" which can roll over from year to year. In
partnership with Regence Blue Cross and Blue Shield, MyHealthBank had
enrolled 1,500 members in Oregon by April 2001, and has since expanded
into Washington, Utah and Idaho. |
| Lumenos, based in Alexandria, Va. It also has a rollover account
that it calls a "Health Savings Account." Lumenos describes
the account exactly like an MSA: "You can use your HSA as you
choose, you don't need a referral to receive care and you can use any
licensed doctor." Also like an MSA, Lumenos has a
"bridge" of out-of-pocket responsibility between the HSA and
the insurance coverage. Lumenos, too, is marketing mostly to large
employers who are not eligible for HIPAA-MSAs. |
These programs may or may not be tax-advantaged. An
employer is always free to provide high-deductible coverage and make an
after-tax cash account available to cover expenses below the deductible,
and some employers have done just that.
But more recently firms have discovered that they can establish a
tax-favored cash account even though they might not be eligible for a
HIPAA MSA.
The funds are allocated to, but not actually owned by, the employee, and
the company doesn't pre-fund the account except as a bookkeeping notation.
The firm can take medical expenses as a business deduction as they are
paid, but may not deduct unused allocations. Because there is no
"constructive receipt" of the money, it is tax-free to the
employee. The employee can see the funds build up over time, but cannot
cash out balances until terminating employment, at which time the balances
may be used to prepay continuation coverage or for long-term care
insurance.
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Despite the advantages of the MSA approach to health care
financing, there has been a steady drumbeat of criticism. Sen. Ted Kennedy
(D-Mass.) was the most vociferous as he filibustered against his own bill
on June 10, 1996, saying "MSAs are likely to raise health insurance
premiums through the roof … they will destroy the insurance
pool…."
A day later he said, "Medical savings accounts have become the Trojan
horse that could destroy health care reform…. They will raise premiums
for the vast majority of Americans." And on June 14, 1996, he said,
"The small business sector … is the most vulnerable to the
disruptions that medical savings accounts would cause."
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"Despite the advantages of MSA's, there
has been a steady drumbeat of criticism." |
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About a year later, the Director of Health Policy
Analysis for Consumers Union, Gail Shearer, wrote to the Wall Street
Journal that "premiums for traditional health insurance will
increase by as much as 300 percent if MSAs are allowed without limit into
the health insurance market." She added, "The MSA demonstration
program … threatens to poison the entire health insurance
market…."
The drumbeat continues to this day. A recent paper by the Center on Budget
and Policy Priorities claims that, because of adverse selection,
"premiums for conventional insurance could more than double if MSA
use becomes widespread" and could "jeopardize health insurance
coverage for substantial numbers of Americans…"
These charges are certainly dramatic and would be alarming - if there were
any factual basis for them. But there is none. Not one of the assertions
quoted is supported by research. To the extent the critics footnote their
charges, they usually quote one another, creating an ever more impassioned
circle of hysteria.
The core charge is that MSAs will result in "adverse selection."
It is alleged that the healthy and the wealthy will opt for MSAs,
"depleting the insurance pool" of the good risks and leaving
only high-risk people in "traditional" insurance.
It is puzzling that these same critics have been sanguine about the
erosion in "traditional" insurance that has resulted from the
growth of managed care. According to the Kaiser Family Foundation,
"traditional" insurance now covers a mere 7 percent of all
workers, down from 73 percent in 1988 and 27 percent in 1996.
Meanwhile, premiums for "traditional" coverage have escalated,
rising from 21 percent higher than HMO premiums in 1997 to 32 percent
higher in 2001.
[See Table
I.] One might think that those who are so anxious about the future of
"traditional" or "conventional" health insurance would
be protesting the growth of managed care as well. In fact, they are not.
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"Most of the criticism stems from a poor
understanding of MSA's." |
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Most of the criticism stems from either a poor
understanding of the dynamics of health insurance or an ideological
commitment to creating a national health insurance system in the United
States. In either case, there is little foundation for the criticism and
evidence aplenty that contradicts the charges. The assertions against MSAs
are generally that:
| Cost savings from raising deductibles are exaggerated. |
| MSAs will not change patient behavior. |
| MSAs will be attractive to "the healthy and the wealthy"
at the expense of everybody else. |
| MSAs will encourage people to avoid needed preventive care. |
| MSAs will pull the best risks from "the insurance pool,"
raising costs for those who remain. |
| MSAs will not help control costs over the deductible, where the need
is greatest. |
We will examine these charges one at a time.
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Critics are skeptical that raising a deductible will save
very much in health insurance premiums, certainly not enough to fund an
MSA very well. Yet the same organizations acknowledge the value of
increasing deductibles for other kinds of insurance. The month before
Consumers Union's Gail Shearer wrote to the Wall Street Journal
complaining that MSAs would poison the entire health insurance market, her
parent organization published an article in Consumer Reports encouraging
readers to raise their deductibles for home and auto insurance because
"the first rule to apply to any insurance… is to buy coverage that
protects against a broad range of risks, getting only enough protection to
insure what you could not afford to cover with your own assets."
This principle is even more true for health insurance than it is for home
and auto insurance, because home and auto claims are large and infrequent,
while claims against a health insurance policy are usually for small
amounts of money and are complicated to process. In fact, raising a health
insurance deductible can save substantial amounts of premium.
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"Premiums for 'traditional' coverage have
escalated." |
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There are several reasons why the premium savings are so
large. The most obvious is that the insurer will pay less in potential
claims. But since relatively few people have a claim in any given year,
this is only a portion of the savings.
MSAs also greatly reduce a problem endemic to the entire health insurance
industry: soaring administrative costs. One study estimated the
administrative savings from switching to a national system of MSAs could
amount to $33 billion annually.
It is far less expensive for a provider to present a bill and be paid at
the time of service than it is to file a claim and wait, often for weeks
or months, to be reimbursed by an insurer.
Immediate payment saves both administrative overhead and the time value of
the funds.
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"MSA's greatly reduce soaring
administration costs." |
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One of the most common complaints health care providers
make about insurance companies is the extreme complexity of the billing
requirements, with many carriers demanding unique systems.
To avoid these burdens, one organization of physicians based in Washington
state is charging cash-paying customers half or less of what it charges
insured customers. The difference in fees is due solely to the reduced
overhead from not having to bill the insurers.
Whether filed in paper format or electronically, claims are costly and
complex to process and adjudicate. They involve confirming that:
| The patient is (or is not) a covered insured. |
| The provider is (or is not) a network provider. |
| The service billed is (or is not) covered under the insured's
contract. |
| The service is (or is not) appropriate for the diagnosis. |
| The insured has fulfilled his or her deductible and coinsurance
responsibility. |
Next, the claim is forwarded for "repricing,"
depending on the provider's network status and agreed-upon discount.
Finally, the check is cut and forwarded to the provider, an EOB
(Explanation of Benefits) is sent to the insured and data are entered and
a summary report sent to the employer. Additionally, there will be:
| Periodic audits to confirm the services billed were actually
received. |
| Utilization review efforts to ensure appropriate care. |
| Customer and provider service departments to answer questions about
claims status, and sometimes to explain why a claim has been denied. |
| Appeals procedures to reconsider the payment of denied claims. |
Reviewing the foregoing, it isn't hard to understand why
the cost of processing a small claim can exceed the cost of the claim
itself.
Depending on the particular plan, a Medical Savings Account program
enables patients to pay small claims from an MSA in one of three ways: (1)
they can pay directly at the point of service with a debit card or paper
check written on the MSA account, (2) they can approve a bill and have
their health plan pay it from the MSA, or (3) they can pay cash and send
the receipt to their MSA administrator for reimbursement. At least in
theory, there is little reason for the insurance company to get involved
in the claim until the patient's total expenses approach the deductible.
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Another reason why high deductibles lower costs is that
they lead to a change in behavior on the part of the insured.
Some critics have suggested that health care is a unique consumption good.
They argue there is no "personal benefit" from consuming excess
health care services, unlike the excessive consumption of food, which is a
"personal choice." Yet there is plenty of empirical evidence
that over-consumption always occurs when health care is a free good.
Moral Hazard.
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"When health care is free, people tend to
over-consume it." |
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The concept that people who are insured tend to engage in
riskier behavior is known as "moral hazard." People with
low-deductible auto policies are likely to drive less carefully than
people with higher deductibles. Similarly, an owner of a run-down
warehouse that is insured is far more likely to see it burn down than a
warehouse owner who does not carry fire insurance.
In health care, moral hazard blends with another concept - "induced
demand." People who have low-deductible health insurance coverage are
far more likely to consume a wide range of services, many of them of
questionable value. Having a higher deductible encourages people to think
twice before consuming services because a greater portion of the cost is
borne by them.
The RAND Experiment.
For example, the well-known RAND Health Insurance
Experiment randomly assigned several thousand families to different plans
with different cost-sharing provisions over an eight-year period.
One plan had free care, another had 25 percent coinsurance, another had 50
percent coinsurance and another 95 percent coinsurance. In each of the
cost-sharing plans, the total out-of-pocket expense was capped at $1,000
(this study was conducted in the late 1970s, so the $1,000 deductible
adjusted for today's prices would be closer to $2,500). The results were
profound, if unsurprising. Project director and Harvard University
professor Joseph Newhouse writes, "Use of medical services responds
unequivocally to changes in the amount paid out of pocket…. Per capita
expenses on the free plan are 45 percent higher than those on the plan
with a 95 percent coinsurance rate…."
He adds, "The more families had to pay out of pocket, the fewer
medical services they used."
Importantly, the lower use of services did not have a negative effect on
health outcomes.
MSAs vs. Managed Care.
Managed care, too, is a response to the
willingness of people to consume excessive health care services when they
can. Unlike the RAND Experiment and MSAs, managed care tries to control
the use of services from the supply side. Managed care sets up obstacles
to acquiring the care the patient demands by the use of
"gatekeepers," utilization controls, benefit limitations,
provider limitations and provider incentives to undertreat. In general,
patients can't get care because it isn't available, not because they have
chosen to avoid it. It is small wonder patients are unhappy. The whole
purpose of a managed care organization is to keep patients from the care
they desire.
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"When people spend from their MSA they
are spending their own money rather than someone else's
money." |
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By contrast, Medical Savings Accounts control expenses
from the demand side. MSAs encourage people to think twice about the care
they want, because they know there is a price to be paid for wasteful
consumption. It is up to the patient in consultation with his or her
family and physician to make the value judgments about whether a
particular service is worth the cost. These judgments and decisions are
not imposed from the outside, but reflect the values and priorities of the
individual.
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The complaint that MSAs will benefit the healthy and
wealthy at the expense of the rest of us is a catchy sound bite well
suited for Washington spinmeisters. Unfortunately, it is no more true for
having been so frequently repeated. Whether or not one chooses an MSA
depends in part on available alternatives. But it is impossible to examine
the likelihood of a selection simply by looking at a single choice.
Side-by-side comparisons must be made.
Traditional Indemnity vs. MSAs: Comparing Plans.
A "traditional indemnity" plan is also
known as a "fee-for-service" (FFS) or "major medical"
plan. It is characterized by a small deductible (usually $250 to $500) and
"coinsurance" (typically 20 percent of claims). Both are paid by
the insured up to some "stop-loss" level ($1,500 or so).
As the name implies, a fee-for-service plan pays providers a fee for
providing a service. The payment may be based on a fixed fee schedule or
may be a "usual and customary" fee. "Managed care"
efforts are minimal and patients are free to choose their own providers,
although utilization review programs are increasingly common in FFS plans.
In contrast, a typical MSA program, as enabled by Congress in 1996,
starts with a deductible of approximately $2,000 for an individual or
$4,000 for a family. In this case, the individual (or the employer) may
deposit as much as $1,300 into the MSA. A family may deposit as much as
$3,000.
These deposits are excluded from taxable income if made by the employer
(thus avoiding income and payroll taxes) and are deductible if made by the
account holder (avoiding income tax alone).
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"The money in an MSA may be invested and
build up tax free over time." |
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Consider an individual with a $1,300 MSA deposit and a
$2,000 deductible. When this individual enters the medical marketplace,
the first $1,300 of expenses are paid from the MSA. The next $700 is paid
out of pocket. And beyond $2,000, all expenses are paid by the health
plan.
Thus in this example, the patient's out-of-pocket risk is limited to $700.
However, if not all of the $1,300 MSA deposit is spent, the remainder
stays in the account and is added to the next year's MSA balance.
So after a few years, most people's MSAs will exceed $2,000 and there will
be no out-of-pocket risk.
The money in the MSA may be invested and build up tax-free over time.
Money in the MSA may be used to pay for health care expenses at any time
without penalty. It may also be withdrawn to pay for other needs, but the
account holder has to pay taxes plus a 15 percent penalty on any amount
withdrawn.
The essential idea behind the MSA is that the money saved on premiums can
be deposited in the savings account. By going from a $250 deductible FFS
plan to a $2,000 deductible MSA plan, an individual might save enough to
cover the maximum $1,300 contribution. Whether that happens depends on
local market conditions, the attitude of the insurance company, risk
factors associated with the insured and a lot of other factors. But the
idea of saving $1,300 in premiums by raising the deductible by $1,750 is
not unrealistic.
Most MSA programs use a "Preferred Provider Organization" (PPO)
for the insured portion of the coverage, thereby gaining the benefit of
whatever cost savings may be available for higher-cost claims. Although
PPOs are customarily considered to be part of managed care, they are more
like traditional FFS plans than Health Maintenance Organizations (HMOs).
They use deductibles and coinsurance and pay providers on a
fee-for-service basis, although they usually negotiate discounted rates
from their "preferred" network of providers. PPOs direct their
patients to the preferred providers by charging a higher coinsurance rate
for going "out of network."
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"The typical MSA plan benefits both the
sick and the healthy." |
|
Most people will spend less money out-of-pocket with an
MSA than they would with a traditional FFS, including high and low
utilizers and high- and low-income earners. Because plan design may vary,
we will look at four different scenarios to illustrate this point.
|
| Plan A is a $250 deductible FFS plan with a 20 percent coinsurance
on the next $7,500 of claims. |
| Plan B is a $500 deductible with a 20 percent coinsurance on the
next $5,000 in claims. |
| Plan C is an MSA with a $2,000 deductible and a $1,000 contribution
in the account. |
| Plan D is an MSA with a $2,500 deductible and a $1,500 contribution
to the account. |
As Table
II shows, in these hypothetical scenarios there is only a small range
of expenses for which the MSA out-of-pocket exposure is greater than the
traditional FFS program - claims between $2,000 and $3,500. But because
out-of-pocket expenses are usually paid with after-tax dollars,
if MSA deposits are tax-preferred, the range is even smaller than the
amount reflected and depends on the marginal tax rate of the insured.
The notion that the unhealthy and the unwealthy do better in a traditional
FFS indemnity plan than they would in an MSA is false. People with few
expenses do better under the MSA regardless of their income, and people
with very high expenses do better with the MSA, again regardless of their
income.
The Urban Institute Study.
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"Sick people gain from MSA plans because
their out-of-pocket expenses are typically lower." |
|
An early Urban Institute (UI) study supports these
conclusions. The study estimated "winners and losers" if
everyone switched to an MSA program. It concluded that 80 percent of the
population would be financial winners. That number of financial winners
would be much higher but UI included the highest utilizers among the
losers, though just barely.
The UI study concluded that the primary losers in an MSA scenario would be
those with annual expenses ranging from $2,000 to $5,250. It also found
that, "on average, lower wage workers would benefit from switching to
MSA/catastrophic plans."
HMO vs. MSA.
If an MSA is better for the unhealthy and
unwealthy when compared to a traditional FFS or PPO plan, what about when
compared to an HMO? An HMO environment presents an entirely different
dynamic and set of choices than an FFS plan. As a rule, HMO premiums are
lower than the MSA/high deductible insurance plan combination and involve
lower cost-sharing. A lower-income person would probably prefer the HMO,
all other things being equal. As it turns out, however, all other things
are not always equal.
When we consider that a person with few expenses will actually have money
left over at the end of the year to be included in the next year's MSA,
the "wealthy" charge looks absurd. A person with $250 in
expenses in the first year may have $750 left over at the end of the year.
This $750 is far more meaningful to someone earning $10,000 per year than
it is to someone earning $100,000 per year. It amounts to a bonus of 7.5
percent of the former person's income, but less than 1 percent of the
latter's.
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"The savings in an MSA are far more
meaningful to a low-income employee than to high-income
employees." |
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Low-income workers might prefer to pay the added cost of
the MSA program because, if they are careful in their health care
spending, they will have money left over at the end of the year. As with
the example above, the opportunity to save several hundred dollars in a
personal account means a lot more to a lower-income worker than it does to
"the wealthy." The value the working poor put on extra cash may
be much higher than the value they put on extra doctors' visits.
This opportunity is admittedly a matter of personal choice. Not everyone
places more value on cash than they do on doctors' visits, and there are a
large number of other factors that enter into the perceived value of one
or the other. The proximity of services is one such factor. It is a lot
easier for a low-income family with children to make use of an HMO's
services if it has facilities or participating providers close by. If the
closest facility is across town or out in the deep suburbs, the value of
the benefit to an inner city, low-income family is greatly diminished, and
the prospect of money in the bank looks more attractive.
So, for lower-income workers, the appeal of an MSA may be a toss-up when
compared to an HMO. Some will prefer one, some the other. But what about
the unhealthy? Would they prefer an HMO or an MSA? Again, it is hard to
say, but there is evidence in that in the Medicare program healthy
beneficiaries tend to select HMO coverage and then revert to traditional
Medicare when they become sick.
As we have seen with the "managed care backlash," many people
fiercely resist the idea of having a limited choice of doctors, or of
having the health plan second-guess recommended services. The
"unhealthy" (people with chronic or acute medical conditions)
are far more sensitive to the problems of managed care than are people of
average risk who encounter the health care system only rarely. Very often
these "high utilizers" will have a personal network of doctors
they know and trust. If one of those doctors does not participate with an
HMO, or is dropped from the HMO's network, that patient will be a good
candidate for an MSA. High-utilizers are also far more likely to
experience the other problems associated with managed care - trouble
getting through on the phone, long waits to get an appointment and in the
doctor's office, being assigned to an inappropriate specialist, having
prescribed treatments questioned and so on.
The RAND Study.
A recent study by researchers at the RAND
Corporation confirms this analysis.
The study, funded by the Department of Labor, constructed a simulation of
multiple choices of health plans in a small group environment. As Table
III shows, it found that those who chose an MSA were on the average
the highest-risk people and considerably less wealthy than those who chose
HMO coverage.
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"The RAND study found that those who
choose an MSA were on the average the highest-risk people and
considerably less wealthy than those who chose HMO coverage." |
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The RAND researchers concluded, "HMOs are attractive
to wealthier workers," and "higher-income employees prefer to
stay with the HMO." They went on to debunk the myth about the healthy
flocking to MSAs when they wrote, "We see that the MSA is not
attractive to exceptionally good risks, as some critics have hypothesized.
Instead, these healthy people prefer to decline coverage."
In other words, the wealthiest workers prefer HMO coverage and the
healthiest workers choose no coverage at all. MSAs are chosen by the least
healthy and the third least wealthy of all the groups. The RAND
researchers add, "We find that MSAs could be desirable to workers in
firms that already offer HMO coverage or standard FFS plans. As a result,
expanding MSA availability could make it a major form of insurance for
covered workers in small business."
NBER Study.
Another problem with the "healthy and
wealthy" argument is it assumes there are two kinds of people, the
healthy and the unhealthy, and never the twain shall meet. For instance,
Catholic University law professor Regina Jefferson states in an article
about MSAs: "Approximately 70 percent of Americans account for only
15 percent of national medical expenditures. Nearly 75 cents of every
dollar spent on health care in the United States is attributed to only 10
percent of the population."
She implies that this small minority of people will be disadvantaged by an
MSA because they will never be able to build up or replenish their funds.
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"The vast majority of people will be able
to build up funds in the MSA before an illness hits, and replenish
them after it is over." |
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These numbers may be approximately right - in a single
given year. But this year's 10 percent of high-utilizers are not the same
people as last year's 10 percent or next year's 10 percent. In fact, most
acute health care expenses involve either end-of-life care or an episodic
illness that may appear for a year or two and then disappear. The vast
majority of consumers will be able to build up funds in the MSA before an
illness hits, and replenish those funds after it is over.
One study published by the National Bureau of Economic Research (NBER)
found "that high expenditure levels typically do not last for many
years."
This study modeled an MSA-type program
based on the experience of a large Midwestern manufacturing firm, and
found that by projecting actual claims experience over the entire
worklives of the employees, even without considering any behavioral
response to increased cost-sharing, 95 percent of the population would
have retained at least 20 percent of their MSA contribution and 80 percent
would still have at least half of what had been contributed.
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"People with MSAs have a source of funds
for preventive care." |
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In other words, almost everybody has some health care
expenses in the course of their lives, but few if any are sick all the
time. If behavioral responses (i.e., the tendency to consume fewer
services when paying for them directly) were accounted for, the authors
say the results would have been more equal with fewer people spending most
of their MSA funds."
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Critics have charged that people with MSAs will be less
likely to take advantage of preventive care.
The opposite is actually true. Money in the savings account provides a
source of funds that is not available in a traditional
"fee-for-service" (FFS) plan to pay for exactly those kinds of
services, and on a completely tax-advantaged basis.
Further, based on the experience in South Africa, if there is skimping on
preventive care it does not translate to more costly procedures later on.
Finally, if Congress allowed more design flexibility, people could have an
MSA and still have first dollar coverage for those preventive services
that have been proven effective.
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This criticism is closely related to the "healthy
and wealthy" argument discussed above in that it makes all the wrong
assumptions about who is likely to select which plan. The argument is also
based on the false assumption that there is a single insurance pool in the
United States.
The assumption is that if only the healthiest people were attracted to
MSAs, they would no longer subsidize the higher costs of the rest of the
population. In fact, there are tens of thousands of pools in the country
and none subsidizes the other. Every self-funded employer group is its own
pool, independent from all others. Every insurance company and every HMO
is independent from every other insurance company. Even within a single
insurance company, there are separate and independent pools for different
states and different blocks of business. The Insurance Commissioner in
Iowa will not allow a company to raise its rates in that state to cover
losses in California. Similarly, a company's small-group block of business
is subject to entirely different rules and rating procedures than is its
block of individual, non-group business.
So, if everyone at Joe's Print Shop chose an MSA, and they were all very
healthy, there would be no effect whatsoever on the premium costs of
Sally's Bakery. Joe's Print Shop pays for the claims experience of its own
employees, plus an administrative markup. If they saved money by
purchasing an MSA, that would bring down Joe's health care costs, but it
would have no effect on Sally's costs.
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The critics have a point here, though a very small one.
It is true that a large portion of annual health care expenses exceed the
deductible of an MSA/high-deductible plan, and thus are not subject to
whatever cost-constraining effects the MSA might provide. Controlling
those high-cost situations is certainly important, but it does not violate
the MSA concept at all. MSAs exist to control low-cost routine expenses,
something managed care does not do very well. But once a patient has
"broken through" the deductible, third-party insurance's
cost-controlling mechanisms will apply. Moreover, people who become active
consumers when dealing with low-cost services are not likely to change
their behavior just because their expenses have broken through the magical
$2,000 figure. They may continue to research their needs and demand that
service providers explain the treatment options - and costs - to them. If
they have become accustomed to dealing from a position of power in making
health care decisions, they are likely to continue doing that. We can only
imagine in what ways physicians and health centers may transform
themselves to accommodate newly empowered patients, and that
transformation will not cease simply because a dollar level has been
reached.
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"MSAs exist to control low-cost routine
expenses, something managed care does not do very well." |
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The presence of an MSA with money in the account enables
patients to exercise their own discretion even after the deductible is
met. In South Africa, for example, to improve the management and cost of
all care for diabetes, Discovery Health has contracted with local centers
for excellence. Discovery Health pays the diabetic center the equivalent
of U.S. $80 per patient per month to cover all treatment costs. Discovery
Health requires each diabetic patient to pay one-third of the cost. Thus
the diabetic center has an economic incentive to deliver services
efficiently and the patient has an incentive to fully use the program.
Patients with money in MSA accounts also have more options to go outside
the provider networks available under their plans or to seek treatment not
covered by ordinary insurance.
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Over the years, the United States and most other
industrialized countries have moved gradually to a system of third-party
payment in which health care consumers have little knowledge of the costs
of their care. Currently, only about 20 percent of total national health
expenditures are paid directly by consumers, and these are concentrated on
services that are rarely covered by insurance - plastic surgery, vision
and dental care, over-the-counter medications, long term care and in-home
nursing services.
As consumers are unaware of costs, they are also unable to influence the
provision of services or the course of treatment. The third party that
pays the bills ends up deciding what bills to pay and what services to
provide. Only the third parties are aware of the costs, and only they are
alarmed when they increase. So, it is the third-party payers that try to
hold down cost increases by limiting access to care.
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"We can expect a wide variety of MSA
programs in the private sector, even without the tax
advantage." |
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With the collapse of managed care, employers as well as
employees are searching for ways to make health care more responsive to
the needs of patients and to give consumers more control over their
resources. MSAs are an attempt to bring patients back into the
decision-making process by giving them more control over the resources
available to them. We can expect a wide variety of MSA look-alike programs
to be developed in the private sector, even without the tax advantage of
official MSAs. Congress would do well to heed the experience of these
experiments and open up the MSA law to encourage innovation.
Greg Scandlen is a Senior Fellow in Health
Policy with the National Center for Policy Analysis. |
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