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Save for a Rainy Medical Day

Imagine being able to go to any doctor you choose

By Mark Moran
WebMD Feature

July 19, 2001 -- Imagine being able to go to any doctor you choose and pay for services out of your own pocket using funds accumulated in a tax-deferred account.

That, in essence, is the vision behind medical savings accounts.

MSAs are an innovative form of health insurance that advocates say side steps the cumbersome third-party insurance reimbursement that has dominated American healthcare for decades. In doing so, MSAs promise to lower healthcare costs by making individuals responsible for paying for their own care -- and hence more cost-conscious.

At the same time, advocates say that MSAs promise to return to individuals their right to seek out care from any healthcare provider they wish, without the restraints of managed care.

"Patients can have more control over their own resources," says health policy analyst Greg Scandlen. "They have no restrictions on who you can see and not see, and many physicians are willing to provide discounts in return for instant payment. Just as important, it helps to restore the doctor-patient relationship by empowering patients to deal directly with their physicians."

Scandlen is with the National Center for Policy Analysis in Dallas, which has been a major proponent of MSAs.

Here's how they work: Purchase a low-cost, traditional indemnity (non-managed care) insurance plan with high deductibles. Then use the savings from paying a lower premium to make deposits into a tax-deferred MSA. While the insurance company would still pay for high-cost medical episodes, such as lengthy hospitalizations, the individual could use the MSA to pay out of pocket for lower-cost routine care.

The virtues of MSAs were extolled in a 1994 book called Patient Power written by health economist John Goodman, PhD, president of the National Center for Policy Analysis." The vision gained considerable momentum in the years following the Clinton Administration's failure to reform the national health system. Even the American Medical Association voiced their support for MSAs.

In 1996, federal legislation to promote MSAs was enacted as part of HIPAA, the Health Insurance Portability and Accountability Act.

Since that time, however, the vision of MSAs seems to have withered somewhat. Many health policy analysts saw the idea as an innovative one with many virtues -- possibly attractive to some individuals -- but full of shortcomings when it came to answering the larger problem of spiraling healthcare costs.

Len Nichols, PhD, a health economist at the Urban Institute in Washington, says the outstanding flaw in MSAs is that they are likely to appeal only to the youngest, healthiest, and wealthiest of the population. Left behind in the traditional insurance market would be the older and sicker population, for whom costs would likely rise.

"The difficulty is that health expenditures are extremely skewed," Nichols tells WebMD. "One percent of the population accounts for 30% of all expenditures."

Additionally, some have feared that MSAs could be used by the very wealthiest -- who can pay out of pocket for even the most expensive care -- simply as a tax shelter.

Partly in response to these criticisms, the HIPAA law capped the number of allowable MSAs at 750,000 and limited them to self-employed individuals or employers with less than 50 workers. It also imposed minimum deductible requirements and restrictions on amounts that could be contributed to accounts.

Since that time, less than 100,000 MSA accounts have been formed. Scandlen says the restrictions have inhibited the growth of MSAs unnecessarily. He also disputes the notion that such accounts are only for the wealthy and healthy, citing research by the Rand Corporation showing that MSAs have broad appeal across income groups.

Now, there is reason to believe that the vision of MSAs may not have faded entirely. One patients' bill of rights proposal, sponsored by Republicans in the House of Representatives, contains a provision that would remove the restrictions currently imposed on MSAs. And during his campaign, President George W. Bush expressed support for medical savings accounts.

Scandlen also says that some businesses confronting high employee healthcare costs are beginning to develop MSA-like products for their workers -- even if they are not being called medical savings accounts.

"The same notion is taking on different forms," Scandlen says. "When HIPAA first passed, most [employers] were moving toward managed care. In the past five years, that attitude has changed dramatically. Now large employers are thinking that some kind of cash account for employees to pay directly for services makes sense."

Still, he acknowledges that only 20-25 insurance companies are offering MSA products -- most of them small companies that still offer indemnity-style insurance. "Until the big guys get in, I don't see a lot of growth," he says.

So while they are not the hot ticket they were five years ago, MSAs should probably be kept in sight -- if only out of the corner of one's eyes.

Are they good for you?

"They are good for the wealthy, and they are relatively good for the healthy as long as they remain lucky and don't get sick and can accumulate enough to cover their deductibles," Nichols tells WebMD. "There are some cases where people who have a chronic illness but have relatively low expenses can benefit because the premium is lower and the contribution is tax deductible."

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