Health Nuts

How Congress kept me from giving my employees Medical Savings Accounts

As a newspaper columnist and a writer for national magazines, I have spent the past several years advocating medical savings accounts as one solution to the nation's health care problems. MSAs would allow individuals (and participating employers) to put tax-advantaged money into special accounts from which they could pay routine medical bills; major medical problems would be covered by high-deductible, low-premium catastrophic insurance plans. I've absorbed and employed all the standard arguments for MSAs–that the special tax treatment given employer-provided health insurance is distorting the market, that MSAs would increase consumer choice, that they would reduce administrative expenses and simplify medical purchases.

As it happens, I am also the president of the John Locke Foundation, a nonprofit think tank that provides health insurance coverage to nine employees with a wide range of ages and health conditions. If any small business could benefit from the MSA option, you would think it would be ours. But you would be wrong.

When last year's ghastly Kassebaum-Kennedy health insurance bill passed Congress, one item was worth cheering: a test of MSAs in the small-group market. Beginning January 1, 1997, self-employed persons and firms with 50 or fewer employees could purchase MSA-based health insurance policies. These policies can have deductibles of up to $4,500 per family and allow both employers and employees to make deposits into MSAs, from which subscribers can draw to pay for routine medical care. Three-quarters of all money deposited into MSAs is tax-deductible, thus helping to equalize the tax treatment of wage compensation (such as cash or MSA deposits) and nonwage compensation (such as insurance premiums). This is not a "use it or lose it" program: Any balance remaining in an individual's account at the end of the year continues to accumulate.

The MSA program is a test, not a permanent change in policy. The test period is four years, and the number of individuals who can participate is limited to 750,000 nationally.

Depending on whom you listen to, the MSA test has been either a bonanza or a bust. Knowledgeable observers believe that some 100,000 people have chosen MSAs. While that's a lot of customers for a new product–a leading MSA advocate, Golden Rule Insurance, has itself enrolled nearly 30,000 people–it is only a hiccup in the context of millions of potential customers. No one really knows what the long-term trend in MSA enrollment will be, but it is fair to say that MSA advocates (including me) expected a lot more interest at the outset.

MSA opponents have seized on the underwhelming early results of the MSA test to proclaim the concept irrelevant at best. But based on my own experience as a would-be MSA customer, the problem lies not with the idea of MSAs but with the design of the test.

Earlier this year, I set out to look for MSAs for the Locke Foundation. I learned a lot. First of all, talking to insurance agents about MSA plans available in my area was like pulling teeth. Part of the problem is that most independent insurance agents who sell health coverage to firms like mine make their money by taking a commission on the first year of premiums. Since MSAs are combined with high-deductible insurance policies that have correspondingly lower premiums, agents who rely on such commissions aren't likely to be wild about MSAs. Of course, insurers could change their compensation structures to eliminate this disincentive, but that will probably take some time and experience.

Commissions are not the only financial disincentive. Acquiring the information required to sell MSAs is an expense that many agents have apparently not chosen to pay. I discovered that, while some agents may not have liked MSAs in the first place, many others were simply ignorant about them. I found myself explaining the benefits of MSAs to agents purportedly trying to sell them to me–not exactly a typical buyer-seller relationship.

In defense of insurance agents, however, the limitations placed on the MSA test are probably the main culprit. A product that can be sold only to a limited category and number of customers, and only during a test period, is a product unlikely to interest potential sellers with money to make elsewhere. Not surprisingly, while many large national insurers have come up with MSA products, few have designed serious training and marketing programs to make them competitive.

In my case, I finally found an agent who understood MSAs and could give me some real information about policies and prices. Then I really got a shock. The most competitive alternative would have cost us hundreds of dollars more a month than our current insurance plan, which combines traditional deductibles and copayments with a preferred provider network. The reason? Like many small firms in similar circumstances, we are enrolled in a purchasing alliance–in our case provided as a perk of membership in the local chamber of commerce–that allows us to receive price breaks through bulk buying.

The alliance we belong to is made up of about 370 firms and covers some 4,000 workers and dependents in the Southeast. Insurers bid to cover members of the alliance, and we have a choice of winning bidders. The prices we are able to command through this arrangement–which, I hasten to add, is purely voluntary and does not require Hillary Clinton's sanction or aid–are lower than the best price I could find for an MSA plan for our nine-person group. That disparity is part of the plan, it seems: The MSA test rules forbid the creation of analogous alliances.

Another surprise was how MSA plans have to be structured under federal law. Rather than having direct access to a savings account and thus being able to pay directly in cash for routine services, MSA administrators have complete control over disbursements. So even though you are using an MSA, you still have to file a claim with your insurer and wait a while for your reimbursement check. Maybe such a system is inevitable, given the need to guarantee that the tax deduction be taken only for medical expenses, but it certainly takes away a major selling point of MSAs to average consumers tired of playing the claim game with insurance companies.

Even with all the barriers that Kassebaum-Kennedy put in front of MSAs, they will still provide hundreds of thousands of Americans with a new way to purchase health care and save for the future. This is a real achievement, but in order for it to have a broad effect on the health care marketplace some changes are needed. Here are some ideas:

• Junk the time limit and the enrollment cap. The slow start we have seen in MSA enrollment is really an excellent argument for getting rid of the four-year limit and the 750,000 cap on subscribers. Congress should also repeal the enrollment cap of 390,000 on the Medicare MSAs included in the budget deal with President Clinton.

As I noted earlier, it is quite likely that many companies and agents have made the rational decision not to make costly investments in time and resources to market a product with a circumscribed customer base. While many people who follow health care policy closely understand the MSA concept (even if they don't like it), most people I know really don't get it at first. You have to take some time to explain carefully how it would work and how the tax benefits, in particular, may be significant even if they aren't immediately obvious. It is unfair to expect potential MSA vendors to develop cheap and effective ways to market this somewhat complicated product if enrollment is capped and time-limited.

Furthermore, MSA opponents have celebrated too soon about the relatively few people who have chosen MSAs so far. The small number actually weakens their argument for limiting the test. After all, if consumer interest is so tepid, what need is there to cap enrollment to protect existing insurance pools from the mass exodus of young, healthy people that MSA critics worry so much about?

• Allow large groups, including alliances of small firms, to choose tax-deductible MSAs. The logic of allowing only small firms and the self-employed to choose MSAs was never clear to me. Because large employers often have full-time employees devoted to studying benefits and getting the best deals, the subtle advantages of MSAs are more likely to be appreciated there than in small firms where managers (like me) have many other demands on their time. Even so, Congress would fix the problem many other small firms like mine are having by letting purchasing alliances include MSAs without penalty.

• Allow all firms, large and small, and individuals to set up "back-ended" MSAs. Like the so-called back-ended IRAs included in the federal budget deal, back-ended MSAs would scrap the tax-deduction for deposits into savings accounts but allow savings to accumulate tax free and be withdrawn later without tax penalty.

The only real difference from the current tax code would be that investment earnings in these MSAs wouldn't be taxed, so they won't save depositors nearly as much as the "front-ended" MSA would. On the other hand, maybe such a reduced tax benefit could be paired with direct access by depositors to their funds, so they would write checks or swipe debit cards from their MSA at the doctor's office rather than having to file claims and wait for reimbursements.

As my own experience has demonstrated, making MSAs truly a competitive product in the insurance market means more than inserting a limited test into a bill. It means making it clear to employers, workers, and insurers that MSAs are here to stay and available in some form to just about everybody. Any test short of that will be inherently rigged against success. Medical savings accounts, an idea with so much potential, deserve better.

Contributing Editor John Hood ([e-mail]) is president of the John Locke Foundation, a state policy think tank based in Raleigh, North Carolina.