Medical Savings Accounts Miss the Real Problem

By Michael Fumento

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Copyright 1996 Michael Fumento

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To Republicans, it’s the greatest hero since John Wayne. To Democrats, it’s the worst villain since the last character that Dennis Hopper played. The contention now threatens to destroy the health care bill before Congress — Bob Dole’s last major piece of legislation as Senator. But a new study out from the prestigious Santa Monica-based Rand Corporation says it’s all much ado about, well, very little.

The issue is medical savings accounts (MSAs). Under an MSA plan, an employer would pay for a "catastrophic care" policy covering all or most costs above a specific amount each year — $1,500 per individual or $3,000 per family in the House of Representatives’ health insurance bill.

Under employer-funded plans, the employer puts a certain amount into an account for the employee, which the employee could use to pay health care expenses under that catastrophic care level. With employee-funded plans, the employee is responsible for the money in his MSA account and may be responsible for the catastrophic coverage as well.

The amount put in would be tax-free. Any that is unspent could be carried forward to the next year and eventually withdrawn for other purposes at retirement.

Republicans have claimed that MSAs could make a huge dent in the nation’s health care spending by making people buy carefully and forego some unnecessary services in the hope of building up an ever larger balance in the account. That’s why they, led by Dole, have tried to make it part of the Senate bill as well.

But President Clinton has threatened to veto such a bill and Sen. Edward Kennedy (D.-Mass.), a co-sponsor of the Senate’s health care reform bill, says that Dole’s support for MSAs threatens to torpedo the whole package.

The Democratic claim is that healthier and wealthier people will abandon current fee-for-service and HMO health care plans and opt for the MSAs, leaving behind only people with low incomes and chronic health problems. Without the premiums of the healthier people who have bailed out of the system, the less-healthy ones left behind will see theirs go up.

One should be asking at this point if healthier people have an obligation to subsidize less-healthy ones. But in any case, the Rand study says that Republicans’ hopes and Democrats’ fears both have little foundation.

The Democrats’ fears? Basing its findings on a sophisticated computer model, Rand concluded that, indeed, employer-funded MSAs are a lure to healthier people. But MSAs funded by employees themselves are more attractive to sicker people because the deductible isn’t that high once you factor in the tax subsidy. The $1,500 cap is pretty generous compared to most fee-for-service plans.

The result is pretty much a wash.

As far as people with more money choosing MSAs, again that depends on whether the plan is employer- or employee-funded. People using employee-funded MSAs do tend to have higher incomes, but those choosing employer-funded ones have below-average incomes.

The Republicans’ hopes? Rand found that at best MSA legislation would reduce national health spending by about 2 percent; at worst, none at all. "The reason why the House bill’s MSA does so little to discourage health care utilization is that account holders’ out-of-pocket costs are relatively low after factoring in the tax exemption," explains lead Rand researcher Emmett Keeler.

The basic problem with both MSAs and the current program of allowing health care deductions, either way you’re still subsidizing health expenditures. When you subsidize something, you get more of it. We are now subsidizing health care to the tune of $60 billion a year.

"The more generous the insurance, the less cost spending discipline it imposes," says another Rand researcher who worked on the study, Jesse Malkin. "If you try to argue that MSAs are a good deal for sick people, you can’t at the same time argue that they would contain costs."

Subsidies do, however, serve the purpose of the powerful health care industry, which doesn’t mind people paying for things they don’t need.

"The real solution to reducing health care costs," Malkin told me, "is to eliminate the subsidy for all health insurance. "Just tax employer-provided health insurance premiums as income and use the extra revenue generated to lower other taxes so it’s revenue neutral. That would remove the incentive to buy low-deductible plans and MSAs would be unnecessary."

Malkin points out that subsidizing insurance not only increases health care costs, it’s also unfair to poorer people because they are in lower tax brackets — hence a tax deduction is worth less to them.

"If you are a low-wage worker and have a $1,000 health plan, that’s only worth $150 because you’re in a 15 percent bracket," he notes. "But if you’re a lawyer earning $60,000 a year, your top bracket is 31 percent and so it’s worth $310 to you." The burger flipper subsidizes the lawyer.

"The richer you are and the more you spend on health insurance, the more you’re subsidized," says Malkin.

If the Democrats and Republicans had the guts, they’d implement real health care reform and cut subsidies. Alas, guts are in short supply in an election year.


Read Michael Fumento’s additional work on legislative issues and on financial issues.