Medical Savings Accounts -- a Bad Idea (1996)
Legislators, health care experts, employers, and other interested parties across the country are debating a new health care scheme called medical savings accounts, or MSAs for short. An MSA is a combination type of health coverage that includes a tax-advantaged savings plan from which funds are drawn to pay for routine medical expenses, and a catastrophic health plan with a very high deductible. An MSA is not a comprehensive health care plan.
Proponents of MSAs claim that they will make individuals better health care consumers because they will have a financial incentive to spend the money in their MSA accounts wisely. Opponents claim that MSAs will drive up the cost of comprehensive health care plans, jeopardize the goal of making affordable health care available to every American, drain revenues from public sector coffers, and provide a new tax break disproportionately benefiting high income taxpayers.
MSAs are being promoted by some health insurance companies and through state and federal legislative proposals. Currently, at least 15 states have passed MSA legislation which exempts employer and/or employee contributions from state income taxes. Those states are Arizona, Colorado, Idaho, Illinois, Indiana, Michigan, Mississippi, Missouri, Montana, New Mexico, Oklahoma, Utah, Virginia, Washington, and West Virginia.
The MSA concept is also finding support at the federal level, especially by conservative politicians who have introduced various bills to make MSAs exempt from federal taxation. To date, no federal legislation has been passed.
Employers in a number of AFSCME-represented jurisdictions have proposed MSAs as an alternative to traditional comprehensive health benefit coverage. At first glance, MSAs may be appealing, but a more in-depth analysis reveals that they are a bad idea.
How do Medical Savings Accounts work?
There are two types of MSAs: the employer-deposit MSA and an individual-deposit MSA. AFSCME is very concerned that employer-deposit MSAs would threaten the financial viability of our negotiated health plans. While individual deposit MSAs may not have the same effect on our health plans, they would reduce the revenues available to fund public sector jobs.
Employer-Deposit MSA
An employer-deposit MSA is a two-part plan that includes a medical savings account, similar to a tax-free Individual Retirement Account (IRA), and a catastrophic health plan with a very high deductible. The employer contributes a specified dollar amount to each employee's MSA account each year. Employees draw on those funds to pay for "ordinary and routine" medical expenses, up to the amount contributed. Much of the state legislation passed thus far limits tax-free contributions to $2,000 to $3,000 per person per year, with an additional limit on the total family contribution.
On the surface, MSAs look like Internal Revenue Code Section 125 plans, commonly known as flexible spending accounts (FSAs). Under FSAs employees can contribute pre-tax money to the FSA account to pay for medical expenses not covered by insurance. Money not used to pay medical expenses during the year is forfeited to the employer at the end of the plan year. FSAs and MSAs are two entirely different types of plans. FSAs are an effective way of allowing employees to use pre-tax dollars to pay for medical expenditures beyond those covered by an existing comprehensive plan and AFSCME continues to encourage such programs. While MSAs are promoted as a way to save pre-tax dollars for future medical expenditures, much of the state MSA legislation allows expenditures for other purposes. A number of states allow employees to withdraw funds above a specified threshold without a tax penalty, allow penalty-free withdrawals at the end of the business year or upon reaching a certain age, or apply only a modest penalty for non-medical use. Most, if not all, of the federal proposals allow penalty-free withdrawals at some specified age. Therefore, although these plans are promoted as health care plans, they are actually tax-advantaged savings vehicles which would tend to diminish health benefit options rather than increase them. Regular taxes are, of course, paid on funds upon withdrawal.
The second portion of the MSA, the catastrophic health insurance plan, covers the costs of more major expenses, following the payment of a substantial deductible, at least $1,800 per year for individual coverage and $3,000 per year for family coverage. Under employer-deposit MSAs, a portion of the deductible would be met with the money contributed to the MSA account by the employer.
At the federal level, some proposals require the employer to contribute into each employee's account the difference between the premium cost of any comprehensive health plan offered to employees and the catastrophic plan. For example, if the comprehensive premium were $3,000 per year and the MSA catastrophic premium were $2,000 per year, the employer would be required to deposit $1,000 per year into the employee's MSA account. It appears that most, if not all, state legislation simply establishes an annual maximum contribution that the employer is permitted, but not required, to make to employees' MSA accounts.
So What's Wrong with Employer-Deposit MSAs?
Employer-deposit MSAs would create serious problems for comprehensive health benefit plans for several reasons:
- Younger, healthier employees who use few, if any, of their health benefits would be likely to select the MSA over the comprehensive plan. This would be particularly true if the MSA allows unspent funds to be used for purposes other than medical expenses at some point in time. Those individuals remaining in the comprehensive plan would tend to be older and sicker, eventually driving up its cost, because of the group's greater medical needs.
Most or all of the MSA legislation prohibits all plans from imposing pre-existing condition clauses. Therefore, employer-deposit MSAs would allow employees to "game" the system by electing the MSA/catastrophic plan option when they expect few health care costs and then switching to the comprehensive plan when they expect higher costs, such as starting a family or having surgery. - Under an employer-deposit MSA, the employer would make the same contribution to each employee's MSA account, without regard to individual health care expenditures. Most people covered under group health plans incur medical expenses that are substantially less than the total premium paid. That is exactly how the health plan covers the cost of the minority of employees who do experience costly illnesses or injuries. Premiums paid by the healthy, or on their behalf, subsidize the cost of covering those who are sick. MSAs provide unearned windfalls to the healthy at the expense of the sick.
- MSAs discourage preventive care through their financial incentives to accumulate money in a tax-advantaged account. Without preventive care, medical costs will eventually increase, since diseases and illnesses will be more advanced and, therefore, more costly to treat once detected.
- Many insurers and large health care purchasers negotiate discounts for their covered groups. Under an MSA plan, where individuals are left to their own devices to "find the best deal," group-negotiated rates would not be possible. There would also be fewer covered individuals left in the comprehensive health care plan, so bargaining power for discount rates would be reduced.
- Most of the state MSA legislation defines an eligible medical expense as one considered eligible under the Internal Revenue Code (IRC). The IRC definition of an eligible medical expense is likely to be more expansive than the insurer's definition of eligible expenses in a particular plan. Employees may incur medical expenses expecting to pay for them with MSA funds only to learn that they are not reimbursable under the MSA and do not count towards meeting the deductible under the catastrophic plan. For example, eye and dental care is considered a qualifying medical expense under the IRC but may not be an eligible expense under the insurer's plan.
- Since employer contributions to the MSA account will likely be limited to the difference between premiums for the comprehensive insurance plan and the catastrophic MSA plan, or less, employees may not accumulate enough in the MSA to cover the high deductible for several years. According to the Congressional Research Service, "increasing a $200 deductible to $1,500 would reduce premiums by approximately $500 per year, not $1,300". Without sufficient time to accumulate funds in the MSA account, an unexpected illness or a serious chronic disease could leave an individual without the funds to pay his or her medical bills.
Individual-Deposit MSA
Under an individual-deposit MSA, taxpayers can contribute money, up to the amount specified in the particular state's legislation (and up to the federal limit if federal legislation is enacted) to a tax-advantaged MSA. Like the employer-deposit MSA, the money in the account can be used to pay for routine medical expenses. Depending on the legislation passed, the money may or may not be used for other purposes without payment of a penalty. However, as with the employer-deposit MSA plans, individuals must always pay regular taxes on withdrawals for purposes other than the payment of medical expenses. Generally, the individual must maintain coverage under a catastrophic health plan to be eligible for participation in the MSA.
While individual-deposit MSAs would not adversely affect our negotiated comprehensive plans, they would unfairly provide large tax breaks to high income taxpayers while draining state and/or federal resources needed to fund public services.
Winners and losers
Employees with little or no health care costs would be the winners under both employer-deposit and individual-deposit MSAs—at least in the short run. Those individuals would be able to use the MSA as a tax-advantaged retirement savings plan. However, when those healthy individuals become older and sicker and need a health plan that offers real financial protection, the comprehensive health plan may no longer be affordable. Most healthy people will be covered by the catastrophic plan, leaving the comprehensive health plan with a sicker, high-cost group, driving up its premiums substantially.
High income taxpayers would also win under MSAs while the poor and middle class would lose. An analysis by the Center on Budget and Policy Priorities concluded that MSAs, without employer mandates, would offer no advantage to poor families that do not owe income taxes and would probably adversely affect such families. Since MSAs would increase the overall cost of health care, the government cost of health care subsidies would also increase. The higher costs would likely be passed to low income families in the form of subsidy cuts.
High income taxpayers would also reap the largest benefit from tax-free investments because they are in a higher tax bracket and are likely to have discretionary income to contribute to individual-deposit MSAs. The Center on Budget and Policy Priorities analysis points out that prior to 1986, when taxpayers at all income levels could deposit up to $2,000 in an Individual Retirement Account and deduct the contribution from their taxable income, "82% of IRA deductions were taken by the one-third of individuals with the highest incomes."
MSAs, without employer mandates, would offer little, if any, benefits to moderate income families. It is unlikely that such families would have adequate resources to take advantage of an individual-deposit MSA plan. In fact, MSAs would likely adversely affect such families because the comprehensive plans could become unaffordable to all but the wealthy.
The analysis also points out that: "Since virtually all those who would benefit from MSAs can afford excellent health insurance under the current system, individual-deposit MSAs are not likely to contribute to the goal of making affordable health care coverage available to every American. Rather, they are likely to make the goal harder to reach by driving up the cost of comprehensive care." Rather than benefiting from MSAs, as supporters contend, those with no health insurance would instead be worse off under the MSA concept.
In spite of these and other findings, proponents continue to tout MSAs as the solution to the health care crisis.
What can you do?
If MSA legislation has not passed in your state, watch for proposals to allow MSAs and lobby to defeat such bills. Educate your membership about the problems with MSAs through newsletters and meetings, and encourage members to voice their opposition to their legislative representatives.
If MSA legislation has already passed in your state, educate your employer about the pitfalls of these plans and fight any proposals to include MSAs as an option to traditional health plan coverage.