Why Is Consumer Demand For Medical Savings Accounts Lower Than Anticipated?

By Ronald L. Scott

Under a four-year pilot project created by the Health Insurance Portability and Accountability Act of 1996 (HIPAA), medical savings accounts, or MSAs, are available to self-employed individuals and employees of participating small employers. A limited number of participants are part of a study scheduled to end in the year 2000. MSAs are part of an effort to empower health care consumers by allowing an alternative means to pay for health care. However, demand for MSAs has been less than anticipated.

MSAs are tax-free accounts set up to pay for routine medical expenses. Contributions to MSAs are tax-deductible and may be made by individuals or by their employers. Withdrawals from MSAs for qualifying medical expenses are not taxed, and MSA balances carry over from year to year and may earn interest that is also tax-free provided it is used only for qualified medical expenses or remains in the account until the holder is age 65 or disabled.

MSAs are available to employees of a small employer (50 or fewer employees) when they have an accompanying high-deductible (catastrophic) plan, i.e., a plan to cover expenses for unforeseen medical conditions after the policy holder has paid a large deductible. The account is employee owned, and employees retain the full right to withdraw the money at any time for any purpose (though a penalty may be imposed). Ideally, MSAs will make employees conscientious shoppers. MSAs would also save the employer money because employer contributions are tax exempt and are limited to a percentage of the deductible. Proponents of MSAs argue that they give employees the power to choose when, how, and who will treat them or family members on their account. The broad definition of medical expenses also allows MSA owners to pursue alternative methods of healing that might not be covered under standard health plans.

Opponents fear that MSA owners will put off preventive or even necessary medical care, which will result in a greater expense overall. They argue that MSAs are tailored to meet the needs of healthy, employed individuals who will benefit from employer contributions while the unemployed population and others who cannot afford to establish or contribute to their MSAs will bear the burden of higher health care costs. Critics suggest that MSAs might crush the system of managed care by reintroducing unconstrained consumer choice. Critics note that health care costs for the average individual may include a significant percentage of the account limit while the money spent may not necessarily be credited toward the deductible on a catastrophic plan. The purchase of eye-glasses, for example, might not count toward meeting the annual deductible. This creates risk for individuals who cannot afford to make up the difference between the costs not included in the deductible and the maximum deductible amount in the case of illness. Critics also note that the penalties imposed for noncompliance are higher than for IRAs or other tax-deferred accounts.

The United States General Accounting Office (GAO) recently released a report on MSAs that includes results from surveys of insurers. See HEHS-99-34 at http://www.gao.gov/new.items/he99034.pdf. The report confirms that consumer demand has been lower than many in the insurance industry anticipated. One reason given for low demand is the complexity of the combination high-deductible plan/MSA insurance product (for both insurers and insurance agents). A majority of insurers that offer MSA products are not marketing them aggressively, with many insurers adopting a "wait-and-see" attitude.

Since premiums (and therefore commissions) for MSA products are lower than for many other health plans, agents may not be promoting MSAs as vigorously as other types of health plans. In fact, the GAO report found that premiums for some qualifying high-deductible plans have dropped between 1997 and 1998. Even though consumer response to MSAs may not be as expected, the Senate’s Republican Healthcare Task Force announced that it will introduce a managed care reform bill in the Senate that would expand medical savings accounts and allow 100% deductibility of health care costs for the self-employed.