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Commentary

Health Care, but Only for the Young and Healthy

Politics: Medical savings accounts would cause insurance rates to rise for the old and sick.

May 11, 2000|IRIS J. LAV | Iris J. Lav is deputy director of the Center on Budget and Policy Priorities, a Washington-based advocacy group

Bills moving through Congress often become a tangle of complicated provisions, the import of any one of which can be hard to discern. The medical savings accounts expansion grafted onto the Patients' Bill of Rights, a bill that extends new rights to managed care patients, is a good example. The White House is hosting a meeting today to push congressional conferees to finish their work on the underlying bill.

Medical savings accounts may seem benign, but they pack a powerful potential for trouble. That's because they benefit the young, the healthy and the wealthy at the expense of the elderly, the sick and the less affluent.

MSAs are for use only with high-deductible health insurance policies, policies that pay nothing until a family incurs between $3,000 and $4,500 annually in covered medical costs. A current experiment allows some taxpayers buying such policies or their employers to make tax-deductible deposits into an MSA. Earnings on funds on deposit in these accounts are tax-free. Funds that are withdrawn to pay medical expenses are not taxed. If funds are not used and are left on deposit until retirement, taxes are deferred and funds may be withdrawn for any purpose without penalty.

Currently, MSA use is limited to people who are self-employed, work in small businesses or are uninsured. Additional restrictions are placed on amounts deposited to the accounts and on the terms of the high-deductible insurance policies.

The restrictions were put in place because research suggested that MSAs lead to "adverse selection," in which one type of insurance is selected by young, healthy people with low medical costs. When healthy people congregate in the policies used with MSAs, the insurers can charge lower premiums for these policies than they would have to if they were insuring a broader cross-section of the population with varying health statuses.

So what happens to older, less-healthy people, as well as those who do not have the wherewithal to make MSA deposits? They would increasingly be segregated in conventional, low-deductible plans, which would become more expensive. Many individuals who most need insurance could be forced into high-deductible plans and become underinsured or could get priced out of the market and join the uninsured.

Research suggests that if use of MSAs becomes widespread, premiums for conventional insurance could more than double over time. According to the American Academy of Actuaries, "The greatest savings [from MSAs] will be for the employees who have little or no health care expenditures. The greatest losses will be for the employees with substantial health care expenditures. Those with high expenditures are primarily older employees and pregnant women." The General Accounting Office conducted a survey of insurers now offering policies with MSAs and found evidence of the beginnings of just this type of adverse selection.

Despite these concerns, Congress is charging ahead to make MSAs universally available and to relax other safeguards on their use. Both the House and Senate versions of the managed care legislation, currently in conference committee, contain such provisions.

Moderate- and middle-income taxpayers get little tax benefit from making MSA deposits; because of their relatively low income-tax rate, the tax deduction isn't worth much. By contrast, MSAs can be attractive for high-income taxpayers even if they have substantial medical expenses. The tax-free compounding of investment earnings on the funds in the MSA accounts along with deferral of taxation can be advantageous for the well-to-do even if the MSA is primarily used as an investment vehicle and health care costs are paid out-of-pocket.

Indeed, some MSA providers already tout the advantages of MSAs as an investment vehicle. In discussing the entry of Merrill Lynch and other investment firms into the MSA arena, the GAO report took note of "insurers' perceptions that MSA enrollees are using their accounts primarily as tax-sheltered savings vehicles.

MSAs have been sparsely used during the experimental period, partly because the restrictions on MSAs made them less attractive and inhibited marketing. This may lull policymakers into a belief that an MSA expansion is harmless, something that could be traded for better patient protections in other parts of the bill. Such a belief would be mistaken.

The Patients' Bill of Rights has important provisions. But the risks that the MSA provisions pose are so great that it would be better to have no bill than to have a bill that includes them.

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