Congressional Budget Office
Briefing on MSAs

Congressional Budget Office Briefing
 Benefits of MSAs
April, 1995

Dan Perrin, Congressional Liaison, The Business Coalition for 
Affordable Health Care
122 C Street N.W. Suite 815, Washington D.C. 20001
Phone: (202) 628-3690, Fax: (202) 628-3698


As representatives of over 900,000 businesses nationwide, the 
Business Coalition for Affordable Health Care seeks to ensure that 
MSAs are included in any reform legislation, and that all Americans 
have tax fairness, i.e. equal treatment under the tax code for their 
medical expenditures if they must or choose to self-insure.

The Business Coalition does not suggest that MSAs are the single 
solution for health care reform, but we strongly believe that MSAs 
should be part of whatever reform package is passed by the Congress. 
MSAs are one of the most broadly supported reform options in this 
debate. In the 103rd Congress there are 17 bills with MSA provisions 
with 167 cosponsors in the House and 38 cosponsors in the Senate. At 
the state level, eight MSA bills were enacted in 1993 and 16 are still 
pending in this year's legislative sessions.

Medical Savings Accounts are an idea whose time has come: 
first, reduce premiums costs by selecting a high deductible policy, and 
second, use the premium cost savings to pay for medical costs which 
fall below the deductible amount of the insurance policy. This concept, 
when combined with the tax deduction now given to most health care 
policies, make MSAs an attractive reform option.

MSAs Lead to Cost Containment

According to "Why Medical Savings Accounts Deserve a Closer 
Look," in the May/June issue of the Journal of American Health Policy: 
"Research has shown that MSA-type insurance plans lower health care 
expenditures markedly, without any negative health effects on 
individuals with such coverage." This conclusion is borne out by the 
experience of many companies who provide MSA type plans to their 
employees:

Dominion Resources, Richmond, VA. Dominion Resources' Vice 
President, Ken Davis, reported in an op-ed in the September, 20, 
1993 Wall Street Journal  that "since 1989, my company's health 
care costs have risen less than 1% a year. . . and we have 
improved and expanded our medical benefits program . . . and 
expanded coverage for preventive and diagnostic procedures." 
These improvements in Dominion's health insurance profile 
occurred during a period in which health claim costs were 
increasing at an average annual rate of 13%.


Forbes Magazine, New York, New York. As Malcolm S. Forbes, 
Jr., Editor-in-Chief of Forbes Magazine who implemented 
an MSA plan at the magazine, wrote in their January 18,
1993 issue, "At time when health insurance premium rates are 
rising an average of 20% to 25%, ours are going down almost 
10%."

	Spurwinck School, Portland Maine. According to Investors 
Business Daily, four of the six years in which the school has 
operated its plan, the price of its health benefit premium dropped.

	Knox Semiconductors, Rockport,, Maine. The President of Knox 
Semiconductors, John Morey, recently told Investors Business 
Daily that Knox's MSA plan has saved his company $100,000 
over three years, which he said "is an impressive number when 
you realize we are a company of 42 employees."

In addition, the Government of Ohio has projected significant       
savings if it offered an MSA program to state employees. Dr. Peter 
Somani, Director of the Ohio Department of Health, estimates that the 
State would save $29 million in annual health-care costs for government 
employees if it offered an MSA program. (See Investor's Business 
Daily.)

In general, the trend for companies or organizations offering 
MSAs is clear: MSAs contain health care costs markedly.


MSAs Constitute Health Care Reform

MSAs are an important option for employers and employees who 
wish to enhance portability, preserve consumer choice, allow retirement 
savings, and contain costs. Tax law should not be allowed to interfere 
with this choice, and should confer the same tax treatment on MSAs as 
it does on traditional insurance programs.

MSAs Will Have a Strong Appeal to Low-Income Wage Earners. 
Companies that have MSAs have found MSAs are most popular 
among lower income employees.  Under conventional insurance 
plans, low-income employees would have to meet their $250 or 
$50() deductible with after-tax dollars before they could access 
their insurance. A single mother earning $14,000 or $15,000 a 
year may find it difficult to meet the deductible when rent, 
transportation, taxes, grocery bills and other needs for her 
children are pressing. An MSA allows these low income earners 
first dollar coverage, permitting them to get medical care when 
they or their children need it. This feature alone could 
significantly reduce the level of emergency room utilization for 
non-emergency care. Low income wage earners would have, in 
effect, first-dollar coverage for medical care up to the amount in 
their MSA.

*	MSAs Enhance Portability.  Should an employee change jobs 
or be laid off or fired, the money in his MSA goes with him. This 
feature of MSAs allows the individual to continue to pay for his 
health care-premium until he finds another job or is accepted into 
his  new employer's health care plan. Indeed, according to the 
above cited article in the American Health Policy "forty-one 
percent of persons losing private health insurance have an 
uninsured spell that ends, within one to three months, and 71 
percent a spell that ends within four months." MSAs are the 
perfect tool to help bridge this gap.

MSAs Promote Consumer Choice. MSAs allow patients to shop 
around, choose their own doctors, and tailor their health care 
expenditures to suit their own individual needs.

*	MSAs Encourage Saving for Retirement Care Costs. As the "Baby 
Boom Generation" ages, the costs of this population's health care 
will increase dramatically. In fact, according to the U.S. Census 
Bureau, the number of Americans most likely to need long term 
care (85 years and older) will double in the next 25 years, and the 
number of Americans over 90 will triple. According to the Health 
Insurance Association of America, in 1992 it cost roughly $3,000 
a month to stay in a nursing home, or $36,000 a year. Allowing 
individuals in their late thirties and early forties to have an MSA 
in which they could build up two or three decades of savings, 
would give these individuals the funds to pay for drug therapies, 
nursing home care, and in-home care. They will not be forced to 
turn to Medicaid or Medicare programs when they need long term 
care, saving the U.S. government hundreds of millions of dollars 
in the future.

*	MSAs Will Stimulate Administrative Savings. When paying for 
routine health care costs, the MSA patient has no forms to fill out 
or claim forms to file. The patient would simply write a check to 
the provider from his MSA, or the doctor would bill the employer 
or insurance company, depending on how the MSA patient's plan 
is administered. In most cases, the provider receives payment 
immediately. The patient's insurance company would not have to 
incur the cost of adjudicating a small claim. It has been estimated 
by Mark Litow, an actuary at Milliman and Robertson, that the 
administrative cost below the deductible amount of the 
catastrophic policy is 2% of the value of the catastrophic policy.
 	Clearly, administrative costs over the high deductible amount, 
once the insurance policy begins to cover the patient, are reflective 
of current administrative costs - which depend on the size of the 
group with the high deductible coverage.

MSAs Will Facilitate Cost Containment. Three anecdotes of 
individuals currently using MSAs programs illustrate this point in 
specific terms: the employee of one company sought a 
consultation with a plastic surgeon after an auto accident. The 
doctor's price for his service, if paid for by insurance, was $900. 
The doctor, however, told the patient that if the employee paid 
cash - the employee had an MSA - his service would cost only 
$200.

Another example: an employee called around to various 
hospitals in his city and found he could have two medical tests 
performed, and the results evaluated for $650 less than his doctor 
would have charged.

In a less dramatic case, an employee needed some fungus he 
picked upon vacation in Mexico removed from his skin. The 
dermatologist suggested local anesthetic for each spot, and looked 
surprised when the patient asked "How much will it cost?" Since 
there were 12 spots, and each spot would cost about $10, the total 
would be $123. The patient tried the first spot without anesthetic, 
and decided to have the rest of the spots without anesthetic.

In each example, the patient intervened to contain costs, 
because the patient was spending his or her own money. 
Juxtapose the attitudes and actions in the above examples with the 
current situation There is a prevalent attitude among both patients 
and doctors that cost is not a consideration because "insurance 
covers it".

Ultimately, MSAs are an efficient means of delivering health care 
because the patient is involved in both treatment and price of treatment 
decisions, which will force doctors to provide their services at 
competitive prices.

MSAs Provide Incentives to Discourage Over-utilization and Incentives 
to Practice Preventative Care.

It will become instantly apparent to MSA users that frivolous 
visits to the doctor will leave less money in their MSA. On (the other 
hand) MSA users also understand that they are rewarded monetarily for 
not getting sick--because they are saving their own money. Therefore, 
the MSA user has the dual incentives to both stay healthy, and to not 
over-utilize health care services.

These incentives have caused concern among some that 
individuals will save money rather than seek care when they need it, 
therefore increasing their expense when they do seek care. This may 
happen in some instances.  However, the experience of companies now 
using MSAs for more than 5 or 6 years - such as Dominion Resources - 
where problems of neglecting preventative care would show up in the 
form of increased insurance premiums, have found that their annual 
premium costs have risen at less than 1% per year. Clearly, this price 
increase is minimal, and actually represents a price cut compared with 
the national CPI medical. Assuming the lack of preventative care would 
reveal itself within five or six years, such minimal price changes would 
not be possible if preventative care was not being utilized by MSA 
users.


Catastrophic Coverage in MSAs Used By a Small Percentage of 
Population

*	MSAs with a $3,000 deductible focus on 85% of Population's 
Health Care Spending:

According to the March/April Journal of American Health Policy    
(pg16) the total claims experience of over 1,000,000 Americans 
studied in 1989 (adjusted to 1994 dollars) was as follows: one-
third of the population filed no claims in that year, 73 percent 
filed $300 or less in claims, 82 percent filed $ 1,000 or less, and 
89 percent filed $2000 or less. In other words, if this group had a 
$2,000 deductible MSA in 1989, only 11% would have met the 
deductible.

The figures above illustrate that while all MSA users pay 
into a pool for catastrophic insurance, the pool must pay claims 
for only 11% of those paying into it. Therefore, the costs incurred 
by the 11% arc covered in part by themselves, but also by the 
other 89% who do not need their insurance policy in a given year.


Medical Savings Accounts Will Not Strain the Federal Budget.

The Business Coalition supports the Roth/Boren MSA 
amendment and H.R. 4410 (Jacobs/Inhofe) and H.R. 3605 
(Jacobs/Archer). Both tax the interest earned on an MSA account. Both 
bills limit the cost of MSA premiums and contributions to MSA 
accounts to the current costs for standard health care coverage for 
participating firms. 

Therefore, since the current law allows the standard health care 
package to be non-taxable, the Federal government would loose no 
revenue if these same funds were applied to an MSA.  In fact, under the 
legislation the Business Coalition is supporting, the Federal government 
would gain revenue from taxing the interest earned in Medical Savings 
Accounts.