Medical Savings Accounts: Power to the People
In offering his health care reform plan last year, President Clinton said that one of his primary goals, in addition to universal coverage, was to control rapidly rising health costs. But ironically, the president's proposal, and similar proposals offered by both Democrats and Republicans, would lead to increased health care spending.
Medical savings accounts (MSAs) are the one reform proposal designed precisely to address the cost-control problem. MSAs allow individuals to set aside money for medical purposes in tax-sheltered accounts similar to individual retirement accounts (IRAs). By encouraging people to self-insure for routine medical expenses, MSAs restore the consumers' incentive to control costs, stimulating true cost-control competition in the marketplace.
MSAs are more than a theory. Despite heavy discrimination against them in the current federal income tax code, MSAs are being used by employers and workers across the country to reduce reliance on traditional third-party insurance. In these private efforts, MSAs have proven highly effective at controlling costs, as well as highly popular among workers.
Perhaps the leading example of MSAs at work is Golden Rule Insurance Company in Indianapolis, Indiana. The company's 1,300 employees have the option of choosing either traditional insurance coverage or an MSA. Traditional coverage includes a $500 annual deductible and 20 percent copayment on the next $5,000 in expenses. An employee's maximum out-of-pocket expense is $1,500 per year.
Alternatively, each worker can choose an MSA. For family coverage under this option, Golden Rule purchases an insurance policy with a $3,000 annual deductible and no copayment. The company then deposits $2,000--roughly the amount it saves each year in lower insurance premiums--in a personal MSA for the worker's family. The worker is then able to tap his or her MSA for the first $2,000 in medical expenses each year. The worker is left with a maximum out-of-pocket exposure of only $1,000--$500 less than in the case of traditional insurance.
Golden Rule first offered MSAs in 1993, and approximately 80 percent of its employees chose that option. In 1994, about 90 percent of the employees chose MSAs. On average, each worker was left with $600 in his or her MSA at the end of last year, an amount that could be withdrawn for any personal use or "rolled over" for future medical expenses. Golden Rule's own health care costs were 40 percent lower last year than projected.
Another company that uses MSAs is Dominion Resources, a utility company in Virginia with two hundred employees. Workers there may choose a standard, low-deductible health insurance policy, or a policy with an annual deductible of $3,000 for families. Workers who choose the high-deductible option save almost $1,100 per year in premiums, which they may keep in personal MSAs.
In addition, Dominion employees whose expenses stay below the deductible receive a share of the company's health care savings. In 1992, the company paid an $800 bonus to each employee who qualified. Employees can also receive a wellness rebate of $600 each year based on five key health factors: blood pressure, weight, smoking, cholesterol, and seat belt use. MSA funds can be withdrawn for any expense, health-related or other, at any time.
Approximately 80 percent of Dominion's employees have chosen the MSA option. Since 1989, when the new system was started, the company's health costs have risen less than 1 percent per year, compared to 20 percent per year for other companies in Virginia. By 1992, the company was underspending its projected health budget by almost one-third. The program is highly popular among workers, who are able to control much of the system's funds directly and gain personally from conserving on health expenses.
The experience of these and other private companies shows that MSAs can bring rapidly rising health costs under control, while preserving both quality and patient choice. Unlike last year's health reform proposal, MSAs shift power and control away from government, insurance companies, and employers to individual consumers. In short, MSAs solve the health cost problem by giving power to the people. Policymakers should fully use this tool to control costs throughout our health care system.
Written for The Heartland Institute by Peter J. Ferrara, senior fellow at the National Center for Policy Analysis. This article is based on Ferrara's recent Cato Institute study, "More Than a Theory: Medical Savings Accounts at Work."