by Gail Perry

Once the darling of the health insurance options, medical savings accounts were launched in 1997 with much fanfare and an appeal to self-employed workers and small employers who were feeling the crunch of rising health insurance costs.

With significantly less fanfare, the MSA program ended on Dec. 31, 2003. Was it a failed experiment, or a clever way to lay the groundwork for a new program with broader appeal?

The MSA program, part of the Health Insurance Portability and Accountability Act of 1996, was introduced as a four-year “demonstration” and was limited to 750,000 participants — a limitation that proved to be unnecessary, as nowhere near that many plans were created.

Designed to provide an insurance alternative to those who weren’t eligible to join the more cost-effective large group health plans, the MSAs were only available to self-employed individuals and employees of companies with an average of 50 or fewer employees.

The MSA program offered an enticing tax-free savings account that, coupled with a high-deductible health insurance plan, provided the opportunity to self-fund medical costs that were not covered by health insurance, and to carry unused amounts forward to future years. It was the carryover feature that set MSAs apart from the more familiar Section 125 plans or health reimbursement arrangements, with their use-it-or-lose-it characteristic, and the tax-free status made the MSA appear similar to the popular individual retirement account as a retirement savings vehicle.

Another major distinction of MSAs was the exorbitantly high deductible required of participants. To take part in an MSA, the insured had to participate in a health insurance plan with a much higher deductible than those typically found in company health plans. Individual insureds faced a minimum annual $1,700 deductible, and for families the deductible had to be at least $3,450. Annual contributions to the MSA were then limited to 65 percent of the deductible for individuals, or 75 percent for families.

Many insurance providers were quick to jump on the bandwagon when MSAs were unleashed, encouraged to find a new type of plan to offer individuals and small businesses. They were also enthusiastic because MSAs offered an opportunity to charge administrative fees and premiums.

But for many providers, MSAs were a hard sell. Not only were the high deductibles a deterrent, but the whole process of paying for medical expenses that weren’t covered by insurance with funds from a tax-deferred savings account was a mystery to many.

The general public “didn’t understand what [the MSAs] were or how they worked,” said Jo Ann Sporleder, media services manager for Indianapolis-based Golden Rule Insurance Co. “They were used to plans where you have a use-it-or-lose-it” requirement.

The public wasn’t the only problem. The higher the deductible on a health plan, the lower the premium. Lower premiums are nice for consumers, but a deterrent for insurance companies and their sales forces. “We had the biggest problem with our brokers,” Sporleder noted. “If a broker sold an MSA, the premium was much less, and therefore they’d rather sell another plan,” something other than an MSA.

The “Westat Report on Surveys of Insurers,” an independent report on MSAs commissioned by the U.S. General Accounting Office, described other broker complaints. According to the report, “Brokers need more training to sell qualifying plans effectively because of the added complexity of the tax effects of MSAs.” The Westat report also found that the average time spent by a broker in selling an MSA was longer than the time spent selling other types of health plans. Lower commissions, additional training and the longer time required to make the sale combined to make many brokers disinclined to devote efforts to the MSAs.

Perhaps the biggest obstacle to selling MSAs was the trial period itself. Because the program was launched as a test and there was no guarantee that MSAs would even be available after the initial four-year trial period (later extended to seven years), there was reluctance to sell the plans. “There was no real commitment to the MSA program,” said Dick Soules, product manager for Portland, Ore.-based MyHealthBank, a developer of consumer-driven health care software solutions.

Rob Guilbert, corporate communications vice president for Milwaukee-based Assurant Health, the leading provider of MSAs, agrees. “It makes it a lot tougher [to sell MSAs] if you don’t know if these vehicles will remain in existence.”

There’s no denying the advantages of MSAs. Tax-deductible contributions coupled with tax-free earnings provide a big draw. The money can be left in the fund beyond the end of the year, to be used for your choice of large or small medical expenses or saved for medical expenses in retirement. Also there is the ease of making claims. “They were very simple, because there was no adjudication,” said Soules.

While there is no requirement that MSA account holders move their funds into alternative health plans so far, most providers are encouraging a switch to the new health savings accounts, or HSAs.

“They may continue with the MSA if they want, but they are not allowed to contribute more than the 75 percent (for families) or 65 percent (for individuals) of their deductible, so why wouldn’t they want an HSA where they could put in the whole amount if they wanted to?” said Sporleder.

Golden Rule sent a letter to all MSA participants last December saying that their accounts would be switched to HSAs after the first of the year unless the participants specifically requested that their funds remain in an MSA. Fewer than 100 MSA account holders called with questions, and in the end, they all agreed to make the switch.

HSAs, unlike their MSA predecessors, are here to stay, permanent fixtures in the repertoire of available health plans. Taking the advantages of MSAs and learning from the MSA problems, HSAs offer lower minimum deductible requirements on health plans (and thus possible higher premiums for insurers), ease of use, global participation, and popular support among consumers, insurers and legislators. The latest news on HSA accounts is that President Bush has added an item this year in his proposed budget to allow above-the-line tax adjustments for premiums paid for taxpayers with HSAs.

Self-funded medical plans provide an incentive to pay more attention to how much money is being spent on health care, a first step toward controlling health spending. “It puts consumers at the front of the health care spending equation,” said Guilbert. “If you as a consumer have an account that can grow, you’re certainly going to be more cognizant of how you spend it.”

Sporleder described workplace situations where employees in a use-it-or-lose-it health reimbursement plan scurry around at the end of the year, trying to find ways to spend their available health plan money on health expenses they might not necessarily need.

Whether it’s with an MSA, lingering on after the Dec. 31, 2003, cutoff for new accounts, or an HSA, there is control over the money being spent. With a self-funded plan, “The person questions what needs to be done,” Sporleder said. Rather than trying to spend all the money in a plan each year, people with self-funded plans tend to shop around for the best price and conserve the money for needed tests and exams.

The mentality behind medical spending necessarily changes when it’s your own money being spent. “I think that now that I am controlling those dollars, and those dollars are portable so I can save them for retirement health expenses, and long-term care expenses,” said Soules, “it’s in my best interest to use it wisely.”

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