Fifteen states have passed legislation backing medical savings accounts, a concept many consider a boutique approach to healthcare reform.
However, medical savings accounts, or MSAs, could come into the mainstream if Republicans succeed in passing legislation that was introduced earlier this month on Capitol Hill.
Although MSAs had been floated last year in Congress, the movement got a heavy hitter this month when Rep. Bill Archer (R-Texas), chairman of the powerful House Ways and Means Committee, stepped up to the plate, introducing a bill that would allow consumers to pay for healthcare through the tax-free accounts. Either individuals or their employers could contribute funds-$2,500 a year-to the accounts; any medical bills would be paid from that account. However, bills of more than $2,500 for an individual or $5,000 for a family would be covered by a catastrophic health insurance policy. In addition, consumers could deduct the cost of the catastrophic policy from their federal taxes.
Several of Archer's influential Republican colleagues also have come out in favor of MSAs, including Senate Majority Leader Robert Dole of Kansas, House Speaker Newt Gingrich of Georgia and presidential aspirant Sen. Phil Gramm of Texas.
Even so, the legislation faces strong opposition. The bill's backers range from big business to farmers and physicians, but they'll run up against a powerful HMO lobby that views MSAs as the antithesis of their brand of healthcare reform.
So far, several states have passed MSA bills. Most recently, Texas passed a bill that allows a pilot project in MSAs for Medicaid recipients.
Most of the state legislation, however, centers around the commercial population, allowing individuals to deduct MSAs from their state taxes. But state taxes are a drop in the bucket compared with the bite Uncle Sam takes each year. If a federal tax deduction is allowed, MSA supporters say consumers will have the financial incentive they need to buy into the program.
Many insurers are ready to launch MSA products once the federal legislation passes.
However, one company isn't waiting. Medical Savings Corp., a Memphis, Tenn.-based company, plans to begin marketing its product next month. Started by a group of physicians, Medical Savings began early to customize its own information system and finalize contracts with insurers.
Because information systems didn't exist for this type of product, the company had to build its own from scratch. But now "we will have the opportunity to take that program nationwide," said Darrell Burnett, the company's chief administrative officer.
Here's an example how the product would work. A 49-year-old female would pay $500 a year for a catastrophic health policy that would have a $1,500 deductible and a $2 million lifetime claims limit. Bills up to $1,500 would be paid through funds in the woman's medical savings account. Either the woman or her employer would put about $2,000 a year into the account each year. Money would be allowed to accumulate in the account year after year, but any nonhealthcare use of the funds would be taxable.
To help individuals keep up with their medical bills, the company has contracted with Union Planter National Bank in Memphis for a credit card that account holders could repay each month using funds from the MSA.
When Burnett was presenting the idea to bank officials, two vice presidents were so excited about the idea that they wanted to start doing it themselves, he said. "It has a strong appeal," he added.
Tennessee is one of the states that hasn't approved the use of MSAs, but Burnett isn't worried about that. Most of the legislation in other states simply allows an individual to deduct the cost from their state taxes, and Tennessee doesn't have a state income tax.
MSA supporters tout the accounts as a way to reduce overall healthcare costs. For example, they contend MSAs will alleviate much of the administrative cost in healthcare (See chart).
Burnett cites studies that show that 90% of Americans have healthcare costs of between $2,000 and $3,000 a year. If most of those costs are paid from an MSA rather than being filtered through conventional insurers or third-party administrators, the cost savings would be substantial.
The Council for Affordable Health Insurance, a coalition of 30 insurers that supports MSAs, puts the savings at $50 billion over a five-year period. Included in those savings are the costs of selling, underwriting, premiums taxes, actuarial and other insurance functions.
Not included are savings they attribute to consumer buying power. When consumers must pay bills out of their own savings accounts, they'll be more prudent buyers than when a third party picks up the tab. When that's figured in, the council estimates savings could total $240 billion over five years.
But what if consumers become so frugal some just won't pay?
That's the worry of some providers. In fact, when MSA legislation was debated in the Montana Legislature this year, the Montana Hospital Association pushed for an amendment that would allow providers to put a lien on MSAs.
"We were afraid it might increase bad debt," said Robert Olsen, the association's vice president. "It's at their leisure to pay and not pay."
The bill passed the Legislature without the lien, but hospital officials aren't too concerned about the impact.
Under the Montana legislation, which becomes effective Jan. 1, 1996, individuals can subtract from their gross income principal and interest from an MSA of up to $3,000 a year. Since most inpatient hospital bills cost more than that, the impact will likely be greater on lower-cost medical care outside hospitals, Olsen said.