The Financial Impact of Medical Savings Account Plans.

What's all the fuss over MSAs? Possibly the best financial alternative in health care around.

The cost of health care in the United States promises to remain a contentious issue into the foreseeable future. Un-funded liabilities in Medicare and Medicaid programs dwarf the financial problems associated with retirement systems such as Social Security. Moreover, following a period of flat/declining premium rates, private-sector health plans are experiencing significant increases in premium costs. The source of this short-lived stability in private health plan costs--managed-care programs--is now under attack, primarily because of the restrictions on patients' rights and perceived declines in health-care quality associated with such programs.

Some observers maintain that only a complete government takeover of the health-care system will curtail these problems. Still others argue that government-run health-care systems such as those in Canada and the UK produce poor health outcomes, long waiting periods, and increased patient dissatisfaction. Given the problems and diverse opinions surrounding these issues, it is no wonder that both major party candidates in the presidential election have made health care a dominant plank in their parties' platforms.

Meanwhile, as the pressure to control health care costs rises, businesses are attempting to find cost-effective alternatives to traditional forms of employee health care coverage. In response, financial analysts, benefit consultants, and academics have suggested Medical Savings Accounts (MSAs) as a solution. In fact, the Internal Revenue Service reported that 11,727 MSAs were opened during the first six months of 1999. Moreover, Republican lawmakers are aggressively pursuing legislation to make them more widely available.

The "MSA solution" involves a return to high-deductible health insurance coupled with all or part of the associated premium reduction being placed in an employee-owned account to be used for low-dollar health expenses. Proponents of MSAs cite several advantages to adopting such a program: (1) because employees are spending their own money, and because the funds remaining in the MSAs belong to them, they are more likely to scrutinize their healthcare choices carefully, allowing market forces to restrict demand and, thus, costs; (2) because the employees become their own "caretakers," the need for the unpopular and restrictive managed-care plans should be reduced; (3) the implicit cost sharing required by MSAs will curtail unnecessary spending on health care; and (4) MSAs allow for greater freedom of choice in providers and services as opposed to the restrictive practices used by managed care plans.

Critics of MSAs argue that unsophisticated consumers may have difficulty making the health care decisions required by this method and thus may invite providers to order unnecessary tests and procedures. Second (and more important), they suggest that the large-scale use of MSAs as a health-care option will lead to a phenomenon known as "adverse selection," which occurs when healthy people opt for MSA plans while people with more health problems retain comprehensive or HMO coverage. The resulting reduction of healthy individuals in the pool tends to result in substantial increases in premiums for non-MSA plans.

Amid these claims and counterclaims, the simple fact remains that there is currently no real-world evidence on outcomes associated with MSA plans. Moreover, many employers, benefit administrators, and even financial analysts are generally uninformed about MSAs and may dismiss the option of including them as part of a health-care benefits package.