July 21, 1998

Medical Savings Account Proposal Poses Serious Risks
To Insurance Market and to less Healthy Individuals
While Providing New Tax Shelter for High-income Taxpayers

Republican proposals recently introduced in both the House and Senate as part of managed care legislation risk driving up health insurance premiums for individuals who are less healthy than average in order to fund a proposal that is, in significant part, a tax cut for the affluent. This is the likely result of the provisions included in House Republican "Patient Protection Act" (H.R. 4250) and the Senate Republican "Patient Bill of Rights" (S. 2330) that would allow universal access to Medical Savings Accounts and remove a number of safeguards included in the MSA demonstration project currently underway.

The bipartisan Health Insurance Portability and Accountability Act of 1996 established a demonstration to test and evaluate Medical Savings Accounts, which are tax-advantaged personal savings accounts that may be used by persons covered by high-deductible health insurance policies. The demonstration is designed to provide information about the effects of MSAs on workers, employers, and insurers without creating widespread irreparable harm to any of the participants or to the insurance market as a whole. Participation in the demonstration is limited to no more than 750,000 participants who are employees of small businesses (businesses with 50 or fewer employees) and self-employed persons. The demonstration is scheduled to run through December 31, 2000, after which time Congress could consider the evaluation authorized by the 1996 law and determine future policy.


Proposed Changes

The House and Senate bills would end the MSA demonstration and make a number of changes to the current law governing use of MSAs.

Finally, by ending the MSA demonstration now, before enough time has elapsed for employers and individuals to gain experience with MSAs, the Republican leadership proposals would insure there is no way to evaluate the impact of MSAs. The MSA changes these bills would make would heighten the probability both of adverse selection that harms less-healthy people and of more extensive use of MSAs as tax shelters by the affluent. But without a demonstration and evaluation, these problems might not be evident to policymakers until the damage was largely done. By that time, the damage — particularly to the availability and cost of conventional, low-deductible insurance — could be irreversible.

End Notes:

1. Emmett B. Keeler, et. al., "Can Medical Savings Accounts for the Nonelderly Reduce Health Care Costs?" JAMA, June 5, 1996, p. 1666-71; Len M. Nichols, et. al., Tax-Preferred Medical Savings Accounts and Catastrophic Health Insurance Plans: A Numerical Analysis of Winners and Losers, The Urban Institute, April 1996; and American Academy of Actuaries, Medical Savings Accounts: Cost Implications and Design Issues, May 1995. The conclusions of these studies are summarized in Iris J. Lav, MSA Demonstration: Research Suggests Controls Needed To Prevent Adverse Affect on Insurance Market, Center on Budget and Policy Priorities, July 10, 1996.