Can MSAs help reduce healthcare costs? - medical savings account

Healthcare Financial Management, April, 1996 by Michael T. Bond

An individual with $2,000 in healthcare expenses pays the first $1,500 out of his or her MSA and the next $500 out of pocket. For healthcare expenses greater than $2,000, the major medical insurance coverage kicks in. The total cost to the employee is $500 out of pocket. The total cost to the employer for the MSA is $4,850: $3,350 for the major medical coverage plus $1,500 for the MSA. This represents nearly a 6 percent savings to the employer compared to the $5,150 cost of the traditional insurance option.

Potential advantages of MSAs

When compared to traditional health insurance, MSAs potentially offer advantages for both the employee and the employer. Exhibit 1 shows that an employee of the Danville school is in a better cash position with the MSA under all potential scenarios. The most that the MSA-covered employee pays out of pocket is $500, whereas the traditional plan can cost the employee as much as $1,200 out of pocket. In the Danville, Ohio school example, approximately 80 percent of MSA-covered employees had annual healthcare expenses of less than $1,500 and had funds left in their MSAs at the end of the year. The average amount remaining in an MSA was more than $700.

Exhibit 1: Employee healthcare costs: Traditional vs. MSA
plans

Health expense     Traditional                MSA
                                   Before tax     After tax
0                       0            $1,500         $900
$400                  $-400          $1,100         $660
$1,000                $-520           $500          $300
$1,500                $-620            0
$2,000                $-720          $-500
$3,000                $-920          $-500
$4,000               $-1,120         $-500
$4,400               $-1,200         $-500
$5,000               $-1,200         $-500

Other drawbacks

MSAs are not without critics. According to a Congressional Budget Office survey titled "Rising Health Care Costs: Causes, Implications, and Strategies," some experts believe that MSAs are contrary to managed care plans, which have been somewhat successful in holding down healthcare costs. However, there is no reason why MSAs, which appear effective in promoting prudent spending of healthcare dollars, cannot be used in conjunction with HMOs to control high-dollar expenses. This, however, would require a change in the HMO law prohibiting all-purpose deductibles.

Another criticism is that MSAs might encourage adverse selection, ie, induce healthy employees to sign up for MSAs in order to receive the MSA cash, while employees who require medical treatment opt for traditional indemnity plans or managed care plans. This should not be a problem, however, if the potential out-of-pocket costs of the MSA plan are no greater than those of a traditional plan.

Summary

The problem of escalating healthcare costs is complicated but appears to be partly attributable to the absence of free market forces in healthcare service consumption.

MSAs are attracting attention as a means to reintroduce market forces into the healthcare system by enabling consumers to shop wisely for healthcare services. Employees are likely to spend their own money more carefully than they would under traditional plans and therefore make wiser decisions, leading to reduced costs.