Medical Savings Accounts: commentary

A good idea that could be better
Commentary
As reported often in the Small Business Times and elsewhere, southeastern Wisconsin health-care inflation continues its relentless upward spiral. Predictions for the near future are no less dire. Premium increases are only a reflection of provider charges and utilization patterns; insurers unable to raise premiums fast enough report huge losses or, worse, shut down. Those increases hit small businesses hard. How does an employer continue to offer benefit packages so important to attracting and retaining needed employees without further eroding profit margins?
There are no perfect remedies and each option carries with it some compromise. Certain options may require a new way of thinking. Fundamentally, it may be time to evaluate employees’ role as health-care consumers rather than health-care users.
One way to raise employees’ consciousness as health-care consumers is to ask them to consider their auto insurance coverage in comparison to health insurance. Most auto insurance shoppers will opt for a higher deductible to lower their premiums. But what if auto insurance was an employee benefit? Then would every repair – even routine maintenance – have to be covered at 100% after a $10 “mechanic-visit” co-pay?
Imagine how expensive coverage would be then.
One option employers can explore is increasing employees’ out-of-pocket exposure at the time of claim. As an alternative to the more prevalent benefit-rich plan, offer one that covers less for routine health care, but provides a solid safety net for serious, costly illnesses or medical procedures and treatment.
To mitigate the realities of a higher deductible plan, employers can augment that health insurance benefit by implementing a Medical Savings Account (MSA).
Some background
The Health Insurance Portability & Accountability Act of 1996 (HIPAA) in part created tax incentives to facilitate the purchase of health insurance for “small business”; those incentives fall under the generic name Medical Savings Accounts (MSA).
In order to have an MSA, employees of eligible groups (those employed by a company with fewer than 50 total employees), must be insured by a High Deductible Health Plan (HDHP). For the year 2001, the lowest allowable HDHP is $1,600. (Note: Insurer deductibles are always calendar year.)
The theory is simple: the higher the deductible, the more affordable the insurance coverage. Thus, an employer sponsoring an HDHP (at $1,600) will find the cost significantly lower than today’s managed-care plans which have nominal out-of-pocket costs at the time of claim (e.g., $10 office visit co-pays, etc.). An employer who could not afford the more expensive managed-care option can at least provide the catastrophic coverage provided by the HDHP.
The MSA and the concomitant tax benefits were designed to abrogate the insured employee’s higher out-of-pocket exposure at the time of claim. If the insured is “single”, the employee is allowed to deposit 65% of the deductible into the MSA annually; if the insured includes dependents, the employee is allowed to deposit 75% of the yearly deductible. The chart below illustrates this premise based on an HDHP of $1,600.
ILLUSTRATION OF MEDICAL SAVINGS ACCOUNT DEPOSITS
For individuals: 65% of the deductible = $86.67/month
($1,600 “single” deductible @65% = $1,040 (12)
For families: 75% of the deductible = $200/month
(“family” deductible = 2x single = $3,200 @75% = $2,400 (12)
NOTE: There are higher deductible options
Current rules allow the employer or the employee – but not both – to contribute funds to the MSA. Employees own their MSAs, which means unused funds accumulate year-to-year as a supplement to retirement. Clearly that is one of the most attractive features of an MSA. If the employer contributes on behalf of the employee, the cumulative annual deposits are a deductible business expense as is the premium for the HDHP. If the employee funds his/her MSA, the cumulative annual deposit is a tax-deductible item as with IRA contributions. (Medical Savings Account deduction, Standard Form 1040.)
Sales of MSA’s have been tepid at best. Based on personal sales experience and objections most often raised, the changes outlined below would enhance the appeal of MSAs.
1. Remove the 65% single, 75% family deposit limitations, i.e., allow MSA contributions to be equal to the HDHP calendar year deductible.
2. Allow MSA funds to originate from both the employer and employee in the same taxable year.
3. Allow MSAs to be available to larger employee groups rather than the present ceiling of 50; perhaps up to 100 or 200 employees.
4. Speed up the MSA tax advantage by allowing contributions to be deducted from pay pre-tax as with 401(k) and other employee benefits under IRS Section 125.
5. The allowable HDHP should be available at levels as low as $1,000 so as to be less intimidating to employees more accustomed to “first dollar” coverage. As an alternative, a Wellness Benefit (e.g., routine exams @ 100% after a $20 co-pay) should not disqualify an HDHP from MSA eligibility. That would diminish the concern voiced by those who fear some people will avoid preventive care to preserve their savings account.
A high-deductible health plan, coupled with an MSA, is only available through a few insurers. While employers are quick to embrace the low premiums, perhaps the real key to a successful MSA is the employee enrollment process. Empowered employees become partners in the process and better consumers of health care. MSAs are new, so the jury is still out. They could be “fixed” with a little help from our friends in Washington. Over time, they have the potential to be a powerful weapon in the health-care inflation battle.
Editor’s Note: Jon C. Rauser is president of The Rauser Agency in Milwaukee, an independent health-insurance brokerage firm with more than 20 years’ experience serving small business clients primarily in southeastern Wisconsin.
Sidebar
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