Medical Savings Accounts CMP:341:701. In This Chapter MSA PLAN OPERATION IMPACT ON COSTS FEDERAL PILOT PROGRAM EMPLOYER POLICIES OVERVIEW

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1 Medical Savings Accounts CMP:341:701 In This Chapter OVERVIEW MSA PLAN OPERATION IMPACT ON COSTS FEDERAL PILOT PROGRAM EMPLOYER POLICIES In the face of rising health care expenses, many employers are looking at medical savings accounts as an alternative to traditional insurance options. Often compared to individual retirement accounts in their design, MSAs put funds for medical expenditures directly under the control of employees to increase individual responsibility for health care spending. MSAs may be funded by a combination of employer and employee contributions. The accounts earn interest, and employees can rollover their account balances at the end of the year to cover future expenses. Since MSA funds belong to employees and can, in many cases, be received as cash, MSAs provide employees a strong inducement to be cost-conscious health care consumers. For employers, MSA programs offer lower premium and administrative costs than traditional, low-deductible health care coverage. Under a typical MSA program, employers offer catastrophic policies with deductibles of $1,000 to $5,000 and require employees to pay for medical services up until these deductibles are satisfied. The low cost of catastrophic policies leaves employers with significant premium savings that they can use to make contributions to employees' MSAs. Costs associated with benefit plan administration are lower because most employees do not amass enough medical expenses in a year for any claims to be covered by the catastrophic policies. A pilot program to test the viability of MSAs has been enacted as part of the Health Insurance Portability and Accountability Act ([PL ] PL ). The pilot program is available to employees covered under a qualified high-deductible health plan of a small employer (employing 50 or fewer workers) and self-employed individuals. However, the number of currently-insured employees allowed to switch to MSA plans under the pilot project - which will run from Jan. 1, 1997, to Dec. 31, is limited to 750,000. Under the program, contributions to MSAs will be tax deductible if made by an eligible individual and excludible from income if made by the employer of an eligible individual. In addition, earnings on amounts in an MSA and distributions from an account that are used exclusively to cover qualified medical expenses will not be taxed as current income.

2 MSA PLAN OPERATION Medical savings account programs can be designed to suit the needs of the particular employer. In general, these programs enable employers to put aside a fixed amount of money into a savings account for each employee to pay for his or her own health expenses. A medical savings account may be employer-funded, employee-funded, or both. The money in a medical savings account accrues over time and is considered the property of the individual employee. Therefore, employees may elect to receive any remaining account balance in cash at the end of the plan year, or roll the amount over to cover future expenses. In addition, employees are allowed to take the amount in their MSA with them when they change jobs or otherwise leave the company. As the MSA structure is typically envisioned, an employer would put cash into medical savings accounts rather than provide employees with first-dollar or low-deductible health care coverage. Under this scenario, the employer would purchase high deductible or "catastrophic" health insurance at a reduced cost per employee, and then deposit into each account an amount equal to the difference between the more comprehensive coverage and the high-deductible health plan. Any employee health care costs above the amount in the MSAs would be covered in full by the employer through the catastrophic plan. CMP:341:702 [Note: Specific design and operation features that must be incorporated in MSAs for them to qualify for special tax treatment under state or federal law are discussed later in this chapter.] Advantages Medical savings accounts can provide the following advantages: Employers can save money on claims and administrative costs since there is no need to process claims for medical costs up to the account balance; Employers can reduce claims or premiums for high-deductible coverage, since the overwhelming majority of employees incur less than $2,000 a year in health care expenses; Employees can save money by paying a lower share of health care premiums, and having money accrue in their accounts over the plan year; Employees have an incentive to be cost conscious health care consumers, since any remaining amounts in their medical savings account can be received as cash; and The money placed in the accounts earns interest over time and can be used to cover other health care expenses, such as preventive services, long-term care, COBRA coverage, and any expenses not covered under the health plan.

3 However, medical savings accounts also have disadvantages. For example, some employers question the ability of employees to successfully negotiate medical services. In addition, MSA opponents say that the programs cannot hold down the cost of big-ticket expenses, such as hospital bills for premature babies. Tax Aspects Medical savings accounts have not yet become prevalent, most likely due to a lack of federal tax incentives. Under current federal law, the amounts contributed to a medical savings account by either an employee or employer are taxable. In contrast, medical flexible spending accounts allow employees to place $3,000 tax-free into their accounts. A number of states have enacted laws to promote MSAs. In most cases, these state laws make contributions to qualified MSAs exempt from state income taxes, but set annual limits on tax deductibility-anywhere from $2,000 to $5,00O-and require employers to have highdeductible health plans in place. In addition, most of the laws allow account holders to withdraw cash from their MSAs on the last day of the plan year, but impose a 10 percent penalty on amounts withdrawn at other times if they do not go toward medical expenses. (For more information, see the specific state digests beginning in section 348.) IMPACT ON COSTS CMP:341:703 Healthy Workers Realize Biggest Cost Savings Young workers in good health would benefit the most from universal adoption of medical savings account plans, asserts a report by the American Academy of Actuaries, based in Washington, D.C. Further, approximately two-thirds of current employees would gain financially if employers combined these accounts with health plans having a "substantially" higher deductible than the current average, the report adds. When combined with high deductible health plans, MSAs are intended to maximize health care choices and lower costs because employees would playa more active role in the financial aspects of the health care system, according to the report. The level of cost savings would depend on the extent to which employees see MSAs as health insurance rather than personal savings accounts. In general, the greatest cost savings would come from employees viewing the MSA as personal savings and using medical services in ways that conserve their account balances, the report notes. While MSAs would lower costs for healthy employees, some plan participants would actually pay more for health care if their employers shifted to a high deductible health plan with an MSA, because the co-payment increase would be smaller than the premium reduction, the report asserts. In this situation, employees with very small health care expenditures would see the greatest savings, but employees with high expenditures - such as older participants and pregnant women - would face a large increase in costs.

4 Actuarial Predictions The report includes the following illustration of a high-deductible plan with medical savings accounts, and the effects of such a plan on both employee and employer costs: An employer changed its health care plan by raising the deductible from $200 to $1,500 per employee. The employer then determined the amount of savings generated from raising the deductible and contributed that amount to individual medical savings accounts for its employees. Total employee savings under the high-deductible MSA plan would vary as follows: Employees who view their accounts as another form of employer-provided health insurance would save an average of $65 per year; Employees who view their accounts as both a health plan and a personal savings vehicle would receive an average of $193 in savings annually; and Employees who view their accounts as strictly a personal savings vehicle would save an average of $346 per year. Employers would also realize cost savings from such a plan, although they would not be "dramatic," the report predicts. Specifically, claims costs could be reduced by as much as 10 percent for those employees who lower their health care utilization in order to realize greater account balances. The employer's administrative costs could also be reduced for this group of workers by as much as 22 percent. Eventually, savings generated from the MSA plan could allow the employer to lower both its health care premiums and the amount contributed to employee accounts. MSAs Versus FSAs Medical savings accounts may appear to be similar to flexible spending accounts, but federal tax treatment of FSAs makes them quite distinct from MSAs. Specifically, FSAs allow employees to make pre-tax contributions to their accounts and encourage participants to spend as much of the FSA funds as they can to avoid forfeiting any remaining funds, the report explains. Conversely, contributions made to MSAs available through a flexible spending account are made with after-tax dollars, and any money remaining in an MSA at the end of a plan year would belong to the employee, who could earn interest on the remaining money until it is needed to pay for medical expenses. In addition, employees decide how much they will contribute to their FSAs for the year, and that total annual amount must be available to the worker throughout the year. (For more information on FSAs, see the chapter Flexible Spending Accounts in this section.) CMP:341:704

5 Effect on Health Plans Proponents of MSAs say the higher employee co-payments - such as deductibles or coinsurance - will reduce a health plan's costs because the employer would be paying less of the health care expense and employees would be encouraged to use fewer services, according to the report. Employers should be aware, however, that the savings available through MSAs will ultimately be dependent on federal and state legislation governing the accounts, the report cautions. Savings also will be affected by the way employers redesign their health plans to facilitate an MSA approach. Overall, the report contends, the impact MSAs would have on employer health plans rely on several factors, such as total medical costs, tax considerations, whether other medical plans are available to plan participants and which types, administrative expenses, and limits on MSA payments. Employers should analyze their total health benefits package and design an MSA program that will achieve the best results. Merely adding an MSA as another health care plan option without careful consideration could actually cause total costs to increase, the report predicts. ("Medical Savings Accounts: Cost Implications and Design Issues," American Academy of Actuaries, th St. N.W., Washington, D.C ) MSA Plans in Practice Both employers and employees can realize cost savings when using medical savings accounts in place of traditional health plans, asserts a study by the Washington Medical Savings Account Project. The study is based on 17 employers ranging in size and geographic location, and was conducted to determine whether well-designed MSA plans secured affordable access to health insurance and health care while maintaining quality, controlling costs, and satisfying employees, employers, and providers. Overall, the study says, employers that adopt medical savings account plans instead of traditional health care plans can realize the following results: Reduced health care spending by employers and employees; Less use of health services by consumers; Increased use of preventive services; Increased consumer involvement in health care decisions and purchases; Dollar savings and improved choice for healthy as well as chronically ill individuals; MSA plan preference by low-income employees; and Strong employee participation and satisfaction.

6 In terms of actual cost savings, the study finds that all the participants experienced cost savings for family coverage under MSA plans versus their traditional policies. In fact, the average cost for family coverage under the MSA plans was $3,882, compared with $6,536 under the traditional plans. Combined employer and employee savings for family coverage under an MSA plan averaged $3,554. For individual coverage, meanwhile, not all participants experienced lower costs under the MSA plan, the study finds. Seven employers said that individual MSA plans cost more than their traditional counterparts, although there was still an overall average savings of $786 for employers and employees under the MSA option. The average cost of individual MSA coverage among study participants was $2,133, compared with $2,319 for coverage under the traditional health plan. Overall, the level of savings depends upon the type of MSA program implemented, the level of employee acceptance of the plan, and the average education level of the workforce, the study says. MSA Plan Components CMP:341:705 Medical savings accounts combined with high-deductible insurance coverage have a greater chance of success when employers establish them within an integrated, comprehensive managed health benefits plan. The specific components that should be combined within an MSA program include a medical savings account; catastrophic, high-deductible medical coverage; incentives for healthy lifestyles; wellness and prevention programs; clinical and resources support management; efficient administration; communication and education; and implementation, monitoring, and evaluation. Medical Savings Account. An MSA is an employee-owned account from which health expenses are paid during a plan year, up to the plan deductible. After the deductible is satisfied, health expenses are typically covered under a catastrophic medical plan. The amount that is deposited into each employee's MSA account is equal to the difference between the costs of the current comprehensive health plan and a catastrophic coverage policy. Account balances can be made up solely of employer contributions, or can require some level of employee contributions. Catastrophic Medical Coverage. Catastrophic medical coverage should be purchased as an adjunct to MSAs to cover any health costs over the account balance. Employers can provide catastrophic, high-deductible coverage through extended self-insurance, contracts with a health insurer, negotiated arrangements with a health services contractor or a health provider organization, or agreements with a third-party administrator. Incentives for Healthy Lifestyles. This component of comprehensive managed health benefits can help prevent and reduce future costs by providing tangible rewards to individuals that adopt healthy lifestyles. Specifically, people who are healthier tend to

7 practice health promotion activities and avoid behaviors that jeopardize their health, thereby reducing the need for medical care and services. Wellness and Prevention Programs. Health promotion, wellness and prevention programs are another form of active risk management that can help reduce the use of costly medical services. Employers can offer company-paid and provided preventive medical examinations, immunizations, and diagnostic tests, and can then use the information obtained from these appraisals to target the types of health promotion programs that are appropriate for the workforce. Clinical and Resource Support Management. Patient-centered resource support services engage employees directly in the processes and economics of health care decisions by helping them become informed and motivated to participate in their medical decisions. For example, employers can hire an ombudsman to act as an employee advocate when family emergencies arise, retain a physician to act as a medical adviser on complex and more costly health care problems, or provide a workplace clinic that is staffed with full-time medical experts. Efficient Administration. The costs for plan administration are lower under an MSA plan, since routine and uniform adjudication of all MSA-incurred expenditures is not necessary. In fact, review of an employee's MSA expenses is only necessary when the deductible is exceeded. Therefore, internal MSA administration can be as simple as creating ledger-entry guidelines tailored for the plan, or enhancing existing accounting software. Communication and Education. Employers should begin an extensive communications effort at the time an MSA plan is introduced to compare the MSA with the old plan and educate employees about its benefits. In addition, employees should be given periodic MSA statements that tell them how much of their account balance has been used and the available balance. These periodic MSA statements can also include health promotion and education information, such as preventive health services that are available and reminders to get scheduled medical examinations. Implementation, Monitoring, and Evaluation. Effective health benefit programs require a coordinated implementation plan. Employers should form a task teamcomposed of members from various levels of the organization-to develop an implementation plan for the MSA program. The team should also develop an ongoing monitoring and evaluation plan to ensure the MSA program is attaining its goals and to make adjustments when necessary. (ACA Journal, Vol. 4, No.3, American Compensation Association, N. Northsight Blvd., Scottsdale, Ariz ) Copyright , The Bureau of National Affairs, Inc.