MSAs: The Future of Medical Care Financing
Arthur Astorino, Jr., MD
Representing MediSmart, an MSA agency and third-party administrator. Presentation made to the Orange County Employee Benefits Council, September 1996, and the Health Care Management Association, May 1997
I know that the MSA is the future for health care financing because it is the best option available today for returning control, responsibility and freedom of choice back to the individual, and thereby preserving and advancing quality medical care for individuals.
By the time you leave this presentation this morning, my goal is that you are all as enthusiastic as I am about opportunities that MSAs will provide in the health care finance arena.
I would also like you to understand that many of our current Healthcare financing problems, such as lack of portability or affordability, are actually a result of government incentives that discourage personal responsibility and restrict individual freedom of choice.
And finally, I would like you to recognize how MSAs work at a principled level to correct those problems practically.
MSAs Briefly Defined
Before we get started on that, however, let us develop a basic understanding of Medical Savings Accounts, or MSAs for short.
The specifics of the MSA in the recently passed Law are outlined in the handout at your table. For now I would like to discuss the broad concept only.
An MSA is a trust account set up to pay for medical expenses at the discretion of the individual. It is generally tax advantaged, either excluded or deducted from income. The individual chooses the medical care they want at the price they are willing to pay to the doctors of their choice.
Money not spent during the year for medical care stays in the MSA and accumulates tax-free.
The MSA may be funded with anywhere from $500 to $3000 depending on the design of the plan.
The MSA is combined with an indemnity type insurance that has a deductible higher than the annual MSA contribution. For example a family plan may have $2000 in the MSA and a $3000 deductible policy.
This means that they essentially have first dollar coverage for the first $2000. Then they have about $1000 of out of pocket costs before their Insurance policy kicks in to cover expenses. This $1000 is often referred to as the corridor.
Those of you that understand the savings achieved by an employer that self-insures, can apply the same understanding to the MSA concept. The individual is essentially self-insuring for the relatively small dollar costs, but covers the catastrophic costs with a stop loss type plan. If they have a good year and are prudent shoppers they save money. If they are very sick they are covered with a good plan after a manageable predetermined out of pocket cost.
The MSA is generally designed such that most participants never use the insurance part to pay for medical care in any given year.
And, as many as 75% of MSA holders will have money saved in the MSA at year-end.
The potential savings are a tremendous incentive. The individual accurately perceives that they are spending their own money for their medical care and there is no more powerful economic force than a consumer empowered with their own money.
Freedom of Choice
With the MSA, Patients are free to go to doctors and specialists of their choice,
they can negotiate their own cash discounts, with or without the assistance of an MSA administrator,
doctors get paid at the time of service without costly administration,
patients are in control of the medical decisions with their doctors advice without third party intervention.
This is in stark contrast to the many mechanisms used today to attempt to reduce medical care spending through restrictive access to physicians, specialists, and treatments.
The difference stems from a fundamentally different philosophy. The MSA is developed from the standpoint of the Idea of an individual's right to freedom of choice.
Principles of Our Founding Fathers
I first came to this realization back in 1992 while driving down Pacific Coast Highway on the 4th of July. I heard these words on the radio: "We hold these truths to be self-evident, that all Men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the Pursuit of
Happiness". As I listened to the Declaration of Independence, I was struck with the long list of tyrannies by the British government. Particularly the charge that the King of Great Britain "has erected a Multitude of New Offices, and sent hither Swarms of Officers to harass our People, and eat out their Substance." I thought of the growing health care bureaucracy with similar tyrannies I and my patients had suffered at the hands of the very government our forefathers established to protect us from tyranny.
It was at that point that I realized that somehow the ideas that founded this country were being subverted or ignored and resulted in many of the problems I was seeing in healthcare.
Since that time I have established an entire organization, Americans for Free Choice in Medicine, committed to educating on the important role that ideas play in producing results-
Ideas have consequences and the wrong ideas produce wrong action and bad consequences. The history of health care financing, as I discovered, bears this out. In order to understand this we must define our terms.
So, what is meant by the idea of Individual liberty guaranteed by our founding fathers in the organizing documents of this country?
Individual liberty is the freedom to act. To take actions necessary to advance your life and pursue your happiness.
It is not a liberty to take the things you want or need from others by force. With liberty therefore comes a corresponding responsibility. You and you alone are responsible for the actions necessary to sustain your life and pursue your happiness.
Your right to pursue your happiness is not a claim on others to provide it for you. When you need something from others to help you live, you must obtain cooperation voluntarily, without force, otherwise, you destroy someone else's liberty.
This voluntary cooperation is called trading, market exchange, capitalism.
Therefore, individual liberty, personal responsibility and voluntary exchange of goods and services are the founding principles of our country. They are the sound ideas by which to base our actions and to understand any reforms being contemplated by our government.
Analyzing Portability of Health Insurance
To understand how to apply these principles in analyzing health care reform, lets look at the problem of portability of health policies, discover its cause and tie in how MSAs can be part of the solution.
Most healthcare reform today looks at lack of portability of healthcare insurance and believes that it is the problem. They do not recognize that portability is simply a benefit feature not usually present in employer policies. Lack of portability is a symptom of a more fundamental problem namely a tax incentive that has discouraged personal responsibility.
How I make that connection historically is important in understanding how MSAs fit into the solution.
We start in the 1940's when the government imposed a price and wage freeze. The logic was that the shortage of employees, who left as soldiers, would cause business to raise wages to entice workers and consequently prices would go up to cover the new, increased cost of production.
The government tried to stop this normal, market correcting mechanism by forcing employers to fix their wages, forcing distributors to fix their prices ignoring reality.
The reality was that businesses still needed workers, and one of the consequences of this was that employers figured out other ways to entice workers. They provided benefits such as medical benefits that did not show up as increased wages.
Well, in 1942 the IRS caught up with this and decided that these benefits were a substitute for wages and wanted to tax them.
This caused an uproar, particularly by unions, who had been most successful at getting these benefits included, and congress complied by establishing that employer-based medical care would not be taxable as income.
That single health policy decision was fundamentally flawed on principle.
What it said, is that if you are personally responsible for paying your healthcare, you are penalized with taxes. If you can get your employer to be responsible for paying for it you get it at a better deal tax-free.
We penalize personal responsibility in favor of group responsibility. If you let the group in this case your employer select and pay for your medical care, it is cheaper. If you want free choice to select your own care, make your own decisions, choose your own insurance and pay for it yourself you pay twice as much because you must use after-tax dollars.
The idea that the responsible unit is the group or the collective, and not the individual, is a distinctly un-American idea and it will raise its ugly head again later.
Has the market responded to this bad idea?
Yes, over the last fifty years this incentive has been so powerful that employers own over 85% of health insurance policies.
There is at least a 100 billion dollars of tax incentive for employer-based coverage.
Less than 15% of the market is personally responsible for paying for their medical care.
Once we made someone else responsible for the bill, most of the time we disrupted normal market function and destroyed the normal function of insurance.
To make this point, look at other insurance that people purchase individually. Insurance is generally something you don't want to use it is purchased to protect yourself financially against costly, catastrophic, unexpected events.
How many of you want to use your auto insurance? How many want to use your homeowner's policies or your disability insurance? How many are dying to use their life insurance? Most of these are personal, portable and they insure against things you don't want to happen.
Now, how many want to use their health insurance when they visit a doctor. Most people today do!
The reason people want to use their medical insurance, in contrast to other types of insurance, is the consequence of the bad idea of collective responsibility for paying for health insurance.
Very soon after 1942, it became obvious to individuals and unions that any dollars spent through the employer on medical care were tax-free. Therefore, the incentive was to create 100% coverage for all medical care, whether routine or not, whether expected or not, whether expensive or not.
Therefore, the function of insurance in medical care became a vehicle through which to bill employers for all medical services.
The concept of the consumer was split in two. The payer was the employer, and the recipient of care was the individual employee. As long as the payer didn't balk and did not have a say in the purchasing decisions, the individual gets all the care they want or need without any worry over price.
Normal consumer pressures did not restrain the doctor charges at the time of service. Advanced technology focused on improving quality without the need to focus on reducing costs.
The proper assessment of access, quality and cost which make up value, was not made at the time of service by the individual, only access and quality.
The shift of personal responsibility to group responsibility resulted in undermining another principle of our American heritage: free market exchange.
Market exchange can not exist when the recipient of the service is not also the payer most of the time.
Medical Care as a Right
By the mid 1960's most people began to think of medical care as something they should get for free. It was "given" to them by employers, it began to be perceived by them as a right a right of belonging to the group something the group must take care of.
Employees Begin to Retire
As employees that were once covered under their employer's plans began to retire many were not prepared to purchase personal insurance and some had already developed pre-existing conditions that made their insurance expensive.
By 1965 there were about seven million insured elderly and about 7 million uninsured.
They all get care, President Johnson said, but it was an affront for many of them to rely on the charity of the Drs. and Hospitals. So, instead of recognizing the problem as discouraging personal responsibility, they kept with the mentality of collective responsibility and passed a law that said the medical care for the elderly is the responsibility of society.
You, as an individual over 65, will secure your medical care by the ability to tax your children and grandchildren. Likewise for the poor, the responsibility for providing their healthcare is the responsibility of the employee and the employed.
This tremendously expended the third-party payment system and further entrenched the idea in the American psyche that paying for healthcare was someone else's responsibility.
Due to the fact that many more individuals relied on someone else to pay for their medical care, costs continued to rise and employers began to notice.
Many employers, having taken the responsibility, believed by this time that it should be their responsibility to pay for healthcare. There is even a movement for an employer mandate for health insurance based on this idea.
In the face of these beliefs, how does an employer solve the problem of rising costs? If you are responsible for paying for something it is certainly responsible to implement control over what you are purchasing.
So, systems were set up to start to control the consumption of medical services through PPO's by limiting fees and access to doctors, through HMO's by limiting access to specialists, through capitation, by incentivizing doctors to be "efficient" with their care.
Notice that all these approaches have in common limiting the individual's freedom of choice.
You cannot hold on to individual liberty without personal responsibility. You can't expect to have free choice without accepting responsibility. And when an individual accepts responsibility for acquiring the goods and services he needs, market forces are aligned and the individual makes the decisions about cost, access, and quality.
This is why MSAs attack the cause of the problem.
It is the only reform that increases choice to the individual and it does it by allowing the individual to accept the responsibility to shop for and pay for a significant amount of his medical care with the same tax advantage as other employer medical care options. And the savings are portable they can move with the employee.
Also it begins to return the function of insurance to its proper function of protection against catastrophic, unexpected events.
Of course, an employer-based catastrophic insurance policy is still not necessarily portable. It is not in the employer's self interest to continue to insure employees that no longer work for them.
The solution to this is simple tax equity. Allow individuals the same tax advantage for purchasing medical insurance plans as exist for employers, i.e. expand freedom of choice.
If this were instituted and individuals wanted portability, they would simply take their employee-benefit dollars and purchase a personal, individual policy that is portable. If many employees wanted this and selected individual instead of group coverage, group insurance would have to respond to the newly empowered individuals if they wanted to maintain market share.
Group insurers would simply write policies so that they were convertible to an individual plan on leaving the employer with a pre-determined agreed upon price.
This is not the approach however, that was written into HR3103. What I mean by expanding "freedom of choice" unfortunately is not the same as our legislators.
Forced portability, forced guaranteed issue, forced community rating are examples of restricted choices and a destruction of individual liberty.
The legitimate role of government is to facilitate the market exchange by eliminating the use of force and upholding contracts not by writing the contracts for us and imposing their use by force
Obviously, I am against many of the impositions placed on the insurance industry by government that currently exists and that will be imposed by many parts of HR3103.
However, the MSA provision in 3103 is our chance to begin to reverse the trend in legislation that promotes group responsibility in favor of individual responsibility.
If we recognize how important that is in principle and why it will work in practice, then we should all SUPPORT THE
IMPLEMENTATION OF the MSA options.
MSA administrators must be able to help you design plans that will meet the objective of the employers and employees. They must recognize the different effects of the MSA when it is the only option open to employees versus one of many options.
MSAs will open up an entire industry of information seekers. All of you out there have important expertise in medical care finance AND
MANAGEMENT. With MSAs your clients for medical care financing information AND CONTRACTING will not only be employers, but individuals and employees.
As individuals accept responsibility for purchasing medical care services directly from doctors, they will have questions. Those groups AND PRACTICES that can develop efficient sources of information, directly to the consumer, will have a valuable product to sell to individuals and to MSA administrators.
Utilization review skills can be used to provide information directly to the patient. Let the patient decide when they want to take a less expensive or more expensive route.
Doctors AND GROUPS who MAKE their pricing easy to understand and competitive, while providing value, will be rewarded by a greater percentage of MSA holders and consequently less administration ATTEMPTING TO RECEIVE payment for their services.
There is a tremendous interest and excitement about this new market. I strongly believe in it as a physician because it allows for the re-establishment of the doctor/patient relationship where the doctor is the patient's advocate.
As an MSA administrator, MediSmart will also maintain that perspective. Acting as a patient advocate from the standpoint of supporting personal responsibility and individual liberty, we can provide a valuable service to the employee, employer, and DOCTORS WHO WANT TO PROVIDE QUALITY CARE IN A FREE CHOICE
Bullet Points About the MSA
I told you I would get back to the hand out on the specifics of the MSA. Before closing I would like to go over a few important points.
Note that the effective dates of the MSA is January 1. That means we can start setting up accounts in January
This is important because MANY EMPLOYERS ARE GOING Into open enrollment soon and with all the publicity over MSAs, THOSE OF YOU THAT CONTRACT DIRECTLY WITH EMPLOYERS ARE GOING TO ASK IF YOUR PROGRAMS HAVE MSA OPTIONS. YOU SHOULD BE THINKING ABOUT HOW YOUR SITUATION FITS INTO THE MSA ENVIRONMENT.
WITH RESPECT TO YOUR EMPLOYERS OFFERING YOU A CHOICE OF PLANS. THE MSA IS VERY DESIRABLE. IT IS THE FIRST NEW FINANCING MECHANISM IN OVER 10 YEARS FOR MEDICAL CARE. FOR THE INDIVIDUAL IT REPRESENTS A NEW WAY TO SAVE TAX FREE. MSAs may be offered as an executive package as another way to put in a benefit for your highly compensated employees.
As MSA administrators, MediSmart has the capability of working with any TPA, insurer, or re-insurer that you have, or we can provide these for you.
Note that the eligibility for the MSA in HR 3103 does not include large employers. However, there is an MSA type product that can be designed for the large employer and is also very effective at creating positive incentives and reduction in cost while increasing choice.
The card also outlines the limits on contributions and the catastrophic plan parameters
I want to thank you all for your attention. I will now be available to answer questions.
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