Medical Savings Accounts and Managed Care: A Mismatch?

The health reform law signed by the president in August authorizes a pilot program of tax-free medical savings accounts. MSAs have been touted as an antidote to HMOs, but some say the two are compatible.
Female patient, 52, calls her HMO for a well-woman appointment. “Nothing available for three weeks.” “I’d like to come sooner,” she tells the clerk. “I haven’t met my deductible under my HMO/medical savings account coverage and will be paying cash. Will the clerk take another look in the book?”

Or how about this? Male patient, 35, calls his HMO requesting an emergency appointment for the flu. Nothing available till the next day. Coughing and feverish, he hangs up and calls the storefront doctor on his block. When he leaves this off-plan physician’s office, the nurse swipes his medical savings account card, the visit is deducted from his MSA — and the tie that binds him to his HMO slips another notch.

At first glance, medical savings accounts and managed care seem at cross purposes. After all, patients with a medical savings account — meaning a tax-free pool of money with which to pay their own medical bills — have become their own “gatekeepers.” Who needs an insurance company or primary care doctor calling the shots? Some wits have even dubbed the MSA legislation a “fee-for-service get-well plan.”

Yet others see self-directed care as the future of managed care — even if partly the consequence of a backlash against it. They contend patients will still need a medical team to manage their conditions, and insurance companies will still have to qualify the deductibles, even if a costly claim is not filed for each medical encounter. Possessing the wherewithal to pay for minor hospitalizations, procedures, and doctor visits upon the rendering of service, this argument goes, merely restores the patient to a parity position with the provider and payer. Will MSAs reduce health care expenditures? The think tanks are duking it out over that one. What no one disputes, however, is that widespread self-selected health care has the potential to rearrange the managed care landscape significantly.

The experiment begins

Starting next Jan. 1, under the Kennedy-Kassebaum health insurance reform bill recently signed by the president, 750,000 people who are self- employed or work for small employers (under 50 employees) will be allowed to set up tax-free MSAs to pay for health care expenses. Such accounts, similar to individual retirement accounts, would not be subject to withdrawal penalties or taxes on income as long as withdrawals met the conditions of the Internal Revenue Code for allowable medical expenditures. MSA holders also would be required to purchase a high-deductible policy (minimum $1,500, maximum $2,250 for individuals and a minimum $3,000, maximum $4,500 for family coverage) to pay in case of a serious injury or illness.

The difference in premiums between a low-deductible and a high-deductible policy (though not dollar for dollar) could be used by employers to fund each employee’s MSA. Alternatively, employees or entrepreneurs could fund the MSA themselves, with no taxes owed if the money is used for IRS-approved medical expenses. Of course, whether the issuer of the catastrophic insurance policy considers each patient-generated expense to meet the standards of its deductible is another matter. More on that later.

At the end of the next four years (1997 — 2000), the experience with MSAs will be weighed in a study by the General Accounting Office, which will look mainly at effects on federal revenues lost due to MSA nontaxability. At that time, Congress will have to act again (it won’t happen by default) to allow more people to set up MSAs.

The pilot program will address a key truth: Questions about the full effects of MSAs currently outnumber answers. Will MSAs constitute what one Blues’ executive called “the ultimate cherrypicking mechanism,” attracting healthy people looking to sock away a tidy tax-free nest egg? Will premiums for sicker people then skyrocket? Will yeasty MSA balances seduce thrifty consumers into skimping on preventive care, such as physicals, well-woman visits, and pediatric checkups? Or will savvy health care consumers be farsighted enough to protect their investment by guarding their health? Will an aggressive, cash-wielding patient uberclass arise, challenging the recommendations of physicians and demanding competitive prices for services?

And finally, what role will MSAs play in managed care? That’s the kicker.

MSAs and managed care

“The deductibles [under Kennedy-Kassebaum] are very high for a managed care situation,” observes Edward Hustead, who headed the MSA task group of the American Academy of Actuaries. “I don’t think anyone considering managed care would be interested in assuming $1,500 risk in their health care. By virtue of selecting an HMO, they are counting on prepaid health care.”

Yet, to no one’s surprise, the major players in managed care worked assiduously during consideration of the legislation to keep their options open. Included in the measure is an amendment to the Public Health Act governing HMOs to allow deductibles in an HMO situation. “There is no reason HMOs cannot incorporate an MSA element,” says Don White, a spokesman for the American Association of Health Plans in Washington. “I believe this is under consideration in some quarters. We’ll have to wait and see.”

“Oh, they’re all ready to go,” asserts Jack Strayer, head of the Council for Affordable Health Insurance across the Potomac from the Capitol. His group, which represents individual and small group insurers, agrees with the actuaries that the $1,500 deductible is too high to attract much HMO action. “Legislation will be needed to bring that down,” he predicts.

Interestingly, however, Strayer believes that the large managed care entities would actually welcome a back-door mechanism for patients to go out of network if they wanted to, thus finessing oft-heard complaints about access to specialists without violating the HMO structure. Also attractive to managed care companies is the possibility that they could hold patient MSAs in their floats, creating more cash reserves, although naturally they’d have to pay interest on the money.

Strayer’s organization has its own MSA plan. Prior to the tax advantages provided by Kennedy-Kassebaum, it amounted to prepaid deductibles. “I pay a doctor bill with my credit card and give the receipt to the administrator back at the office, and she writes me a check,” he says. He usually also gets an annual check for $600 to $700 in unused funds. Under Kennedy-Kassebaum, unused funds would roll over to the next year, earning interest all the while.

“I can foresee a way for patients to buy a block of preventive care that is more or less capitated, leaving certain decisions to their discretion,” says David L. Massanari, M.D., chairman of the Commission on Health Care Services of the American Academy of Family Physicians. Others have also suggested this: a sort of preventive care, basic services plan, backed up with the MSA for larger-ticket procedures, then leading to the catastrophic policy for the really major events. “I call it a sandwich,” Massanari says, “with the patient risk-taking in the middle.”

“If you’re paying cash, you as a patient would want to pay a capitated price, with market prices reserved for the catastrophic portion,” Strayer suggests. As for patients neglecting their preventive care to save a few shekels, Strayer thinks that’s a possibility. “MSAs are made for mental health visits, runs to the emergency room, and maternity,” he says. “But what’s the incentive for patients to select them? The only hope is that they will become more aware of costs, especially the costs they will face down the road if they neglect their health care. The only incentive in this country is the almighty dollar.”

Cure for managed care’s ills?

Under an MSA, the almighty dollar goes further. In an example provided by the Rand Corp. in its report, “Can Medical Savings Accounts for the Nonelderly Reduce Health Care Costs?”, a taxpayer in the 33-percent bracket with an MSA can write a check for $300 worth of medical expenses and pay only $200 when the tax break is factored in. This, coupled with the fact that the money cannot be used to buy a boat or put a child through college, at least until age 65 (and then not without being taxed and incurring a penalty), will induce MSA holders to spend on preventive care, some analysts are saying.

“Uncoupling the payer, the provider and the receiver of the care is what has gotten us where we are now,” Massanari says. “This has led to a severe inflationary effect on fees, especially with regard to procedural fees. You could make the argument that if people are paying directly they will demand better value.”

“Eventually,” says Thomas LaGrelius, M.D., chairman of a Los Angeles County Medical Association legislative committee, who helped secure passage of California’s new MSA law, “managed care will destroy health care in this country. We have to find another way.” LaGrelius favors the veterinary analogy. In managed care, he says, “you have the doctor, the dog, and the owner. The owner — or insurance company — makes the decisions on the site of care and the funding level. The doctor communicates as much with the owner/manager as with the dog/patient. The difference between that and a human-patient scenario? “The owner loves that dog. Does the insurance company love that patient?”

LaGrelius is skeptical, however, of the applicability of MSAs to managed care. “I don’t see how they could work in a capitated system,” he says flatly. “In a PPO, maybe, but why would you need them? Under an MSA, the patient is becoming his own care manager. We need to eliminate the need and cost of that middleman and let the ‘invisible hand’ of the marketplace work.”

With the average person only spending $500 or less a year on the uninsured portion of medical care, Golden Rule Insurance has done well with its existing, taxable MSAs. They are so popular that, according to LaGrelius, if 20 percent of a workforce in a company elects an MSA the first year, 90 percent will have converted by the second year, based on word of mouth.

LaGrelius also cites the Singapore experience. He says Singapore is comparable to the United States in some respects — physician income and per capita income, for example. Citizens are required to put 6 — 8 percent of their income into an MSA up to a ceiling of around $8,500. One hundred percent of physician visits are paid by check at the time of the visit. Eight out of 10 patients write a check for hospital expenses on their way out the door. The average hospital stay is 5.3 days. Health care costs in Singapore are 3.1 percent of the gross national product, while ours are 14 percent. “Even if we could eliminate the half of our costs that go to insurance company administration such as advertising, marketing, and paperwork, that’s still 7 percent of GNP,” LaGrelius says. “Don’t you think it’s time to try something else?”

Some say go slow. “Medical savings accounts are not ‘the answer’ to the problems of health care finance,” writes Joseph White in a Brookings Institution paper titled “Medical Savings Accounts: Facts Versus Fiction.”

“MSA advocates,” he writes, “argue that patients will save by shopping around for better prices. Some individuals might want this opportunity to shop, but it’s hard to square with physicians’ interest in MSAs. Physicians are unlikely to look for an opportunity to lower prices. Rather, many AMA members would prefer to negotiate fees and services with individual patients, rather than with employers and managed care plans.

How physicians feel

“Many doctors like the idea,” White continues, quoting American Medical News, “because they believe MSAs would take the cost-control onus off them, defusing pressures for price controls and managed care rationing. They envision a return to the days before widespread managed care, when patients and physicians, without third-party interference, jointly decided on the course of care and terms of treatment.”

On the contrary, says LaGrelius, MSAs will hardly create a physician’s paradise. “They’ll lead to fewer elective surgeries, for one thing. I deal with cash patients all the time. I may have to do things for them myself within a visit that I would prefer to have a specialist handle, or I may order fewer tests. If a person demands this because they have an MSA rather than because they have no insurance, I might be less willing to go to all this trouble. But make no mistake, the patient will be a customer. You’d better please him and save him money at the same time. Just as people know what a good brand of TV is, people shopping for care will know who the good doctors are.”

Hewing to the bottom line, LaGrelius adds: “Fifty percent of the money spent on health care is not spent on health care. We know that. It’s spent on administrative costs. With MSAs, we could put that 50 percent back in the patient’s pocket. Then, say a patient didn’t need to spend half of what was left. That’s three-quarters of today’s outlay that would stay in the patient’s pocket. This could get popular.”

“Will patients have the know-how to manage their own care?” wonders Jim Roberts, a partner and actuary with Ernst & Young. He foresees a time in this shifting scenario when MSA-holders will go on the Internet, key in their symptoms and test results, and enter a decision tree that will show them the incremental improvements they can expect from a range of treatment modalities. Arguably, this would constitute a significant shift in risk and responsibility from the physician’s shoulders to the patient’s.

As for the applicability of MSAs in managed care, Roberts doubts the system will reap big efficiencies as it is defined under Kennedy-Kassebaum, permitting payment of IRS-allowed medical expenses with an MSA. “HMOs are efficient in managing patient hospital care, minimizing excessive physician visits, and creating care sites of economic scale,” Roberts says. “Maybe there would be a way to carve out the things managed care does best and let people decide the rest for themselves, but it won’t happen under this bill.”

Yet talk continues of insurance products incorporating HMO and MSA elements, along the lines of Massanari’s “sandwich.” For one thing, the company holding the catastrophic insurance policy mandated under Kennedy-Kassebaum is going to have something to say about whether a patient’s self-selected medical services meet the deductible. Too many facelifts or psychiatric visits, and patients expecting the catastrophic policy to cut in may experience “sticker shock.” “They could get hit by a bus, get their previous MSA expenditures audited and find that they still have $800 to go on their deductible,” predicts American Academy of Actuaries spokesman Hustead.

“Your insurance company will definitely be looking at your decisions,” says Strayer. “A smart card that will be swiped at the doctor’s office and register the amount toward your deductible is already in the works. I saw a demonstration the other day.”

No one expects managed care companies to willingly abdicate their middleman role. Given the ingenuity of the insurance and managed care community — and the billions of dollars at stake should MSAs roll out for the population at large — the smart money is backing an MSA/managed care marriage, no matter how rocky the engagement might seem now. Maybe the real question should be: Will the managed care industry, when approached by MSA-supported patients waving greenbacks, find it profitable to relinquish some of its record-keeping and gatekeeping functions to land cash customers?


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