Health Sciences Report Winter 2003

By Thomas J. Hendrix, R.N., Ph.D., Assistant Professor, and Kathleen Kaufman, R.N., M.S., Associate Professor (Clinical), Department of Innovative Models and Systems, U of U College of Nursing

Will medical savings accounts save you money?

The IRS recently clarified the tax implications of a Health Reimbursement Account (HRA) beginning with the 2003 enrollment year. The use-it or lose-it rule that led to the development of flexible-spending accounts is gone, and unused funds can be carried forward into the next year. All firms can participate, and former employees are eligible to access unused money. Although an HRA is not a true Medical Savings Account (MSA), it is close to the MSA ownership model. With HRAs, the employer owns the account. Whether these consumer-driven health plans would save money depends on whom you are talking about "employer, employee, insurance company, or government" but they just might.

What is the current problem? The incentives to search for better prices have been removed. Although patients and providers make knowledgeable choices about treatment services that directly impact cost, the insured patient has a normal incentive to consume more medical care than he or she would otherwise consume, because "it's free." Many studies have associated the presence of health insurance with higher costs. These studies share a common conclusion: the consumption of medical services decreases as out-of-pocket expenditures increase.

Most health care is filtered through insurance companies at a substantial cost. The American Academy of Actuaries estimated that administration alone consumes 15 percent of the premium. This makes insurance an extremely inefficient way to pay for routine care. If car insurance operated in a similar manner, the more expensive car policy would cover oil changes and tune-ups. HRAs are different in that they allow individuals to save money in their own tax-exempt accounts, then use this money to pay for routine medical expenses. They keep what they do not spend, which provides an economic incentive to spend this money wisely.

High-deductible, or catastrophic insurance, is the second piece in the HRA/MSA model. The employer also must provide catastrophic health insurance that is cheaper than comprehensive coverage. This covers 100 percent of health expenses once the deductible is met. The employer could put part, or all, of the money saved by the purchase of the less costly catastrophic policy into the employee's health account. The only expense to the employee would be the difference, if any, between what the employer puts into the account and the dollar value at which the catastrophic policy begins. Cost-conscious consumers then might begin to question the price and necessity of all aspects of routine medical care and put downward pressure on prices over time. The RAND Institute has estimated that these types of accounts could reduce health expenses by 13 percent, if all the non-elderly participated.

Critics contend that the public lacks the skill to shop wisely for health care. The fact that some may be more motivated than others to comparison shop is true in every market; we shouldn't expect health care to be different. Some people study Consumer Reports. Some clip coupons. Others do not. Another concern is the segmentation of the insurance pool. Under the current system, all employees are pooled together and share risk. MSAs may provide an incentive for the healthy, younger workers to opt out of the pool. The resultant cost per employee remaining in the pool would increase. However, this is a short-term problem. Some bridging mechanism could cover the potentially large out-of-pocket expenses that might preclude certain employees from taking advantage of the HRA/MSA.

A decision probably will be made in the very near future between increased government or consumer control of health-care dollars. As you ponder these important choices, please do not compare consumer-directed accounts with a perfect health insurance model in which all receive quality care at an efficient price with minimal administrative cost. That system does not exist.

For an in-depth discussion of the topic, see the authors' article "Medical Savings Accounts: Theory, Politics, Pros, and Cons," in the February 2002 issue of the journal Policy, Politics & Nursing Practice.

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