Article

Insurance is a way of protecting people from financial hardship or ruin. It solves financial problems of high cost but low incidence. Note that hardship means insufficient dollars to provide necessities, not being short of cash and skipping a stop at Blockbuster one week. Payment for medical care in the United States is most often paid for through medical "insurance" plans. But this use of the word is inaccurate. In the vast majority of current plans insurance is secondary to the payment for normal expenses.

The gross cost of medical expense plans is high. People can buy most of their needs and much of what they desire. But most people feel nobody can independently afford medical care today! Expert prognosticators claim that without complex medical plans enrolling nearly all people (universal coverage), only rich families will receive proper medical care.

History and complexity cloud the economics. All medical plans taken together form a macroeconomic system of payment for medical services. This system sits between the providers and the consumers. We intuitively know the system is inefficient. Gut wrenching anecdotes of the medical and financial failures of this system are a staple of today's news media. These "horror" stories are symptoms of inefficiency. Our common sense rebels at obvious waste and yet the complexity makes us feel helpless. At the same time we are afraid to leave these plans because we need to be in an insurance pool to protect us against the financial impact of an expensive medical event.

A family covered by insurance limits its financial risk to its "out of pocket" payments toward medical expenses. How do these payments under current plans compare with costs under the new Medical Savings Account (MSA) approach? Such a comparison shows the fear of switching to high deductible insurance coupled with an MSA to be unfounded. The MSA approach restores the insurance element to a position of primary importance and returns the normal expenses to the family's control.

The Status Quo

Today's medical care industry features plans consisting of a constantly evolving blend of Medicare/Medicaid, group insurance, Blue Cross organizations, Health Maintenance Organizations and the multiple variations of managed care plans. The majority of dollars passing through these plans pay for normal medical services that were directly purchased prior to 1965. While commonly called medical "insurance," these plans are actually collective systems of payment for services.

In keeping with the misconception that these plans are insurance, the enrollment charges are commonly called "premiums." Sixty to seventy percent of enrollees incur expenses normal for generally healthy people. Twenty to thirty percent of enrollees incur expenses to maintain the ongoing care of chronic, but controllable, ailments. Care for high blood pressure or diabetes are examples of maintenance programs. Most maintenance programs are relatively low cost compared to the expenses associated with catastrophic events such as heart disease or cancer. The majority of activity in modern plans revolves around the healthy or low maintenance enrollees. Although the enrollment charge includes the cost of true insurance, a large portion is directed at minor medical costs and, importantly, the administrative costs of these transactions.

Another common trait is that the enrollment charges for the plans are paid by an employer. Enrollees or their employer may share additional charges for dependents. The link to the employer has existed since World War II when medical plan charges paid by the employer became supplements to employee cash wages without incurring additional income taxes.

Enrollees who are not in employer plans have no tax incentive to include normal medical expenses in a plan they join. But they find it difficult to buy true medical expense insurance. Individuals "know" they cannot afford medical care independently, so they look for a "plan" with the least out of pocket costs. They usually enroll in community area plans. Coverage rules and benefit payments of these plans mirror the typical employer plan. The insurance element is buried under the payment of normal medical expenses. Most people who are "uninsured" have determined the bundled package is not affordable or undesirable. The very rich may be uninsured because they are sufficiently wealthy to pay even catastrophic expenses directly.

The Medical Savings Account Approach

The Medical Savings Accounts concept reintroduces, after a thirty year absence, true insurance against medical expense catastrophes. An MSA plan also bundles, but the pieces are more explicit. First, the family owns and invests funds held in a medical savings account (MSA). Disbursements from this account cover the family's normal expenses. MSA funds not spent at year end are retained in the account rather than lost to a common benefits pool as in a current plan. A second, coordinated piece is a high deductible comprehensive medical expenses insurance policy. The insurance policy protects the family's assets against financially harmful expenses. MSA plan funding consists of deposits to the MSA, policy premiums and small administrative fees (e.g., bank charges).

Since no tax is levied on MSA deposits or the accompanying policy premium, the tax bias is eliminated. The financial effect is equal to employee and employer whether compensation is cash or payments toward an MSA plan.

Individuals with MSA funds are not restricted by plan rules as to what expenses are covered. The allowable uses of MSA funds are a very broad list of medical expenses defined in the Internal Revenue Code. For example, many employer plans do not include dental or vision expenses, but these are eligible uses of MSA funds.

What About Coverage For The Uninsured?

Broader coverage in the general population results from the lower cost of the unbundled insurance component. Some who are currently uninsured due to the high cost of the bundled, status quo plans will purchase the high deductible insurance policy of the MSA plans. The experience reported so far supports this claim with more than 15% of policies being issued to previously uninsured people.

Critics say that Medical Savings Account plans will be used only by healthier families to the detriment of the less healthy that remain in the status quo plans. Their argument is:

The medical savings account (MSA) is held by the subscribing family and therefore leaves the "insurance" pool. The healthy family does not spend the entire amount deposited to the account. The fund balance remaining is "lost" to the health care system that therefore harms the less healthy.

The answer is:

The premium for a high deductible policy is the required expense for an MSA plan. By definition, all MSA participants, healthy and otherwise, stay in the "insurance" pool. The maximum payment limits of these policies are typically as high as or higher than current plans. The protection to families against financial ruin is as good or better under MSA plans than under the status quo, bundled plans. The funds held in the medical savings account do not come from the insurance pool.

Some families are currently uninsured because they, or their employers, find the bundled cost too high. With affordable insurance, the insurance pool actually increases as high deductible policies are issued to these people. They gain security against major medical expenses and are no worse off for every day medical expenses even if they make only small contributions to their medical savings account.

Of course, the misuse of the word "insurance" is the key to the critics' charge and the answer. The critics are really referring to the bundled economic system as a whole. The insurance part of the system is improved, not harmed by MSA plans.

What About The Benefits Pool?

Maybe the critics are right but should use the word "benefits" instead of "insurance." What about the medical expenses not paid by the insurance? If fewer dollars are available under the MSA plans to pay for medical services, is that where the less healthy would suffer a loss?

A family that chooses a $4,500 deductible insurance policy, is permitted to deposit $3,375 to their MSA. It is possible for policy covered expenses of $1,125 to be "out of pocket" costs paid by the family. That $1,125 is the maximum difference a family would experience compared to a current plan. Usually the difference will be less since most plans still have some family cost sharing through deductibles, coinsurance or co-payments.

Beyond the maximum out of pocket analysis, the MSA has an advantage. Status quo plan deductibles and co-pays are first dollar family costs. The MSA deductible is a last dollar cost to the family. Medical expenses can be 100% paid from the medical savings account until it reaches zero and only then is the family forced to pay out of pocket until the policy deductible is fulfilled. Most families would pay less even under MSA plans that have a greater maximum out of pocket possible.

The number of families with maximum deposits to the MSA who suffer an out of pocket loss will be low. The dollar amount of potential loss is not a financial catastrophe for most. Deposits to the MSA that are not spent each year remain available for a future expenses. As accounts grow larger with funds retained from earlier years, the percentage of families with out of pocket loses will decrease. A family using an MSA is freed from restrictions on covered services, listed providers and "mother may I" gatekeepers or precertifications as these often currently apply to normal medical expenses. Second opinion and utilization reviews are limited to the case management of catastrophic illness covered by the insurance policy where the effect is more likely to improve quality of care as well as control cost.

Funds Are Saved By Families And More Are Covered By True Insurance. Who Loses?

The claim of all current plans is that "costs" will be controlled. The cost that is uncontrolled is the administrative burden. Administrative expenses of existing plans are exposed as unproductive by the preceding analysis of the MSA approach. Productive administrative expense would be less than the reduction in the benefit and/or insurance costs. Excess funds retained in the medical savings accounts are not a loss to the benefits pool or the insurance pool. They come from the pool of administrative costs.

The health care industry is currently overburdened with direct and indirect costs of top down, central control. This has predictably resulted in unproductive administrative costs. It also causes an unsatisfactory relationship between consumers and health care providers.

With increased participation in MSA plans, costs will be shed as providers, employers, auditors and so on are relieved of the bureaucratic burden associated with reporting and monitoring each routine transaction. Quantifying all these costs is not necessary to prove this claim of savings. Allowing MSA plans to exist with current plans will demonstrate this operational cost advantage. If these claimed savings do not exist, experience will kill the MSA concept as inefficient in competition.

Consumer Services And Cost Control Would Be Lost?

Support services such as advice hot lines, newsletters and physician recommendations can be part of an MSA package. Managed care can also be part of the MSA approach. Typically case management of care will be applied only to the high cost treatments paid by the insurance policy. Because the vast majority of transactions occur within the deductible range this extra step will be less intrusive to the consumer and provider. Expenses of case management are more likely to be productive when concentrated on the high cost treatments.

MSA Plans Allow Gradual Change

The current quasi-socialistic mix of profit and non-profit companies with Medicare/Medicaid and regulatory agencies make revolutionary changes disturbing to contemplate if not impossible to implement. Since the industry directly and daily affects so many people we are rightly cautious of radical change.

Current plans all depend on central influence, if not control, over decisions about medical expenses. Each new version of these plans is disruptive to both consumers and providers of medical care. Currently Congress and state legislatures are attempting to "manage" managed care plans to "correct" complaints of constituents. The MSA plan experiment represents a different direction since power over medical expense decisions is restored to the consumer and provider. It is an interesting paradox that disruption of current plans is not necessary in order to try the MSA plan approach.

The medical savings account plans are a way to change gradually. Of course, the new way is nothing more than a return of the health care industry to a normal position in the economy. There should be no tax advantage based on whether an employer or employee buys the care. The statutory limits on the availability and future of MSA plans should be removed. If MSA plans then fail in competition with the status quo plans nothing is lost. If consumers choose the MSA model, the central authority of the status quo plans and administrative costs it spawns will disappear.

Dick Herchenroether's practice is primarily pension consulting. He is affiliated chiefly with MMC&P-Retirement Benefit Services of Pittsburgh, PA. He earned his Master of Science in Actuarial Science degree from Northeastern University in 1975, his E.A. and M.A.A.A. credentials in 1979, and his F.S.A. in 1982. He currently monitors investment and medical practice issues as well as defined benefit plan valuation issues. His email address is HrknrthrRH@aol.com.

Reprinted on BenefitsLink by permission.