Medical Savings Accounts Study
Principles and Aims of Medical Savings Accounts

The underlying goal of MSAs combined with higher deductible major medical health insurance is to provide strong incentives that influence demand for health services. MSAs provide incentives to change health-seeking behaviors, reduce avoidable and unnecessary health services utilization, reduce administrative costs, and directly reward those who produce the savings. The prudent person only purchases insurance for risks the buyer is unwilling to absorb.

Transaction costs grow in relation to the frequency of claims made and paid. Processing many small health services claims significantly contributes to health care spending. When individuals pay directly at the point of services using personally owned, prefunded accounts, two important things result. First, paying losses directly eliminates costly third-party handling of numerous smaller but frequent claims. Second, the individual acting as risk bearer spends personally owned money, not someone else's money.

Employees have direct control of money that accrues in their personal medical savings accounts. Any year-end balance belongs to the employee as savings for future health care expenses or other needs, enhancing personal security.

Medical savings accounts minimize the potential problem of having to pay out-of-pocket for unexpected costs. MSAs essentially replace the deductible by prefunding first dollar medical expenses with MSA contributions. People with these accounts can self-insure, just as they can with their automobile insurance. MSAs provide the cash to pay directly for claims up to the predetermined amount, typically $2,000 to $3000. Major medical self-insurance or third party insurance covers higher expenses.

Since more than 87% of individuals have less than $2000 in medical claims in a given year, MSAs greatly reduce expenses associated with frequent smaller claims.2 Adjudication and reimbursement processes come into play only when claims exceed the insurance deductible.

Employers and employees save money by paying a lower premium for security against high health expenditures.3

Utilization of health services drops because their value becomes more real and personal. The person with an MSA, for example, is more likely to weigh the cost and benefit differences between generic drugs and name brands. Likewise, the same person spending personal funds is more likely to weigh differences among various brands available in the supermarket. MSA participants know they are spending their own money. No longer do they think that they are spending other people's money or that their employer is giving them "free" health and medical care services.

Contrary to beliefs held by some opponents, MSA users are more likely to seek and use preventive services since they do not face deductibles and out-of-pocket expenses to buy such services, as discussed on following pages.

MSA programs do not require third parties, insurers or managed care organizations to negotiate charges for health care providers. Instead, in the absence of pre-negotiated charges, informed patients may negotiate at the point of service. In some MSA plans, provider charges may be pre-negotiated and combined with optional arrangements such as preferred provider networks. A person may use out-of-network services, but the costs, taken from personal savings, may be more. In its most flexible form, the choice of plan and provider still belongs to the individual. In its most constrained form, the MSA and catastrophic benefit package may be integrated fully with a preferred provider managed care plan or even an HMO.

"Employees have direct control of money that accrues in their personal medical savings accounts."

"Contrary to beliefs held by some opponents, MSA users are more likely to seek and use preventive services..."

Employer-provided health insurance benefits are considered a cost of doing business and therefore are exempt from federal income tax. Attempting to bring equity to the self-employed, several members of Congress have introduced bills allowing individuals and business to establish tax exempt MSAs. S. 121 is the first such bill before the 104th Congress.4

Evergreen Freedom Foundation P.O. Box 552, Olympia, WA 98507 Phone: (360) 956-3482, Fax: (360) 352-1874 Email: effwa@effwa.org