Building A Nest Egg While You Pay The Doctor

Imagine paying your medical bills from a savings account that your employer may help feed every month. Imagine not having to pay taxes on the money and being able to spend it on any doctor, hospital, and medical treatment you desire--or saving it and letting it build up interest, tax-free. Starting in January, thousands of Americans will be able to open a medical savings account (MSA) that will let them do just that.

As part of a four-year experiment to test whether MSAs are a viable form of health insurance, Congress recently gave the green light to 750,000 policies that link a tax-favored account to a high-deductible catastrophic insurance plan. The pretax dollars in the MSA will pay for routine health-care services, while the insurance policy will cover major medical expenses. For now, only people who are self-employed or who work for a business with a maximum of 50 employees are eligible, on a first-come, first-served basis. The former can sign up on their own through a participating insurer, such as Golden Rule Financial in Indianapolis, American Medical Security Group in Green Bay, Wis., and various Blue Cross & Blue Shield plans. The latter group must wait for their employer to provide an MSA option.

Under the pilot project, an employer pays the premium on the catastrophic policy and makes a tax-free contribution of up to 65% of the deductible on an individual catastrophic policy and 75% for a family plan in a year. Deductibles will range from $1,500 to $2,250 for individuals and from $3,000 to $4,000 for families. Once the covered medical expenses meet the deductible, the insurance kicks in.

Any money you put into the account is pretax, and you don't pay federal income tax on your employer's contributions. MSAs are exempt from levies in 18 states as well. The funds in MSAs will be managed, at least initially, by insurers and financial institutions and will earn a preset return. Golden Rule, for example, is offering products with a minimum guaranteed 6% return.

If you become ill you will be able to draw on the account to pay for medical treatment. But if you need little or no health care, the money left over just stays put and earns tax-free income until you need it. You pay a 15% penalty on top of income tax for withdrawing money for nonmedical purposes. After age 65, you get access to the funds without penalty for any reason. Even if Congress doesn't renew the MSA program after the four-year trial period expires, anyone who has an account will be permitted to maintain it and keep on making contributions.

One of the most attractive features of MSAs is that they allow patients to pick almost any doctor, hospital, or treatment they want. The insurance will keep paying in full for a doctor who is on an extensive list of preferred providers. But if your physician is out of network, you will still get partial reimbursement, with the percentage varying according to your plan. You can even use the money in your account to pay for services that may not be covered by your insurance, such as eye and dental care, cosmetic surgery, and long-term care. But these expenses do not count toward your deductible.

FINE POINTS. Make sure you find out which health services qualify under your insurance. If you use up all your MSA funds on noncovered expenses and need additional medical care during the same year, you'll have to come up with extra money to pay for the deductible. "It's easy to underestimate what your out-of-pocket expenses will be," warns Gail Shearer, director of health policy at the Consumer's Union in Washington. Another hidden cost you might incur with an MSA: Some plans require you to make co-payments even after you meet your deductible. Congress has limited out-of-pocket expenses to a maximum of $3,000 a year for an individual policy and $5,500 for a family.

The bigger problem is that the catastrophic insurance may not cover certain kinds of costly medical conditions. Some policies linked to MSAs exclude benefits for pregnancy and AIDS, and many do not cover prescription drugs. "People should not be under the illusion that all their health-care needs will be taken care of with an MSA," says Shearer.

MSAs are probably best suited for young, healthy people who are unlikely to run up high medical bills and can stash away unspent contributions. But those who will benefit most from an MSA are consumers who shop around for the best values in care--not just those blessed with good health.

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