Medical Savings Accounts: A Big Tax Break For Helping To Insure Yourself
Last year, Stephen Felder, a self-employed engineering consultant in Lake Alfred, Fla., paid Mutual of Omaha Insurance Co. $290.49 a month for family health insurance with a $2,500 per-person deductible. His wife, Victoria, worried that if the family of four ever had a serious car accident, they would pay $10,000 in deductibles before coverage kicked in. Even then, insurance would pay only 80% of expenses.
Today, Felder enjoys better coverage at a lower cost, under a Golden Rule Insurance Co. policy regulated by the new health insurance reform law. His $253.73 premium buys 100% coverage, after a total family deductible of $3,000. Felder can cover most of the deductible by contributing tax-deductible dollars to a medical savings account. The MSA pays 5% annual tax-free interest, and Felder can withdraw funds to pay for dental work, eyeglasses, or other medical expenses not covered by his policy.
TIME-SENSITIVE. The Health Insurance Portability & Accountability Act, which took effect on Jan. 1, was designed to make health insurance accessible for some of the 42 million who currently do without. For at least a few months, until interim caps kick in, it creates a taxpayer-subsidized opportunity for self-employed people such as Felder and companies with up to 50 employees to buy cheaper coverage.
The legislation authorizes individuals and small companies to buy so-called catastrophic, high-deductible health policies in conjunction with MSAs, which work like individual retirement accounts. Participants or their employers can deposit up to 65% of an individual's deductible or 75% of a family deductible into the MSA each year.
The new policies and MSAs can mean lower costs for small companies who want to provide their employees with comprehensive insurance. But employers always have been able to deduct the expense of workers' medical insurance, so their savings from MSAs are modest. By contrast, MSAs are "an incredible boon for the self-employed," says Greg Scandlen, who heads up Health Benefits Group, an MSA consulting firm. "For the first time, they get a 100% deduction for part of their medical expenses." In 1996, before the MSA, self-employed workers could deduct 30% of health premiums.
Experts say such products will prove especially attractive to healthy self-employed people who have few actual health expenses. Dr. Niranjan Shah, a self-employed cardiologist in Holmdel, N.J., says his family of four never spends more than $500 a year on health care. He bought a new high-deductible policy from Blue Cross & Blue Shield of New Jersey and an MSA for the tax benefits. If his family stays in good health, the money he sets aside can accumulate interest tax-free, and--unlike employees' contributions to flexible spending accounts--can be carried over from year to year.
Importantly, the MSA is a pilot project. The law authorized just 750,000 accounts before 2000 and imposed interim caps for earlier years. If the MSAs exceed this year's cap, the Treasury Dept. can bar new employer-sponsored accounts as of Sept. 1 and new self-employed accounts on Oct. 1.
That leaves a "nine-month window this year" to establish an unlimited number of MSAs, notes David Lack, executive director of the Council for Affordable Health Insurance. The financial services industry, true to form, is rising to the opportunity. Some 30 insurers already offer high-deductible health policies and MSAs, and 47 additional firms expect to introduce products by the spring, says Mark Morris, executive vice-president of Eclipse MediSave America Corp., an Indianapolis-based consultant (table).
PRICE CHECK. Insurers typically offer either an indemnity product that pays a percentage of each claim, or a preferred provider organization that offers lower costs if policyholders stick to a limited network of doctors and hospitals. Many administer both the insurance policy and the MSA; others affiliate with banks or other institutions that handle the MSA. Blue Cross & Blue Shield of New Jersey, for example, offers MSA Blue, including full coverage of preventive care, with an MSA administered by First Union Bank. WellPoint Health Networks has joined with Mellon Bank, which allows MSA funds over $2,000 to be invested in its Dreyfus mutual funds.
How do you sort through the panoply of offerings? First, check the price. Abundant supply doesn't mean that these policies are always a great deal. In some areas, catastrophic policy premiums for individual coverage aren't much cheaper than a good managed-care plan. "And don't hesitate to ask for new price quotes every quarter," suggests Morris.
Pay close attention, too, to how the policy's deductible is applied. Golden Rule's $4,500 family deductible applies even if just one individual requires care. Mutual of Omaha's $4,500 deductible, however, limits any individual family member's deductible to $2,250 in expenses before coverage begins. In addition, consumers should determine which expenditures will be applied to their policies' deductible and out-of-pocket caps. Some insurers apply only regular physician and hospital charges to the deductible, while others also allow dental and vision-related charges, even if such services aren't covered by the policy. Still others allow only a percentage of "usual, customary, and reasonable" expenses to qualify toward the deductible.
Evaluate how out-of-pocket caps are applied in preferred provider organizations. Golden Rule's PPO offers 100% coverage for services from doctors and hospitals in its network and 75% coverage outside. Patients can pay up to $5,000 in out-of-network coinsurance, plus the deductible. By comparison, WellPoint Health Networks hopes to get California regulatory approval to offer 80% coverage in network and none out of network--but its out-of-pocket caps, at $3,000 for individuals and $5,500 for families, include the deductible.
Figuring out the MSA itself shouldn't be as complex. The account should allow easy access to funds to pay current medical bills and also provide a high rate of return on unused assets. A good MSA administrator can track deposits, claims withdrawals, and expenditures. It also can adjudicate and reprice claims, informing account holders if deductibles and out-of-pocket expense caps have been met.
The big risk? Experts worry that some workers won't save enough, especially in the short run, to cover unanticipated expenses. "If you do not put enough money into your MSA because you think you're healthy, and you get hit with a big claim, you won't have enough money" to pay for it, notes Kwasha Lipton health consultant Howard Tarre. The government's gift to small business and the self-employed can be a godsend--but only if people actually act on it.