Medical Savings Accounts and Flexible Spending Accounts

Medical Savings Accounts

Medical savings accounts [MSAs] were introduced into the tax code as a demonstration program in 1996. Their features are similar to HSAs, but the various cutoffs and limits occur at different values. The key distinction, however, is that MSAs are only available to individuals and to employees of firms with fewer than 50 workers. Moreover, enrollment was limited to 750,000 nationwide, and the original legislation had provisions that would have terminated the program in 2000.

MSAs have had limited appeal. Indeed, a survey of small businesses conducted in 2003 found that only 5% of small employers offered an MSA to their employees [Morrisey 2003]. Advocates would say this is because of both the limitations on eligibility and the sunset provision that was to end the program in 2000. MSAs are likely to disappear with the introduction of the more-generous features of the HSAs.

Flexible Spending Accounts

Flexible spending accounts [FSAs] are only tangentially related to the HSAs and MSAs. There is no requirement that a high-deductible health plan be offered; indeed, an employer need not offer any health insurance plan to still offer an FSA. However, FSAs are only available through an employer. An FSA is a tax-sheltered account held by an employer. Employees may contribute any amount up to the maximum established by the employer to such an account, and the money may be used for any qualified health service. However, unlike HSAs or MSAs, if the money in the account is not expended in 12 [or 15] months, the money is no longer available to the employee. "Use it or lose it" applies.

Employers may pass the employee premium contribution for employer-sponsored coverage through an FSA, effectively making those contributions tax sheltered. Employers also can establish what is sometimes called a "premium-only plan." This sort of FSA only covers the employee premium contribution, and employees are not allowed to make contributions that would be used for uncovered medical expenses.

Finally, proponents of CDHPs argue that the plans will provide information to help consumers made informed decisions about routine care. They assert that fully implemented plans will have contracts with centers of excellence for tertiary care and incentives for high-quality efficient care for chronic care and more-expensive acute-care services. There are several issues to consider with respect to CDHPs. Among them are the following:

The HSA can be considered a tax-sheltered investment tool. It has the advantage that both dollars contributed and those withdrawn for allowed purposes are free of federal taxation. Indeed, on reaching age 65, the funds can be withdrawn for nonhealth uses and be subject only to ordinary income tax rates. [Savvy investors might stack a CDHP on top of an FSA, using the FSA for routine health services expenses and using the HSA for investment and true catastrophic medical events.]

The CDHP is supposed to encourage consumers to shop among providers for greater value and to forgo those health services that do not appear to be worth the full cost. To what extent do CDHPs reduce healthcare spending? Are consumers able to shop among providers for value? To what extent do consumers forgo truly beneficial health services to preserve their HSA investment?

The health insurance firm potentially has much greater ability to negotiate prices than does an individual consumer. To what extent do the prices subscribers pay reflect the prices the managed care plan/insurer has negotiated with providers versus the list prices of those providers?

There are no complete answers to these questions, but research conducted on MSAs does provide some insight into the effects of HSAs. In addition, research studies that are now somewhat dated have examined consumer searches for such health services as dental and eye exams and eyeglasses.

These latter studies are of particular interest because they report the effects of the [then] newly allowed consumer advertising. If CDHPs are to be serious competitors in the health insurance market, we would expect to see increased advertising of price on the part of providers.

Health savings accounts [HSAs] allow individuals or their employers or both to contribute money to a tax-sheltered account that can be used to pay for qualified health services. Unspent balances can be rolled over from year to year. Such accounts can only be established if combined with a high-deductible health insurance plan.

A consumer-driven health plan [CDHP] is a high-deductible health plan with an HSA.

The attractiveness of HSAs and other tax-sheltered accounts, such as medical savings accounts [MSAs] and flexible spending accounts [FSAs], increases with the marginal tax rate of the subscriber. As of 2005, approximately 1% of insured adults had a CDHP, and another 9 % were estimated to have HSAs that were eligible for CDHPs. Early research on HSAs provides modest evidence consistent with higher-income people enrolling in high-deductible plans. However, lower-income people also appear somewhat more likely to enroll.

A key issue with CDHPs is the extent to which people will actually search for greater value or at least lower-priced health services. The limited evidence on this issue suggests only modest effects and is quite dated, but it does imply, however, that provider advertising may be key.

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