| Three
powerful trends have combined to cause many employers to explore offering
individualized health care benefit accounts to their employees --
(1) the resurgence of double-digit health care inflation; (2) a backlash
by employees and physicians against managed care and other provider-side
cost constraints; and (3) a rise in health care consumerism fueled by the
internet and direct-to-consumer advertising for health products and services.
Employers are investigating whether new approaches involving defined contribution
benefits might not only contain health care costs, but also increase employee
choice and satisfaction concerning their health care.
This web site provides an
overview of the advantages and disadvantages of the three main types of
individualized health care benefit accounts in the field today. It
is intended to help employers, employees, and public policy makers better
understand these options and choose among them. Customized research
is also offered. Future web site development may include additional
services and products. Suggestions for improvement of this site or
corrections are welcome (please see contact information at the end).
MEDICAL
SAVINGS ACCOUNT (MSA)
A Medical Savings Account
(MSA) is a form of individualized health care benefit account which has
been relatively well-defined by federal legislation. An MSA is a
tax-advantaged personal account from which an individual pays their health
care bills. It is usually accompanied by a high-annual-deductible
("catastrophic") insurance policy which pays 100% of health care bills
above the deductible. The amount put into the MSA each year is generally
less than the annual insurance deductible. MSA funds which are unspent
as of the end of the year can be kept in the account to pay health care
bills in future years. Many MSAs also allow individuals to withdraw
funds for non-health-care purposes after payment of taxes (and a 15% penalty).
In theory, an MSA could be
funded by an employer, employee, or both. Current federal legislation,
however, does not allow contributions by both employer and employee.
In current MSAs, employee contributions into an MSA are exempt from federal
income tax, social security tax and (in many states) also state income
tax. Employee contributions remain subject to Social Security tax,
so employee-funded MSAs are generally less desirable.
In many MSA plans, all expenses
which qualify as health care expenses under the IRS income tax code are
eligible for MSA reimbursement. This scope of services is more generous
than under many traditional health plans. Many MSA plans also allow
an individual to see any provider. This provides more freedom of
choice than with most managed care networks. Some MSA proposals incorporate
care management into the high-deductible insurance plan; others do not.
MSAs are currently authorized
under a four-year pilot study initiated by the Health Insurance Portability
and Accountability Act of 1996. This pilot limits MSAs to: individuals
at firms with under 50 employees; the self-employed; and the uninsured.
It also limits annual MSA contributions to no more than 65% of the accompanying
insurance deductible for individual coverage and 75% for family coverage.
The scope and flexibility of MSA design may expand or shrink in the coming
years, depending on what legislation follows the pilot.
MSAs have been hotly debated
in the public policy arena. MSA supporters say that MSAs would: contain
health care costs without the intrusion of managed care into the patient-physician
relationship; empower people to take greater control of their own health
and health care -- improving their health and shopping for value in health
care services; expand individuals' choice of providers and thus their
satisfaction; provide equitable tax treatment for individuals who choose
high out-of-pocket insurance plans instead of more expensive low-deductible
plans; and reduce the number of uninsured people by offering a low-cost
tax-exempt insurance alternative.
MSAs opponents say that MSAs
would: disproportionately attract healthy and wealthy people -- leaving
the sick and the poor in traditional health insurance with increasing premiums;
provide a tax break for the wealthy which would overshadow health care
effects; cause people to neglect preventative care; and not significantly
contain costs or decrease the number of uninsured people. Some
of these negative effects could be reduced if employer contributions to
MSAs are adjusted for health status and/or income level. This would
require employers to modify the concept of equal defined contributions
for all employees. It may also be possible to reduce adverse selection
by balancing MSA design incentives.
MSAs are not yet common in
the U.S., but could become so. In a recent survey of 400 health care executives
by PricewaterhouseCoopers, 60% of the executives believed that most U.S.
employers will offer MSAs to their employees by 2010 (Wrobel and Metropulos,
1999).
HEALTH
CARE REIMBURSEMENT ACCOUNT (HCRA)
A Health Care Reimbursement
Account (HCRA) is a second form of individualized health care benefit account
which is relatively well defined. Each employee funds their own HCRA
with tax-free contributions from their earnings and then uses the account
to be reimbursed for allowable medical expenses that are not paid by their
primary insurance (such as co-pays or non-covered health-related services).
HCRAs have been used for many years in a secondary role -- supplementing
an employee's traditional, low-deductible health insurance policy.
With an HCRA, employees determine how much they want to put into the account,
but money left unspent in the HCRA at the end of the year is lost to the
employee. Each year, the employee must "use it or lose it."
Also, HCRA funds can not be withdrawn for non-health-care purposes.
The inability of consumers to save unspent funds for future years or to
withdraw funds for non-health-care purposes differentiate a HCRA from an
MSA.
Although both MSAs and HCRAs
both allow employees to avoid paying income tax on medical expenses not
covered by the employee's primary health insurance, the design of HCRAs
is currently more flexible than MSAs because of the MSA pilot legislation.
HCRAs are not as restricted with respect to employer size or plan design.
This is a key advantage of HCRAs today. The main disadvantage of
an HCRA is the risk of losing unspent funds at the end of the year.
HCRAs may also dilute the utilization control purpose of copays and deductibles
in primary health insurance.
COMPREHENSIVE
INDIVIDUAL MEDICAL ACCOUNT (CIMA)
A Comprehensive Individual
Medical Account (CIMA) is a variation on an MSA or a HCRA in which an employee
purchases health insurance through the account, instead of having an insurance
policy provided separately by their employer. A CIMA is called "comprehensive"
because, unlike the situation with traditional MSAs or HCRAs, all health
care benefits are purchased through the account. If a
CIMA qualifies as an MSA under current federal legislation, including employer
size and deductible criteria, then it is a variation on an MSA; multi-year
saving and cash withdrawals (after penalty) are possible. If a CIMA
does not quality as an MSA, then it is a variation on a HCRA; unspent funds
are lost at the end of the year.
An employer generally makes
a defined contribution into a CIMA for each employee. The employer
does not pay directly for a catastrophic or primary health insurance policy.
Each employee uses their CIMA to purchase a blend of health insurance and
individual health care services. A key advantage of a CIMA is that
each employee can individually customize their own health benefits package.
Insurance purchased through
a CIMA can be: a single capitation contract with an HMO or other care system;
or a combination of sub-capitation contracts with individual providers.
With a single capitation contract, the HMO or care system is paid a fixed
amount per month to provide the care that the employee needs from all types
of providers in the system network. With sub-capitation contracts,
each provider is paid a fixed amount per month to provide only the care
that the employee needs from that provider. Ideally, multiple sub-capitation
contracts combine to form comprehensive coverage for the employee.
Advantages of a CIMA with
multiple sub-capitation contracts include: greater choice of providers
and customized network creation by employees; and greater price and quality
competition among individual providers. A potential disadvantage
of CIMAs with multiple sub-capitation contracts is the possibility of cost-shifting
among independent providers. HMOs often have risk pools and other
internal arrangements to: align primary care physician, specialist and
hospital incentives; coordinate physician referrals and hospital admissions;
and avoid cost-shifting among providers. When an HMO is replaced
by multiple sub-capitation contracts in a CIMA, such coordination may be
lost.
Another potential disadvantage
of CIMAs concerns risk segmentation. CIMAs can allow individual employees
to select insurance packages with different levels of copays and deductibles.
This increased choice can be good for employees, but it can also lead to
greater risk segmentation for a firm offering CIMAs than a firm offering
MSAs.
CONCLUSION
Many employers are investigating
new defined contribution options to provide their employees with health
care benefits. These options include: Medical Savings Accounts (MSAs),
Health Care Reimbursement Accounts (HCRAs) and Comprehensive Individual
Medical Accounts (CIMAs). MSAs and CIMAs are relatively new
and their results are not well documented yet. Will they cause risk
selection in insurance markets and leave the chronically ill paying higher
insurance premiums? Can negative effects may be avoided through balanced
plan design? Will these accounts provide cost containment, greater
employee choice, and improved service -- a win-win situation for employers
and employees? As the results of pilot programs and early innovation
become known and these benefit arrangements are refined, then we will learn
whether they live up to their promise to improve employee choice and satisfaction
with health care.
© MoreHealthOptions.
FOR
MORE INFORMATION:
Health Savings Accounts
Medical Savings Accounts
Personal Health Account
Health Benefits Design
Health Insurance
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concerning Consumer Directed Health Care. It is intended for further
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