An Answer to the Health Policy Dilemma. Part 3

In fact, in 1996 the Congress passed, and President Clinton signed, legislation that made MSAs a legitimate tax-favored insurance product — if only on a limited, experimental basis. While Congress put a cap of 750,000 MSA policies into the law, to date something around 100,000 have been sold. So far, the MSA experiment has largely been a flop.

To be fair, MSA supporters had wanted more flexible plan designs than were included in the original law — especially lower deductibles for the catastrophic insurance policies.

The campaign health policy proposal Forbes pushed is instructive of how the many prominent supporters of medical savings accounts see the concept working:

Employers pay about $6,000 per year to provide traditional health care insurance for the average employee.

Forbes suggested that in addition to the usual health insurance policies and HMOs, the employee have the choice of using $3,000 of the typical $6,000 cost toward a catastrophic policy, with a $3,000 deductible. The other $3,000 in expenditure would go into a tax-preferenced medical savings account which could be used to pay deductibles, co-pays and other medical expenses not often covered by cheap medical insurance, such as dental costs, eye care, etc.

By having all of this flexibility, the consumer would be able to select any provider and have the financial incentives to spend their medical dollars wisely.

Forbes points out that an MSA would be portable — you could take your medical savings account to your next employer.

Forbes points out that about one-third of all new MSA policyholders were previously uninsured — that affordable MSA programs could cut the number of uninsured.

Forbes also argues that the MSA concept could be used in Medicare. He argues that a senior could use the average $1,200 many seniors pay for Medigap insurance to fund a Medicare medical savings account.

MSAs are now a part of federal law — they were passed by the Republican Congress as part of the Kassebaum/Kennedy health insurance reform bill in 1996. (A Medicare MSA was also added to the Medicare program as part of the 1997 budget.) However, Forbes believes the Congress did not go far enough:

Current law mandates that consumers under age 65 have a minimum MSA policy deductible of $3,000 for a single person and $4,500 for a family. He argues that this can be too high and that the market should determine the proper level.

Current law puts a cap of 750,000 policies on the under-65 program. Forbes says that this cap discourages insurance companies from better developing the market. Medicare law allows a cap of 390,000 Medicare MSAs, which Forbes also thinks should be removed.

Current law also limits MSAs for people under age 65 to individuals and workers in small employer groups. Forbes believes this restriction should also be lifted and that all citizens — including federal workers — should have access to MSAs.

MSAs as a Policy Solution

MSAs are not the broad policy solution Forbes would like them to be. But, MSAs are also not the bad policy many Democrats think they are. MSAs have the potential to be a useful niche health insurance product that many consumers would likely find attractive.

Forbes likely has a point in arguing that MSA opponents in Congress were successful in placing limitations on the programs that have hurt their development. But, having said that, even Forbes points out that an MSA program can cost as much as $6,000 per year.

Forbes argues that MSAs could reduce the number of uninsured, but he does not indicate how the majority of the uninsured, who could not afford to fund a $6,000 MSA program, would do so. Giving an uninsured person the right to purchase a policy that costs $3,000, with a $3,000 deductible, might be better than nothing. However, how could a poor person afford the $3,000 premium in the first place and what good it would do them if there is also a $3,000 deductible before it could be used?

Forbes argued that MSA programs were a great “patient rights” solution because they would allow the consumer to go to any doctor or hospital he or she wanted to and even be able to negotiate the price. That’s fine, as far as it goes. But, Forbes misses an important point. Those big HMOs and other managed care plans use their large membership lists to negotiate discounts that are as much as 25 percent to 50 percent less than a walk-in price at a doctor’s office or hospital — likely a much better deal than any single person could negotiate.

With fewer than 100,000 MSAs sold to consumers over the three years they have been available, many have questioned the degree to which Forbes and many other prominent Republicans rely on MSAs as their core healthcare policy. For a candidate who claimed to believe so strongly in the market, he doesn’t seem to be listening to what the market is telling him about them — their deductibles make them too risky, they are too complicated, and consumers simply want the comprehensive plans they have become accustomed to.

That is not to take issue with MSAs generally — they are a good niche product that should be available to everyone.

However, it is not clear how they provide any kind of comprehensive solution to what ails the American healthcare system.

Many Democrats are suspect of the MSA concept, believing that only the healthiest people will buy MSA plans thereby leaving other insurance plans with the burden of taking care of the sickest people. They argue that any insurance system has to be one that includes the largest pool of people possible where the sickest and the healthiest are together — the healthy offsetting the costs of the sick thereby creating a lower average cost for all.

There is some credence to this notion. In the 1980s and early 1990s, there were many examples of insurance company “cherry picking,” where some insurance companies went out of their way to insure only the healthiest consumers to keep their prices and their claims lower. Most of this behavior was outlawed by a series of state and federal laws, including the 1996 Kassebaum /Kennedy insurance reform law.

Many Democrats fear that some insurance companies just want to write MSA programs as another way to begin the cherry-picking process all over again.

The MSA critics also worry about another insurance concept – anti-selection. Anti-selection is the notion that consumers will select the health plan that is in their own self-interest with healthy people going one way and sick people going to another plan. They look at MSAs as an insurance product that, because of its reliance upon high deductibles and the consumer’s ability to save any money not spent in a tax-deferred account, will attract only the consumers who think of themselves as healthy. To the critics, this means the insurance companies would end up getting only the healthiest consumers and an unfairly profitable block of business.

While the reasons for the MSA critics concerns are valid, they miss the rest of the story on anti-selection and cherry picking: durational rating.

It is true that some insurance companies went out of their way to cherry pick the healthiest consumers, especially prior to the state and federal reforms. But those same companies were also faced with another aspect of insurance underwriting as the initial selection process wore off. What that means is that while an insurance company could get the healthiest people in the beginning, on average, a healthy group of people doesn’t stay disproportionately healthy over the long run — healthy people also get sick. It is not uncommon to find what was a cherry-pick group of better-than-average healthy people later looking like an average health group — in as little as 18 months. That’s why during the days of insurance company cherry picking insurance companies would gradually compensate for this underwriting “deterioration” by raising the rates over time. That process was called durational rating. Sometimes companies who at first had selected just the healthy people to insure later gave those same people larger rate increases and even canceled their coverage as those consumers who had previously been attractive to the underwriters became less attractive customers.

The upshot of all of this insurance jargon is that while MSA programs may get the healthiest people on day one, they will not likely have a healthier population over time. While the critics of MSAs have reason to be concerned that MSA insurance products will unfairly attract the healthiest people there is also good reason to believe that phenomenon will be at best temporary. As long as an insurance company cannot cull out their sickest customers, that may have been healthier than average in the beginning, their overall pool of customers will likely not be significantly healthier or sicker than any other health insurance plan over time.

It is possible that MSA consumers will take advantage of the system by moving to a comprehensive insurance plan when they become sick. To minimize this, an MSA system might include a provision allowing MSA participants to be limited in how often they can change their coverage, to perhaps once a year.

When all of the pros and cons of MSAs are considere