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Ten years from now, health plans could be a big source of mutual fund assets.
Entrepreneurs are promoting a new type of health plan, the “defined contribution health plan.”
Members of defined contribution retirement plans accounted for $1.2 trillion in mutual fund assets in 2000, up from $67 billion in 1990, according to the Investment Company Institute, Washington.
Regulatory resistance and stock market slumps could could keep defined contribution health plans from copying that success. But, if they succeed, they could put $1 trillion in benefits assets in play. The shift would “represent a tidal wave of consumer changeand opportunity,” health care consultants at Booz-Allen Hamilton Inc., New York, predict in a recent report.
Letting consumers invest health plan assets in mutual funds “would scare me to death,” says Alan Vitberg, a Fairport, N.Y., health marketing consultant.
An employee who invested cash intended for appendectomies in mutual funds would be assuming investment market risk as well as insurance risk, Vitberg says.
But many experts are more comfortable with the idea of employees diversifying into mutual funds once health account assets exceed $10,000, or some other preset limit.
Brokers who now sell Medical Savings Accounts, a type of defined contribution health plan, say some MSA holders are already putting assets in mutual funds.
Often, an MSA “is a long-term investment program,” says Harvey Randecker, president of the National Association of Alternative Benefits Consultants Inc., Glen Ellyn, Ill. “Almost as long-term as an individual Social Security account would be.”
Traditionally, employers have “defined” health benefits, then paid what was necessary to meet that definition. Now, some are trying to hold down costs and give employees more control by promising a set amount of cash, then giving workers some responsibility for managing coverage.
In theory, an employer could hand employees cash and wish them luck.
In practice, many companies setting up the plans, such as Definity Health Corp., Minneapolis, and MyHealthBank Inc., Portland, combine a high-deductible catastrophic health insurance program with individual “health accounts” or “care accounts” that employees can use to cover routine expenses.
Employers feed a few thousand dollars into the individual accounts each year.
Employees with high expenses may end up with high out-of-pocket expenses, but program organizers say they will also have the freedom to pick the best doctors.
Employees with low expenses could accumulate several thousand dollars a year in unspent health account assets.
For now, enrollment in defined health programs is negligible, but Definity Health says employers will be offering its program to 100,000 U.S. workers in 2002.
Watson Wyatt Worldwide, Washington, says many defined contribution health programs that incorporate individual health accounts are set up under Internal Revenue Code Section 105, which governs employer-sponsored medical reimbursement programs.
The Internal Revenue Service has not yet given clear signals about how it will treat employees who carry over substantial amounts of Section 105 assets from year to year, or try to roll health account assets into 401(k) plans, according to Greg Scandlen, a senior fellow with the National Center for Policy Analysis, Washington.
Internal Revenue Code Section 220, which governs the MSA pilot program, does give participants an explicit right to carry over assets at the end of the year.
An MSA combines a high-deductible major medical policy with a savings account.
MSA holders can deduct account contributions from their taxable income.
The annual contribution limit is 65% of the policy deductible for individuals, and 75% of the deductible for families.
Holders can invest MSA assets in mutual funds and other instruments, carry over unspent funds at the end of the year, and withdraw assets as ordinary income once they reach age 65.
The Health Insurance Portability and Accountability Act of 1996 established the MSA program in 1997.
Opponents amended HIPAA to turn the program into a temporary, tightly limited test program, but MSA supporters are hoping Congress will make MSAs permanent this spring and lift the many restrictions.
If the MSA program does expand, defined contribution health programs could help employees keep health account assets by recasting themselves as MSAs.
The IRS says U.S. taxpayers have set up fewer than 55,000 MSAs. MSAs probably hold less than $1 billion in assets of any kind, experts estimate.
An insurance agent would have to handle many MSA customers to build up significant trail commissions from MSA mutual fund investments, says Ronald Dobervich, a Rolling Meadows, Ill., benefits broker.
But the State Bank of Howards Grove, Howards Grove, Wis., a major MSA distributor and administrator, and a few competitors have been working hard at making mutual fund options available.
“We had lots and lots of requests” for a mutual fund brokerage option, says Kirk Hoewisch, a vice president at State Bank.
Three years ago, State Bank set up an arrangement with U.S. Clearing, an affiliate of FleetBoston Financial Corp., Boston, that gives MSA holders access to most U.S. mutual funds.
Half of the State Bank MSA holders who open brokerage accounts invest in mutual funds, Hoewisch says.
For the MSA administrator, handling tax reporting for the mutual funds and other investments within an MSA is similar to handling the tax reporting for mutual funds within Individual Retirement Accounts, Hoewisch says.
Fortis Health, Milwaukee, a U.S. affiliate of Fortis, has been packaging MSAs with mutual funds for several years. Fortis once marketed MSAs with its own mutual funds, but it recently switched to the State Bank/U.S. Clearing program, according to Scott Krienke, a Fortis vice president.
One-quarter of Fortis MSA holders put MSA assets in mutual funds, Krienke reports.
“After one year you have a relatively modest amount of money,” Krienke says. “After three or four years, you have the potential to have close to $10,000.”
Most MSA holders want to see $10,000 in assets earning more than 3% a year in a savings account, Krienke says.
The fund selections of MSA holders who invest in mutual funds appear to be similar to the fund selections of any other group of fund investors, Krienke adds.
Benefits consultants who sell MSAs say self-employed professionals are interested in hearing about mutual fund options.
Clients “know they can get a better return than they can get from savings accounts,” says Christian Clark, a San Diego consultant.
“They do like the investment idea,” agrees Timothy Taylor, a Salem, Ore., consultant.
But both brokers say they usually help clients with the insurance aspects of the MSA, then recommend clients turn to bankers, securities brokers or others for help setting up the savings accounts.
Taylor finds that the carriers in the MSA market in his state still use strict medical underwriting. Because clients must be healthy to set up MSAs, they tend have long life expectancies.
Those long life expectancies tend to make Oregon MSA holders good candidates both for using MSA funds to pay for LTC insurance, and for investing excess MSA cash in mutual funds, Taylor says.
Reproduced from National Underwriter Life & Health/Financial Services Edition, December 17, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.