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June 04, 2006 at 04:00 PM
When you are coming up with ways to market and explain health savings accounts, one useful exercise might be to think about the differences between the HSA program and the old medical savings account program.
Medical savings accounts hit the market in 1997. Insurance carriers hoped qualified individuals would seize the opportunity to achieve tax benefits and take control of their health care expenditures.
For years, underwriters of individual medical policies had heard entrepreneurs complain about a tax system that denied them the same tax advantages enjoyed by participants in large employer-sponsored plans. The MSA gave entrepreneurs tax advantages.
What’s more, many carriers believed the innovative MSA alternative would resonate strongly with independent-thinking, self-reliant entrepreneurs who preferred to have greater direct control over all aspects of their lives–including their health care decisions.
The carriers were disappointed.
Looking back, the MSA was the best product that could be offered at the time. Although the product foundered, it taught employers, brokers, insurers and policy-makers valuable lessons that may well transform the entire health insurance industry.
Design by committee
As the Clinton administration watched health care costs skyrocket, it looked for practical alternatives to a third-party payment system characterized by high administrative costs and widespread application of increasingly expensive health care technologies.
After considering reforms such as managed competition, the administration compromised on a narrow, temporary MSA program that promised to help qualified self-employed individuals lower costs, gain tax benefits and reclaim direct health care decision-making power.
The program worked well enough for some early adopters. In many cases, they reduced their overall health care costs by purchasing low-cost, high-deductible insurance policies that covered catastrophic illness, and they invested the premium dollars they saved in tax-free MSAs.
That way, the early MSA holders could avoid paying to insure the cost of routine health care services. In theory, the MSA holders also could choose health care providers based on quality and cost, and manage the direct payments themselves through their MSAs.
But three factors prevented greater adoption.
First, prospects objected to the program’s restrictive qualification guidelines. MSAs were open only to the self-employed and small business owners, and Congress established an income ceiling that excluded many business owners.
The institution that dominates the American health insurance culture, the large business, could not use the MSA.
