Wednesday, October 30, 2002

With medical savings accounts,
era of managed care is ending

By Grace-Marie Turner

The age of managed care ended and the era of consumer-driven health care began on Wednesday, June 26, 2002.

That was the day the Internal Revenue Service ruled that companies across America can liberate their employees from the shackles of bureaucratic control over their health insurance and create new health plans with incentives for employees to be partners, not adversaries, in decisions about their health spending.

Now, any company, large or small, has a green light to offer health plans based upon the structure of Medical Savings Accounts.

Here's how they would work: A company would put part of the money it had been spending on health insurance premiums for an employee into a new tax-free account that the employee could use to pay for routine medical bills. The company also would purchase a catastrophic policy to cover the employee's major medical bills.

The key part of the IRS ruling is in allowing employees to roll over any balance they have saved in their health account from one year to the next. The money is theirs to keep, even if they leave the company or retire. It stays tax-free as long as it is spent on substantiated medical expenses.

This dramatically changes the incentives in health spending. Workers, who in the past would make a doctor's appointment for a sniffle or a stubbed toe, now may think twice, saving doctors' visits for real medical needs.

During the heyday of managed care in the 1990s, employers thought they had found the magic solution to rising health insurance costs. They hired outside firms to oversee employees' access to care and to negotiate lower payment rates with doctors, labs, and hospitals.

But the incentives were all wrong: Employees wanted more services and flexibility, and physicians became angry and frustrated with micromanagement of their decisions. Employers finally gave up the power struggle and relaxed the strings.

But partly as a result, health insurance costs are soaring. Many companies expect their health insurance costs to increase by 20 percent or more this year.

Clearly, something new is needed.

The IRS was asked last year to interpret a provision in the tax code guiding employment-based health insurance arrangements. Several wise officials correctly ruled that if employers deposit money into health spending accounts for their employees, it stays tax free and can be rolled over for future health expenses.

Some workers will choose to stay with their current PPO or HMO, but others will opt instead for the new accounts. Whichever route they choose, they will continue to have insurance protection for major medical costs.

But if they choose the new MSA-like accounts for routine and controllable expenses, employers and employees will have the same goal: Spend wisely and save money. Employees will see the money that they are spending on health care as real money - their money - with dollars that have the same value as those they spend on groceries, clothes, and housing.

In announcing the ruling, Treasury Secretary Paul O'Neill said: "With this new guidance, we clear the way for employers to adopt health plans with patient-directed features so that employees have more choice and greater control over their health care coverage."

Some workers already are eligible for tax-favored Medical Savings Accounts, primarily the self-employed and those working for companies with fewer than 50 employees.

But these first MSAs were created in 1996 by an act of Congress, which put a mountain of rules and restrictions on them that extinguished any chances of a viable market emerging.

The new plans, which the IRS calls "Health Reimbursement Arrangements," won't be shaped by politicians but by the marketplace.

There are issues to be resolved about the new policies, involving incentives for preventive care and networks of doctors that agree to lower rates in return for the direct payment. But blessedly, companies, and not Congress, will be in charge of making those decisions.

A number of major companies are ready to offer this new product in their health insurance mix next year but were waiting for the IRS to rule on whether or not the tax-free rollover was legal. Many will be signing on the dotted line this summer to make the new accounts available next year.

Fortune magazine reported recently on the experience of a major health plan, Humana, in offering health accounts to its own employees. Humana's internal health-insurance expenses were expected to rise 19 percent this year, but because of these new consumer-directed plans, may rise by only 4 percent.

A new era indeed is dawning.

[Grace-Marie Turner is an adjunct scholar with the Georgia Public Policy Foundation and president of the Galen Institute, www.galen.org, a not-for-profit public policy research organization focusing on free-market health reform. The Foundation is a nonpartisan, member-supported research and education organization that promotes free markets, limited government and individual responsibility. Its Internet address is www.gppf.org.]

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