Update on MSAs, Now Called
Health Savings Accounts (HSAs)
Congress enacted Health Savings Accounts (HSAs) in 2003 as part of the Medicare reform package. HSAs are essentially Medical Savings Accounts (MSAs), according to the Council for Affordable Health Insurance. For information about HSAs, see:
The information and links cited above were updated on February 3, 2006. The following article about MSAs has been posted since 1998.
Medical Savings Accounts (MSAs)
Give Patients Power*
by Sue A. Blevins
On August 21, 1996, President Clinton signed into law the
Kassebaum-Kennedy bill that allows Americans to open a Medical
Savings Account (MSA). The new law (Public Law 104-191) became effective January 1, 1997
and it restricts the number of people who can open an MSA
to 750,000 persons who are self-employed or who work for a
small business (50 or fewer employees). However, the 105th
Congress has indicated that it might remove that cap, and
allow all Americans to open an MSA.
What is a Medical Savings Account (MSA)?
MSAs are tax-deferred accounts that allow you to save money
for medical expenses. Here's how an MSA works: Your employer
(or self) would take the money currently spent on your health
insurance and deposit a portion into your newly established
Medical Savings Account, up to $1,400 for an individual (or
$3,375 for a family). The other portion would be used to purchase
a catastrophic policy that covers medical expenses after you
meet a deductible.
Using your MSA funds, you pay for your first $1,400 worth
of medical bills directly. MSA funds can be used to cover
any medical expense that is currently tax deductible. The
list of medical expenses is very broad. It includes (this
is a partial list, the entire list includes over 100 deductions):
acupuncture, anesthetist, chiropractor, contact lenses, dentist,
eye glasses, medical doctor, psychologist, registered nurse
MSAs create an incentive for you to become a smart health-care
consumer because you get to keep money that is left over.
You have two options for handling unspent MSA funds:
Nonmedical withdrawals would be fully taxed and subject to a
15 percent tax penalty.
- you can save money (tax-free) for future medical expenses
and the interest that you accrue is also tax-free; or
- you can withdraw money from your MSA at the end of the
year, but would need to maintain a minimum balance.
MSAs may prove to be the most viable option for reducing
our nation's health-care bill, while preserving patient choice
and improving access to all types of health-care providers.
Who Would Choose an MSA?
A lot of negative information has been circulated about MSAs,
with the primary charge being that MSAs will drain money from
the sick and help only "healthy, wealthy" Americans. But no
empirical evidence exists to support this charge. Instead, research
indicates that a large number of Americans, not just the "healthy,
wealthy," would likely switch to MSAs, if they had the option.
A survey by Blue Cross found that 43 percent of employees would
"definitely or probably" switch to MSAs if they were offered.
And that's also why United Mine Workers insisted on MSAs in
their new contract, according to the Wall Street Journal.
Myths & Facts about MSAs
Myth #1: MSAs provide a tax break for the rich.
Fact: MSAs create a level playing field by giving
self-employed and uninsured workers the same tax break as
people who work for corporations. Today, individuals whose
employers offer health insurance do not pay taxes on their
health insurance. Yet those who work for companies that don't
offer health insurance must pay income taxes on their purchase
of health insurance.
MSAs promote tax equity by allowing all workers to save
money tax-free for medical care, regardless of whether or
not their employer offers health insurance.
Myth #2: Only healthy people will choose MSAs, thereby
draining money from the sick.
Fact: There is no evidence that only healthy people
would open an MSA. Sick patients would have an incentive to
choose an MSA because they would receive money up front to
pay for medical expenses, such as prescription drugs. Additionally,
sick patients would have direct access to medical specialists
and the freedom to choose their doctor. Moreover, to open
an MSA, all patients must prove they have a catastrophic health
insurance policy. This means that healthy people still contribute
money toward a catastrophic health insurance pool -- they
can't just take their health care money and run.
More Information on MSAs.
For a thorough understanding of Medical Savings Accounts (MSAs),
see the book "Patient Power" by John Goodman, Ph.D. (President
of the National Center for Policy
Analysis and Gerald Musgrave. The book is available from
the Cato Institute, 1000 Massachusetts
Ave., N.W., Washington, D.C. 20001 or (800) 767-1241.
*Note: This article has been posted since March 10, 1998.