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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 and surgery.

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:

  1. you can save money (tax-free) for future medical expenses and the interest that you accrue is also tax-free; or
  2. you can withdraw money from your MSA at the end of the year, but would need to maintain a minimum balance.
Nonmedical withdrawals would be fully taxed and subject to a 15 percent tax penalty.

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.