From Families USA
February 22, 2000

New Patients' Bill of Rights Fact Sheets: Medical Savings Accounts

What are Medical Savings Accounts (MSAs)?
MSAs are tax-free savings accounts that can be set up by those who purchase health insurance plans with large deductibles.

How do they work now?
Under current law, an individual or family with a high-deductible health plan can put money in a tax-free account that they use to pay for medical expenses. To qualify, the plan must have a deductible that is at least $1,500 but no more than $2,250 for an individual and at least $3,000 but no more than $4,000 for a family. Contributions to the account are limited to 65 percent of an individual's deductible or 75 percent of the family's deductible for the accompanying health plan. There is no requirement that employers contribute to the account. MSAs are available only to small employers and the self-insured. A maximum of 750,000 MSAs may be established.

What changes are proposed in pending legislation?

• Reducing the minimum deductible to $1000 for an individual and $2000 for a family.
  § Allowing the full amount of the insurance policy deductible to be contributed to the tax-free account.
  
• Lifting the restriction that currently limits the use of MSAs to small businesses and the self-employed.
  
• Requiring the Federal Employees Health Benefit Program to establish catastrophic health insurance plans and MSA accounts with contributions from the government.
  
• Eliminating the cap on the number of plans that can be sold.

Why shouldn't we expand MSAs?

• Healthier people are likely to select these plans because they anticipate few medical treatment costs and expect to be able to shelter some income from taxes. Like most tax shelters, the tax-free benefits of an MSA are worth more to wealthier individuals.
  
• By luring the healthiest persons out of the broader insurance pool, MSAs will drive up premium costs for those who cannot participate.

How many currently uninsured people would MSAs help?
Current law limits the number of MSAs to 750,000. The IRS recently projected that 45,000 MSAs would be opened by the end of 1999. The IRS also estimated that only 10,000 of over 44.3 million uninsured people would gain coverage through the expansion of MSAs.

Will MSAs cause higher premiums for people not in MSAs?
Yes. As healthier and wealthier people join these plans, people who remain in health plans outside of MSAs will see their premiums rise. This could result in employers dropping coverage as their premiums increase.