59

Medical Savings Accounts and the
Federal Employees Health Benefits Program

Merrill Matthews, Jr., Ph.D.
Director, Center for Health Policy Studies
National Center for Policy Analysis

Thank you, Mr. Chairman. for the opportunity to address the committee on this

important subject.

Established by Congress in 1960, the Federal Employees Health Benefits Program
(FEHBP) provides health insurance coverage to about 9 million federal employees and their
families. The FEHBP has a number of positive elements that have made it a very attractive
health insurance program for federal employees,! The program provides employees with a
wide range of choices, from fee-tor-service policies to health maintenance organizations
(HMOs). And by imposing 4 matimum amount the government will contribute to each
employee's policy (in essence, 4 defined benefit), the program forces employees to be
value conscious in choosing a plun Ava result, competition is enhanced in a way that

benefits the government, federal employees and American taxpayers.

However, there is recognition among FEHBP administrators and federal employees
that the program could be made even more competitive. For example, some of the
departments have been considening implementing Flexible Spending Accounts (FSAs),
which give employees the opportunity to set aside pretax dollars to pay for health care and

health insurance. And the Postal service has had FSAs for years. But while adopting

| See, for example, Walton Francis, “The Political Economy of the Federal Employees Health Benefits
Program,” in Robert B. Helms, ed., Health Policy Reform: Competition and Controls (Washington, DC:
‘American Enterprise Institute, 1993), pp. 269-307


123

those amounts paid for, among other key factors, the diagnosis, cure, mitigation,
treatment or prevention of disease, or for the purpose of affecting any structure or
function of the body, as well as prescription drugs and biologicals. We urge that this
broad definition be retained with respect to MSAs.

2) Reimbursement Standards

MSA plans should be required to reimburse providers at a standard rate. We
suggest a payment floor set at the average local FEHBP provider usual, customary and
reasonable payment rate 2s a viable standard. If ihe FEHBP MSA includes no payment
standard, there is a serious risk that the catastrophic coverage component will set
rates arbitrarily and deliberately low, through some self serving inappropriate fallacious
standard, thus effectively denying patients access to quality medical care. We note
that a reasonable reimbursement requirement is in conformity with current Majority
thinking as evidenced by a similar requirement in the conference agreement on
Medicare reconciliation.

3 Tax Treatment of MSA Contributions

FEHBP beneficiaries selecting the MSA option should be entitled to make
contributions to the MSA using pre-tax dollars. This is simply in conformity with
Current tax treatment of “employee health spending accounts” in the private sector.
Federal employees and their qualified dependents should be accorded the same right
to make their contributions with pre-tax dollars. Further, we urge the Congress to
spacify that Federal employees may contribute pre-tax dollars to the MSA up to the
current Internal Revenue Code limit on “employee health spending/savings accounts”,
Not just to the level of the average ermployee share of the typical FEHB plan. This
provides a meaningful incentive to Federal employees at all income levels to select the
MSA option.

4) Allowable Expenses

As noted, we believe that the definition of “medical care” for purposes of MSA
distributions ve conformed to current applicable Internal Revenue Code definiticns.
Further, all out-of-pocket expenscs incurred prior to the triggering of the catastrophic
plan should be reimbursable from the MSA, including medical expenses beyond
whatever the specified coverage limits are in the average or typical FEHB plan. For
example, if the typical FEHB plan limits coverage of outpatient psychiatric services to
20 visits, the limit should not apply te reimbursable expenses from the MSA. If this
provision is not included, individuals selecting the MSA option precisely to ensure that
they will have specific out-of-pocket expenses ccvered may suddenly find that they
have the limit they sought to escape reimposed through the back door.


25

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COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT

WILLIAM F. CLINGER,

BENJAMIN A. GILMAN, New York

DAN BURTON, Indiana

J. DENNIS HASTERT, Illinois

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

STEVEN SCHIFF, New Mexico

ILEANA ROS-LEHTINEN, Florida

WILLIAM H. ZELIFF, Jr., New Hampshire

JOHN M. McHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

PETER BLUTE, Massachusetts

THOMAS M. DAVIS, Virginia

DAVID M. McINTOSH, Indiana

JON D. FOX, Pennsylvania

RANDY TATE, Washington

DICK CHRYSLER, Michigan

GIL GUTKNECHT, Minnesota

MARK E, SOUDER, Indiana

WILLIAM J. MARTINI, New Jersey

JOE SCARBOROUGH, Florida

JOHN B. SHADEGG, Arizona

MICHAEL PATRICK FLANAGAN, Illinois

CHARLES F. BASS, New Hampshire

STEVEN C. LaTOURETTE, Ohio

MARSHALL “MARK” SANFORD, South
Carolina

ROBERT L. EHRLICH, Jr., Maryland

Jr. Pennsylvania, Chairman

CARDISS COLLINS, Illinois

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, Jr., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

JOHN M. SPRATT, Jn., South Carolina

LOUISE McINTOSH SLAUGHTER, New
York

PAUL E, KANJORSKI, Pennsylvania

GARY A. CONDIT, California

COLLIN C. PETERSON, Minnesota

KAREN L. THURMAN, Florida

CAROLYN B. MALONEY, New York

THOMAS M. BARRETT, Wisconsin

GENE TAYLOR, Mississippi

BARBARA-ROSE COLLINS, Michigan

ELEANOR HOLMES NORTON, District of
Columbia

JAMES P. MORAN, Virginia

GENE GREEN, Texas

CARRIE P. MEEK, Florida

CHAKA FATTAH, Pennsylvania

BILL BREWSTER, Oklahoma

TIM HOLDEN, Pennsylvania

BERNARD SANDERS, Vermont
(Independent!

JAMES L. CLARKE, Staff Director
KEviN Sano, General Counsel
JupitH McCoy, Chief Clerk

Bub MYERS, Minority Staff Director

SUBCOMMITTEE ON CIVIL SERVICE
JOHN L. MICA, Florida, Chairman

CHARLES F. BASS, New Hampshire
BENJAMIN A. GILMAN, New York
DAN BURTON, Indiana

CONSTANCE A. MORELLA, Maryland

Ex
WILLIAM F. CLINGER, Jr., Pennsylvania

JAMES P. MORAN, Virginia
BERNARD SANDERS, Vermont (Ind.)
TIM HOLDEN, Pennsylvania

OFFICIO
CARDISS COLLINS, Illinois

Grorce Nesterczux, Staff Director
DaniEL R. MOLL, Senior Policy Director
CAROLINE FieL, Clerk
CeDRIC HENDRICKS, Minority Professional Staff

()


119

‘The premise behind MSA’s, noted Tobias, is that they allow consumers to choose @ health
care option with a high deductible that provides coverage for catastrophic medical expenses only
above a certain level. He said the consumer would also receive a pool of money to be used for
‘medical expenses of his or her choosing, If the poo! of money is not spent, it can usually be rolled
‘over and used the following year, or even revert to the consumer for personal use

‘An October 1995 study by the American Academy of Actuaries, said Tobias, concluded
that if MSA's were adopted for all Americans, the sick and elderly would be hurt, while the young,
and healthy would be better off

“Young and healthy individual federal employees and their families would be attracted to

the possiblity of the extra cash that MSA’s would offer. This would allow insurance carriers to
practice the very worst kind of health care practice -- often referred to as chemry picking ~
secking only those risks that are considered to be the best risks. There is little question that this

‘would upset the delicate balance inherent in the FEHBP and pethaps lead to the demise of the

FEHBP as it currently exists,

said Tobias

‘Since 1959, FEHBP has attempted to provide health coverage at reasonable rates for the
‘entire federal community -- young families, the elderly, the healthy and the frail Any effort to
alter this basic premise will not have the support of this Union,” said Tobias

30.


68

with patient choice and with the patient-physician relationship.
MSA's would allow the individual, not a third party, to choose the
physician, treatment, and range of health care services that best
meet his or her needs.

Now, as has been already pointed out, there are several criti-
cisms of MSA’s, and many of those have been addressed. But let
me, from the perspective of a physician, address a couple of those,
if I may, Mr. Chairman.

It has been argued that MSA’s are likely to reduce incentives to
seek preventive medical care. We disagree. The American Medical
Association has long advocated the importance of preventive medi-
cine, from routine checkups for kids to mammograms and prostate
screenings for adults. We are aware of no long-term studies to sup-
port the contention that MSA’s are likely to discourage individuals
from seeking preventive medical care. In fact, as has already been
pointed out, from existing experiences, medical savings accounts
could be a source of funds for services such as preventive care not
always covered by traditional health insurance.

It has also been argued that MSA’s are not likely to reduce costs
because consumers are not in the position to bargain for reductions
in cost, as are managed care plans and insurance companies.
Again, Mr. Chairman, we disagree. An MSA option in the FEHBP
would empower patients to make prudent and sensible treatment
choices and to reap the reward of their savings—savings realized
by more cost-conscious purchasing of health care would accrue to
the patient, not to some other third-party payer. Consumers can
and will make prudent decisions about their health care, just as
they decide the type of mortgage to purchase, the kind of car to
buy, or the amount of life insurance to carry.

As Thomas Sowell of the Hoover Institution wrote during the
health system reform debate last year, “No freedom can be more
personal than to decide for yourself what should be done to pre-
serve your health and your life.” While the private sector health
care market and the Medicare program may soon be touting MSA’s
among their plan offerings, the FEHBP will not unless we act now.

We believe this is ironic, considering that many have praised the
FEHBP as a model for other health care delivery systems and have
advocated opening the program to non-Federal workers. In the in-
terest of furthering consumer choice and competition in the FEHBP
and enhancing a proven program, Federal employees should like-
wise have access to an MSA option.

Thank you very much, Mr. Chairman, for the opportunity to par-
ticipate in your hearing, and we, as well, look forward to any ques-
tion you may have for us. Thank you.

[The prepared statement of Dr. Johnson follows:]


79

We don’t think we’re wrong, and there's no evidence to suggest
we're wrong, but if we are, the fix is quite simple.

Mr. MIcA. Well it seems to run contrary. Usually you hear, “See
your physician annually,” or as often as you can get down there to
the physician, and the other thing is to always encourage preven-
tive care. Some folks say that MSA's may lead folks in the opposite
direction, but you’re saying there’s no evidence to this and, in fact,
support the MSA concept strongly. Is that the correct assessment?

Dr. JOHNSON. Yes, Mr. Chairman. If I might go to the example.
It covers both of the issues you raised, I think. Look at the AMA’s
long-standing proposal to have a tobacco-free society by the year
2000. If it was in the best interests of physicians to increase our
income, we would have free cigarettes in our reception rooms. We
don’t do that.

What we want is for people to take better care of themselves,
and, increasingly, people understand that doing so will save them
money over the long run, and that’s what we advocate for the pub-
lic health, for the kind of preventive measures that will make a dif-
ference to individuals, that will enable them to lead a longer and
healthier and happier lives.

And so it has been an ongoing part of our advocacy and, hope-
fully, it would be no surprise that we are anxious to see the system
used in a more cost-effective way.

Mr. Mica. Thank you. It’s interesting, very interesting testimony,
and your observations, I think, will be important to action this
committee may take in the near future.

Dr. JOHNSON. Thank you.

Mr. Mica. Commissioner Glenn, how long has your experience
been with the MSA’s?

Mr. GLENN. Mr. Chairman, our experience is brand new. We had
open enrollment in September, and the first deposits will be made
into the medical savings accounts on February 1.

Mr. Mica. Is this open to a select group or to all employees, and
what about retirees?

Mr. GLENN. Mr. Chairman, we don’t have retirees covered.

Mr. Mica. You don't?

Mr. GLENN. It was offered to all—well, it was technically offered
to all 900 employees. The truth of the matter is, in our experience,
20 percent of our work force voluntarily enrolled, but that is, in
fact, about almost 80 or 90 percent of those that we know knew we
offered it.

We had a peculiar political situation, in which I’m confident that
there are hundreds of our county employees who aren’t even really
aware that we offer the program, and many more who may have
been vaguely aware that we offered it and who don’t have a lot of
information about it.

We had about 250 employees—actually 10 briefings by the coun-
ty that gave in-depth information about the medical savings ac-
count program. Our plan was intentionally designed the first year
so as not to be attractive to those currently enrolled in the option
of an HMO, and so we have just about 90—maybe even close to 100
percent of those who were in the old indemnity plan, who actually
attended the briefings.


15

The Honorable Bret Schundler

Testimony to the House Subcommittee on Civil Service
December 13, 1995

Page 3

and immunizations. These services were not covered by our traditional indemnity plan,

nor did they count toward

employee's deductible or co-payment requirements. So,
under the MSA, we have actually increased our employees’ access to preventive care.

Let me share a personal experience about how MSAs save money, not by
encouraging employees to defer necessary medical treatment, but by eliminating
gratuitous medical spending. Two years ago, I had back surgery. After completing the
necessary physical therapy regimen, my back felt fine. But 1 was told by the physical
therapist that I could continue coming for the various treatments -- which were quite
pleasant ~ and they would wave all co-payments. I responded that it was not proper for
them to make such an offer, and I declined. But I could easily see someone else saying
yes," and running up unnecessary bills, because under most health care plans, there is
no financial incentive to decline such an offer. Medical savings accounts would address
this problem.

As I mentioned previously, the MSA has provided immediate budgetary savings

to the city. The cost of family coverage under the State Health Benefits Plan is $6,775
per year and rising (premiums have doubled in just the last five years). ‘The cost of the

MSA option is only $6,500 —- $4,700 for the catastrophi

insurance policy and $1,800 for
the cash contribution to the Medical Savings Account. Therefore, in the first year alone
we save about $275 for every management employee that chose the MSA over the

traditional indemnity plan.


128

American Psychiatric Association
1400 K Street, N.W., Washington, D.C. 20005 + Telephone: (202) 682-6000

DISCUSSION DRAFT

STATE OF

LEGISLATIVE ASSEMBLY

BILL NO.

AN ACT TO PROVIDE FOR THE PROTECTION OF PATIENTS’ HEALTH CARE
MADE AVAILABLE THROUGH PRIVATE UTILIZATION REVIEW AGENTS AND
MANAGED CARE SYSTEMS BY A CERTIFICATION PROCESS AND PUBLIC

DISCLOSURE OF CERTAIN INFORMATION ABOUT THEIR ACTIVITIES.
BE IT ENACTED BY THE LEGISLATIVE ASSEMBLY OF THE STATE OF
Section 1. Short title.
‘This Act may be cited as "The Patient Protection in Utilization Review and Managed Care

Act,” hereinafter "the Act.”

Section 2. Purposes.

‘The Legislative Assembly hereby finds and declares that the purposes of this Act are to:


184

(9) The requirement that a representative of the private review agent is reasonably
accessible to patients, patient's family, and providers at least five days a week during normal
business hours and that payment may not be denied for treatment rendered during a period when

the review agent is not available;

(10) The policies and procedures to ensure that all applicable state and

federal laws to protect the confidentiality of individual medical records are followed;

(11) The requirement that no private review agent be permiued to enter 2
hospital to interview a patient unless approved in advance by the patient’s attending physician and

that the attending physician or a designee be entitled to atend the interview; and

(12) The prohibition of a contract provision between the private review agent and a
business entity or third-party payor in which payment to the privaie review agent includes an
incemtive or contingent fee arrangement based on the reduction of health care services, reduction

of length of stay, reduction of treatment, or treatment setting selected.

(13) The requirement that there be nondiscriminatory utilization review of treatment for

all ilinesses. without regard to whether an illness is classified as medical/physical or mental.


14

ving the Physician-Patient Relationshij

By giving consumers the ability to make their own decisions about the value of the health care
they will purchase, we believe the MSA option has the potential for substantially improving the
physician-patient relationship, a relationship which has eroded by the increasing intrusion of
third party payors, Unlike some traditional health benefit plans which "manage" care by limiting
access through plan restrictions, MSAs would eliminate the need for bureaucratic restraints that
interfere with patient choice and the patient-physician relationship. In addition, savings made
by more cost conscious purchasing of health care would accrue to the patient, not to the HMO
or some other third party payor. Most important, MSAs would allow the individual -- not a

third party -- to choose the physician, treatment, and range of services that best meet his/her

needs.

MSAs ~- Unlimited Potential
MSAs have unlimited potential in our health care system. From the private sector to FEHBP
to Medicare and Medicaid, MSAs should be a viable option in the health care marketplace as

well as an important savings mechanism for future undetermined medical expenses, including

ong term care costs.

MSAs, Medicare Transformation vat

The AMA fervently believes that the Medicare program must be transformed and applauds those
efforts as set forth in the Balanced Budget Act Conference Report accompanying the Medicare
Preservation Act of 1995 (H.R. 2491), which unforrunately was vetoed by President Clinton.

The AMA is pleased that an important component of this transformation would be the


32

them the same HMO, basically, that they had before, or they could
choose the MSA plan with a fee-for-service provider.

Now, you can make an HMO fit within an MSA structure, but
for those who actually have a personal relationship with an HMO
now, where they’ve been going, they continue to go where they're
going. There were some others who choose to stay where they are,
too, because of a pre-existing condition, and so they want to stay
under the relationship that they have.

But we have not suffered adverse selection. The reality is, our ex-
perience is that, again, if you have high costs, this is going to lower
your out-of-pocket expenses.

Mr. Mica. But what about now that folks that are left in the
other systems or choose to stay in those other plans?

Mr. SCHUNDLER. Right.

Mr. Mica. Have you in fact seen that they’ve had to pay more?

Mr. SCHUNDLER, Not at all.

Mr. Mica. Their premiums have not been increased?

Mr. SCHUNDLER. Not at all.

Mr. Mica. I didn’t really understand whether this has been ex-
panded or will be expanded to retirees. Do you have city retiree
folks that are eligible?

Mr. SCHUNDLER. Yeah, we do. Again, this first year, we put it in
with management employees. Next year, we believe we'll be able to,
without having a big political fight, have the unions want to get
involved, because they will have been able to see, by through
watching the experience of their own direct unit bosses, that it’s
working well.

We think retirees tend to be the most conservative, in the sense
that anything new, they’re suspicious of. They like what they have,
and they’re perfectly happy to stay with that. Our belief is that
when we have, again, a full work force filled with people who are
saying, “This is great,” you won’t notice any change in your doctor
relationship, because you just go to the same doctor you’ve been
going to, and that’s fine.

The only thing you'll notice is that your bills will go down. Once
we have all of those people speaking up for the program, I think
we'll be able to get the retirees in, as well, but we have not tried
to force this on anybody at all. We’ve really done this in a way
where we—with management employees, we offered it to them;
they took it.

Now, we're going to go to the unions again and not force it on
anybody, but simply say, “This is what’s happening, and look at
how great the success, the experience is.” We think they'll take it.
Then, when we go to the retirees—again, who may be the most sus-
picious of change—we can say, “Look at how well this is working,”
and make it a very nonpolitical evolution into MSA coverage.

Mr. Mica. Now, just to make sure that we've got the record clear,
you stated before the committee before, the cost was—what?—
$6,775?

Mr. SCHUNDLER. Exactly.

Mr. Mica. It went down to $6,500.

Mr. SCHUNDLER. Right.

Mr. Mica. And that only dealt with management. So even if they
cherry-picked, there still was no additional cost.


103

Medical Savings Accounts: An Invitation to Adverse Selection

The free market promotes efficiency and cost minimization in
many instances, but in the case of health care, the free market
is a notorious failure in many respects. Before the role of the
federal government in purchasing and regulating health care
markets degenerates into the issuing of vouchers, it is necessary
to restore an understanding of the limitations of the market in
efficient resource allocation.

The concept of group insurance has always been anathema to
free-market adherents. At the very heart of the faith in the
free market system is the belief that individualized consumption
is the only type of consumption that maximizes one’s well-being.
Compulsory participation in a group endeavor like insurance is
seen as oppressive, preventing the individual from pursuing his
view of his own best interests. In this vein, those who believe
that free market solutions are optimal oppose public schools,
Social Security, publicly-funded mass transit, and many other
publicly-funded goods and services.

To free-market purists, group health insurance is a
particularly problematic example of coercive, collective
consumption. While many individuals might voluntarily sign up
for group health insurance, there are always some who would
prefer to go it alone. But this is where the market fails. Once
low-risk individuals are permitted to quit the group, the group's
average risk rise. Premiums, which reflect average risk, rise as

well. This is a type of market failure called "adverse


39

that effect that I’ve submitted as part of the record. Those benefits
are as follows.

The opportunity to receive up to $2,100 in cash per year from the
county, any portion of which not spent on health care is the em-
ployee’s to keep and spend as he or she sees fit.

Because money they can otherwise keep is now at stake, we ex-
pect the county’s MSA enrollees to become cost-conscious shoppers
for health care services, just like they are for everything else, to file
substantially fewer claims for nonessential health care, resulting in
even lower premiums long-term, and helping force providers to be-
come more price conscious in order to compete.

These funds are also extremely portable, which would address
the people who are uninsured solely because they are between jobs,
between employers who offered health care insurance.

Based on the size of their families, it also offers the chance to
dramatically reduce the maximum amount of money they face hav-
ing to pay out of their own pockets in the worst-case scenario.

In my family’s case, with a wife and four children, I have an 82
percent reduction in my maximum worst-case out-of-pocket risk by
enrolling in the medical savings account, and when I enrolled in
the medical savings account, I save the taxpayers of my county, on
my family alone, $1,100 a year, even if I’m taxed by the Federal
Government, and if the Archer-Jacobs bill passes, then my family
alone will save the taxpayers of my county $1,500 per year.

Even the sickest individual is better off with our MSA, because
they will end up spending less, or in the worst case, if you’re single,
no more out of their own pockets than they do with the old low de-
ductible 80/20 copay plan.

Finally, and most important, the MSA plan financially empowers
individuals with cash over which they have absolute control, and
MSA thereby provides our employees maximum freedom of choice
regarding their family’s health care. Our MSA plan is based on
faith in the ability of adult Americans to make rational choices in
the best interests of themselves and their families.

Mr. Chairman, I’ve included specific information in the packet
I've submitted as to the design of Ada County’s plan. I know that
you know how these things are designed and work. I would briefly
describe ours as follows.

If you are a two-party family or a larger family, you have a
$2,000 per-individual with a $3,000 maximum per family deduct-
ible, and the county will give you $2,100 a year in cash. If you’re
single, you have a $2,000 per-individual deductible, and the county
gives you $1,100 in cash.

Mr. Chairman, I'll be happy to address that in questioning in
more detail if you like, but let me speak for a moment as a tax-
payer, instead of an elected official. I urge you to support Rep-
resentative Salmon’s bill.

But speaking as a taxpayer, I urge you, as stewards of the tax-
payers’ money, to decide that an MSA-based health insurance plan,
as Representative Chrysler indicated earlier in his opinion, that
that should be the only plan you offer Federal employees at some
point in the future, perhaps after a phase-out for other plans and
retirees.


64

@ MSAs would restore the doctor/patient relationship, making doctors agents of

patients, rather than agents of third-party payer bureaucracies.

© MSAs would allow patients rather than third-party payers to make the sometimes

tough choices between health care and other uses of money.

@ Paperwork and administrative costs would be greatly reduced; since patients would
be paying most bills directly out of their MSAs, primary care physicians would rarely

be burdened by insurance forms.

@ Those who live healthy lives and avoid risky behavior would benefit financially from

those choices,

MSAs would put the consumer, rather than an insurance company or the government,

in charge of the health care system.

Answering the Critics of Medical Savings Accounts. The existence of
plans like the NCPA's refutes most of the major criticisms against MSAs. It is ridiculous
10 argue, as some have. that the plan isn’t actuarially feasible since the very existence of the
NCPA employee benefit plan and 1,000 similar private plans proves the opposite. The
argument that MSAs benefit the healthy but not the sick is also easily refuted. A person
with high expected health care costs benefits by choosing the new NCPA plan because his
total financial exposure is $375, rather than $1,500 under the NCPA’s old plan. For
families, the exposure is $500 rather than $4,500.

Finally, the criticism that MSAs are incompatible with managed care is clearly
untrue, since the NCPA‘s MSA plan has a managed care component. Although the NCPA
has never been a proponent of managed care and MSAs probably are inconsistent with the
traditional philosophy of HMOs, efforts to make medicine cost-effective are natural allies of

Medical Savings Accounts.

Page 6


35

their own health care destiny in their hands and save taxpayer dol-
lars at the same time. It’s a total win/win situation. We ought to
pursue this as vigorously as we pursue any kind of legislation this
ear.

* There are several companies in Arizona, as I believe either Mr.
Chrysler or Mr. Schundler mentioned that there are insurance
companies that craft policies where they couple a catastrophic care
policy with an MSA, and that has happened in Arizona.

Insurance companies have seen this as a wonderful opportunity,
and they will manage, then, and they do manage the medical sav-
ings account, itself. They take care of the fiduciary responsibilities
for that, and then they also provide the catastrophic care policy,
which kicks in when your medical savings account has been ex-
pended.

Mr. Bass. Thank you very much, Mr. Chairman.

Mr. Mica. Well, we have just a minute here, and we’re going to
recess for a vote, but could any of the panelists cite any instances
where they’ve seen MSA’s institute—Mr. Chrysler in the private
sector, Mayor Schundler in the municipal sector, Mr. Salmon in the
State sector—where you've seen the introduction of MSA’s in bal-
ance or increasing costs as a result of that, or some deprivation of
service, either quality or availability at the level of service? Mr.
Salmon.

Mr. SALMON. Can I just make a comment? I know that I’ve pored
over, time and time again, results from private sector companies
that have offered medical savings accounts to employees, and
they’ve all had the same results. They have all lowered their costs
and increased employee satisfaction.

Let’s walk through this just 1 minute, because I think we've
mentioned a lot of positive benefits or attributes of a medical sav-
ings account. But let’s talk about within the medical industry, it-
self.

About 40 percent of the costs of hospitals and doctors are push-
ing paper, whether it’s paper to satisfy the Federal requirements
for Medicaid or Medicare or whether it’s pushing paper through the
insurance companies. About 40 percent are costs of pushing paper,
and if you deal on a cash basis with a doctor, they cut you breaks.
They give you discounts.

In my life, the last child that we had, Matthew, was born 7 years
ago. We were covered by a traditional third-party payer policy, and,
basically, the costs for delivery of my child, with hospital and doc-
tor, was $3,500. Two months later, my sister-in-law had a baby,
same doctor, same hospital, only she wasn’t insured, so she paid
cash, $1,500—$2,000 savings just on a delivery of a baby.

You shop around, and you look at procedures for everything from
gallstones to heart surgery, and you will find prices all over the
maps. If individuals are empowered to deal on a cash basis with
their doctors, they can negotiate. They can drive costs down. Doc-
tors benefit, patients benefit, the taxpayers benefit, and the econ-
omy benefits.

There is no real argument against this, other than those entities
that are scared to death of the competition that they will be thrown
into if medical savings account into the arena and we're going to


67

Mr. Mica. Thank you, Mr. Matthews, and we'll recognize Dr.
Daniel Johnson, who’s a member of the American Medical Associa-
tion Board of Trustees.

Welcome, and you're recognized, sir.

Dr. JOHNSON. Thank you very much, Mr. Chairman. My name is
Daniel H. Johnson, Jr., M.D. I am a practicing diagnostic radiolo-
gist from Metairie, LA, and, as you've pointed out, I also serve as
the president-elect of the American Medical Association. We com-
mend you, Mr. Chairman, for holding this important hearing.

For more than a decade, the AMA has supported the adoption of
MSA's as an option in all segments of our Nation’s health care sys-
tem. We believe MSA’s not only represent a cost-effective approach
to financing health care, but also would strengthen the market for
medical care by assuring patients more freedom of choice.

Empowering individuals with the responsibility to choose the
type of health care they will purchase has continued to remain at
the center of the health system reform debate. Should we favor
more bureaucratic control over our health care dollars or more free-
dom for all of us as consumers of health care to make our own deci-
sions? The answer from the American people, we think, is quite
clear, and MSA’s would help to provide Federal employees with
that freedom.

With FEHBP enrollees making cost-conscious decisions in choos-
ing among competing health plans, it’s no wonder that the program
has had a positive track record to date for cost-effectiveness. The
AMA believes that the FEHBP could be further enhanced by allow-
ing participants the opportunity to choose an MSA option if they
choose to do so.

There are many advantages to an MSA option. For instance, one
might ask a simple question. Is it more desirable to link the pa-
tient to the cost of health care or to insulate the person from the
cost? Unfortunately, the lack of this direct linkage has led to over-
use by consumers, who have had little incentive to limit spending
or thoughtfully weigh the costs or benefits of services.

Numerous studies provide evidence, as has already been pointed
out, that third-party payment for health care shields patients from
cost awareness and the responsible consumption of health care dol-

ars.

But a second question might also be asked. Is it better to reward
individuals for using the system in a cost-effective way or to punish
them for not doing so? Companies searching for more innovative
and cost effective ways to provide health care benefits for their em-
ployees have learned. first-hand the benefits of putting employees
in control of their health care dollars through the use of MSA’s, de-
spite the fact that individuals who choose MSA’s are discriminated
against by current Federal laws.

By giving consumers the opportunity and the responsibility to
make their own decisions about the value of the health care they
will purchase, we believe an MSA option has the potential for sub-
stantially improving the physician-patient relationship, a relation-
ship which has been eroded by the increasing intrusion of third-
party payers. Unlike some traditional health benefit plans which
manage care by limiting access through plan restrictions, MSA’s
would eliminate the need for bureaucratic restraints that interfere


104

selection," which occurs "when those most likely to receive
benefits from the insurance are the ones who are most likely to
purchase it." (Harvey Rosen, Public Finance 3rd Edition, 1992,
Richard D. Irwin: Homewood, Illinois, p.597).

Thus a vicious cycle is born. As adverse selection raises
premiums, the cash inducement to quit the group (which is the
difference between the catastrophic back-up premium and the
maximum government contribution to regular insurance premiums)
will rise, encouraging more individuals to quit. The stubborn
remainders in the group insurance pool will be those with
manifest high risk, and the premiums charged to them will reflect
this

The government's willingness to maintain its contribution
levels to these premiums will likely wane and what will have been
accomplished is the replacement of managed competition among
group insurance plans with MSAs or vouchers. Federal workers
will no longer have employer-sponsored group health insurance
coverage. They will begin the year with a little extra cash, but
according to the calculations of the Congressional Research
Service, they will almost inevitably be financially worse off at
the end of that year than if they had been in a traditional FEHBP

plan financed at rates currently in effect.

FEHBP ts will Rise as a Result of MSA:

Despite the fact that MSAs will leave almost all federal

employees financially worse off, the costs to the government of


126

APA Princinies of Health Cere Reform - page 2

7) Provision must be mece for appropriate continuing care for severe memtai iliness.

8) We advocate access to individualized treatment in the most clinically appropriate
and cost-effective environmem Funding, therefore, should be available for treatment in
‘the full continuum of scientifically-Lased psychiatric treatment modalities.

9) The APA is able to support budget targets which include fair and equitable
reimbursement for the diagnosis and treatment of menral ilinass. We oppose the
incorporation of undefined “g!opa! hudget targets” as part of health care reform.

10) Insurance coverags must be uninterrupted. Pre-existing iliness must not be
barrier to enroilmert in health insurance coverage. Premiums shall be community-rated
without reference to previous >ustory of iliness.

11) We affirm the historic principles underiying patient care: The preservation of
confiderniality, the privacy and security of sensitive personal information anc the freedom
of patients to select their own physicians in organized systems of care.

12) Patients shall be allowed to contract for care at their own expense outside the
system.

9/12/93


45

House Subcommittee on Civil Service / Page

EVEN THE SICKEST INDIVIDUAL IS BETTER OFF WITH OUR MSA,
BECAUSE THEY WILL END UP SPENDING LESS -- OR IN THE WORST CASE,
NO MORE -- OUT OF THEIR OWN POCKETS THAN THEY DO IN THEIR OLD

LOW-DEDUCTIBLE, 80/20 CO-PAY PLAN.

#3. FINALLY, AND MOST IMPORTANT OF ALL --- BECAUSE IT
FINANCIALLY EMPOWERS INDIVIDUALS WITH CASH OVER WHICH THEY
HAVE ABSOLUTE CONTROL, OUR MSA PLAN PROVIDES OUR EMPLOYEES
MAXIMUM FREEDOM OF CHOICE REGARDING THEIR FAMILIES
HEALTHCARE. OUR MSA PLAN IS BASED ON FAITH IN THE ABILITY OF
ADULT AMERICANS TO MAKE RATIONAL CHOICES IN THE BEST INTERESTS

OF THEMSELVES AND THEIR FAMILIES.

THIS IS EXACTLY THE OPPOSITE OF THE DICTATES AND FINANCIAL
INCENTIVES OF THE MANAGED CARE SYSTEM AT THE HEART OF THE
CLINTON ADMINISTRATION'S SOCIALIZED MEDICINE SCHEME, WHICH
WOULD DENY INDIVIDUALS FREEDOM OF CHOICE AND PAY DOCTORS NOT

TO PROVIDE HEALTHCARE.


87

Mr. Moran. You know, Mr. Chairman, another concern—lI'll be
very candid about this—that I’ve had with the MSA’s is the prin-
cipal firm that is identified with medical savings accounts. I’ve
read a few articles in the Wall Street Journal, actually, and the
fact they're heavy contributors to GOPAC or the Speaker, what-
ever, that’s their business. I don’t see that as a particularly damn-
ing indictment.

[The articles referred to follow:]


The other critics of MSA's for federal employees have different motives,
These are supporters of entrenched insurance interests who see their market shares
threatened by MSA’s. These opponents will never support MSA's and will appear
wherever MSA's are offered to block any change from the status quo. These
opponents may couch their rhetoric in terms of federal employees, but their true
opposition is to competition in the market for health insurance. These opponents
should be dismissed out of hand.

One claim cited by some opponents is that people with MSA’s will choose
to forego preventive care, to keep funds in their medical savings account. This is
ridiculous. MSA’s do encourage people to live healthier, so that they do not need
expensive medical care. But there is absolutely no reason to think that anyone
would jeopardize their entire MSA nest egg--or their life--just to save the costs of
atest or doctor's visit.

In fact, private sector companies who offer MSA’s have found no evidence
that preventive care is being skipped. Rather, middle- and lower-income workers
are MORE likely to get preventive care with an MSA, since they won't have out
of-pocket co-pays or deductibles like they currently have.

Adverse selection problems are also alleged at times. But they have never
been found in the private sector experience with MSA’s. MSA’ are actually
attractive to the very sick as they will experience much lower out-of-pocket costs
as compared to traditional insurance plans. Moreover, the very sick will retain
their choice of physician or specialist under an MSA, which is an attractive
feature, particularly for those using an extensive amount of medical care. These
individuals often find managed care too restrictive

As federal workers find themselves stuck in the middle of a dispute between
Congress and the President about whether to balance the budget, we should try to
do something for them. One thing we can give them now is an MSA option for
their health care, If action is taken in early 1996, federal employees can begin
accruing savings in their Medical Savings Accounts in 1997. That would benefit
the workers who choose them, would reduce health care expenses for the federal
government, and would serve as a laboratory to prove in the federal public sector
what Jersey City Mayor Bret Schundler and the private sector have already shown:
MSA's work.

Your staffers, and mine, deserve an MSA option now, and the taxpayers
deserve a break. MSA’s for federal employees will save the entire health care
system money. I urge the Subcommittee to support free market competition by
supporting H.R. 2341, the FEHBP-Medical Savings Account Promotion Act of
1995



FEHB/MSA: ADDING MEDICAL SAVINGS
ACCOUNTS—BROADENING EMPLOYEE OP-
TIONS

WEDNESDAY, DECEMBER 13, 1995

U.S. HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON CIVIL SERVICE,
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT,
Washington, DC.

The subcommittee met, pursuant to notice, at 9:45 a.m., in room
2154, Rayburn House Office Building, Hon. John A. Mica (chair-
man of the subcommittee) presiding.

Present: Representatives Mica, Bass, and Moran.

Staff present: George Nesterczuk, staff director; Daniel R. Moll,
senior policy director; Caroline Fiel, clerk; Cedric Hendricks, minor-
ity professional staff.

‘Mr. Mica. Good morning. I would like to welcome you to this
meeting of the House Civil Service Subcommittee. Today we’re

joing to have a hearing on medical savings accounts. We have
Members who are involved in very weighty conferences on both
sides of the aisle and several other mark-ups, but with the agree-
ment of the minority side, we are going to begin.

T’ll make my opening statement, and we'll get right to our first
panel so we won't delay the hearing, but, in fact, your comments
as witnesses today will be available to all of the Members, and we
hope they can join us as the hearing this morning proceeds.

Today, we'll be gathering information on medical savings ac-
counts, also known as MSA's, before we actually include them in
the Federal Employee Health Benefit Program or any other pro-
gram that deals with Federal employees. MSA’s, I believe, give peo-
ple more control over health care spending, and I think that taking
a direction like that is very important today, especially when we're
looking at costs and effectiveness of programs.

The FEHB program is a managed competition program that I be-
lieve is working extremely well. Overhead and administrative costs
are relatively low, while employees can choose from a broad array
of plans to meet their specific health care needs. Providing MSA’s
as an additional option for Federal employees can only reinforce
one of the strongest tenets of the program, and that’s freedom of
choice for employees during what we call “open season.” MSA’s are,
in fact, a positive, productive change, I believe, that will strengthen
the program by adding a benefit for enrollees.

As one of the program’s strongest supporters, I’m really only in-
terested in improving the program. As | said, it’s a program that

@


42

House Subcommittee on Civil Service / Page.

AND IF MAYOR SCHUNDLER AND I CAN DO IT, SO CAN THE FEDERAL
GOVERNMENT. THE ONLY DIFFERENCE IS THAT YOU WILL IMMEDIATELY
SAVE AMERICAN TAXPAYERS MILLIONS OF DOLLARS PER YEAR, RATHER
THAN THE TENS AND THEN HUNDREDS OF THOUSANDS IN SAVINGS WE'LL

EXPERIENCE AT THE LOCAL LEVEL.

IF { HAVE READ CORRECTLY REGARDING SOMEWHAT RELATED
LEGISLATION, THE C.B.0. PREDICTS ONLY ONE PERCENT OF MEDICARE

RECIPIENTS WOULD SELECT AN MSA OPTION IF OFFERED. HOW ABSURD.

BASED ON ADA COUNTY'S EXPERIENCE, | FEEL CONFIDENT IN

PREDICTING THE FOLLOWING REGARDING FEHB:

* TENS OF THOUSANDS OF FEDERAL GOVERNMENT EMPLOYEES WILL
ENROLL IN A WELL-DESIGNED MSA OPTION THE FIRST YEAR

* THE MAIN REASON FOR THOSE WHO DON'T WILL BE THE SIMPLE
FEAR OF CHANGE -- ANY CHANGE -- WHICH WILL EVAPORATE AFTER THE
FIRST YEAR'S TENS OF THOUSANDS OF ENROLLEES BRAG TO CO-WORKERS

ABOUT THE CASH THEY HAVE LEFT IN THEIR ACCOUNTS.


3

Further, by allowing unspent balances in MSAS to be carried over tax-free to subsequent years,
consumers will be rewarded for practicing responsible consumption. We believe it is more
desirable to reward health care consumers for using the system cost effectively rather than
punishing them for not using the system in a cost effective manner. By encouraging appropriate
use of our nation’s health care dollars, while preserving individuals’ access to the physicians and
other providers of their choices, MSAs represent one of the best approaches to achieving cost

savings in the FEHBP.

We believe MSAs have the capacity to increase portability of health care policies, a goal which
hhas broad bipartisan support. The portability aspect of MSAs will enhance job mobility by
eliminating "job-lock" that forces many employees, especially those with pre-existing conditions,
to stay in jobs in order to continue receiving needed coverage. Indeed, recent public opinion
surveys conducted by the Employee Benefit Research Institute in conjunction with The Gallup
Organization found that one in five Americans surveyed indicated they or a family member

passed up a job opportunity based solely on health benefits.

In addition, MSA funds could provide financial resources for workers who become temporarily
unemployed, allowing them to purchase bridge health insurance while they are between jobs.
While the greater availability of MSAs will not completely solve the portability problem, they

could result in greater access to our health delivery system.


82

retarial assistance, and I didn’t get to all of them. But now I’ve got
170 people that are going to have cash in their pocket.

This thing has been roundly supported. It has been endorsed by
our AFL-CIO affiliate union; it was endorsed in three separate edi-
torials by the Idaho Statesman newspaper, which is not exactly a
mouthpiece for a free market or a conservative philosophy, and it
has been well received by the taxpayers who are able to under-
stand the math, that they’re going to save money when employees
enroll in the plan.

Mr. Mica. Now, one of the parade of potential horribles is that,
again, this cherry picking is going to result in increased premiums
for someone else who remains. Now, you have other options, obvi-
ously, because you only have 170 covered by this. Is there any evi-
dence, since starting this or offering this, that there has been any
increase in premiums or costs or loss of benefits or services, some
imbalance created by offering the MSA?

Mr. GLENN. Mr. Chairman, the answer to your question is no,
but to be fair, it’s too early in the process to tell you. We have to-
tally put Blue Shield on notice, because Blue Shield handles both
our medical savings account and our standard indemnity plan.
Blue Cross has an HMO option for our employees. We’ve put Blue
Shield on notice that, if they come in next year and try to raise pre-
miums on the people who did not enroll in the MSA, that they're
going to have to be able to prove it.

We anticipate that there will be fewer claims filed by those who
enroll in the MSA, and that can be for one of two reasons. Either
the people who enrolled in the MSA had a predisposition, a pre-ex-
isting record of being those less likely to file claims, or they filed
fewer claims because, suddenly, it was their own dollars they were
spending.

So if they come in to us and try—we intend to be pushing for a
rate decrease, a premium decrease on our MSA enrollees. And, of
course, we've always got the option of going back out for bid at any

joint.
p We had Golden Rule Insurance of Indianapolis, Blue Shield of
Idaho, and Blue Cross of Idaho bid on the MSA, and it’s always our
option to go out for bid on all of our insurance packages and force
them right back into the marketplace. So we don’t anticipate that
kind of problem.

Again, the young and healthy, the single employees of Ada Coun-
ty, have the cash incentive. It is the larger families, those who by
definition, you would think, demographically would prove out to be
the older and more likely to be sicker. Because I’ve got six different
members in my family, the chances of there being a sickness that
has to be covered by my insurance is six times over.

Those people have two reasons, two incentives to switch—the
cash and the reduction in maximum out-of-pocket risk. So I think
the way we have designed our plan is we've given the “older, sick-
er” an additional incentive to enroll on top of the one that the
young and healthy—those that are single—have to enroll.

Mr. Mica. Thank you. Mr. Hendee, do you see any reason for
HMO’s or fee-for-service or other medical option plans or ap-
proaches—is there any reason that they should fear, or can you see
any endangerment to their activity, viability, ability to provide


FEHB/MSA: ADDING MEDICAL SAVINGS
ACCOUNTS—BROADENING EMPLOYEE OPTIONS

HEARING

BEFORE THE

SUBCOMMITTEE ON
CIVIL SERVICE

OF THE

COMMITTEE ON GOVERNMENT
REFORM AND OVERSIGHT
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
FIRST SESSION

DECEMBER 13, 1995

Printed for the use of the Committee on Government Reform and Oversight

a

U.S. GOVERNMENT PRINTING OFFICE
86-622 CC WASHINGTON : 1997

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-054254-5



108

cost-cutting that Congress would want to create new compensation
costs through the introduction of MSAs into the FEHBP Under .
the current financing formula for FEHBP, CBO estimates that MSAs
would cost FEHBP $1.5 billion over seven years. This is a
conservative estimate which uses a set of very optimistic,
perhaps unrealistic assumptions. In order to arrive at this low
cost figure, CBO assumed that there would be no lag between
claims or cost increases and premium increases

But it would be a mistake to assume that individual
insurance carriers can predict with accuracy how the exit of some
fraction of their enrollees or their potential reentry in
subsequent years might impact on insurance claims. Choice among
dissimilar plans leads inevitably to adverse selection, and
adverse selection inevitably imposes aggregate cost increases.
CBO does not dispute this fact, but has not accounted for it in
its $1.5 billion cost estimate

The CBO estimate also ignores the possible revenue impact of
the introduction of MSAs as well as the impact of Medicare cuts
on the premiums in FEHBP. These latter costs are likely to
increase the incentive for the healthiest, lowest-risk segments
of the FEHBP population to choose MSAs. The proposed Medicare
cuts will shifts greater responsibility for retiree health care

costs onto the FEHBP, raising both total and average costs.


131

(G) “Secretary” means the Serretary of Healti:,

(HD "Utilization review" or "managed care” means a system for reviewing the appropriate and
efficient allocation of hospitai, medical or other health care services given or proposed to be
given to a patient or group of patients for the purpose of recommending or determining whether
such services should be reimbursed, covered or provided by an insurer, plan or other entity or

person;

() "Utilization Review Plan” means a description of the criteria, standards and procedures

governing utilization review or managed care activities performed by a private review agent.

Section 4. Certification of Private Review Agents.

(A) A private review agent who approves or denies payment. or who recommends approval or
denial of payment for hosp:tal or medical services, or whose review results in approval or denial
of payment for hospital or medical services on a case by case basis, may not conduct utilization

review or managed care in this state unless the Secretary has granted the private review agent a

certificate;

(B) The Secretary shall issue a certificate to an applicant who has met all

the requirements of this Act and all applicable regulations of the Secretary;




109

FM: 1_Sa’ counts egressive

One of the features of MSAs which is meant to encourage
their use is the right of an individual to keep and invest the
tax-free money deposited on his behalf. While presumably the
tax-free status of the funds in MSAs is meant to mirror the tax-
free status of the compensation represented by employer-paid
health insurance premiums, there is a difference. an annual
health insurance premium is completely used up in any given year
regardless of whether the individual uses that insurance policy
to pay for health care costs. Its "value" to the individual is
not known until the end of the year and depends as much on health
status as on income. The cash deposited in an MSA, if unspent at
the end of a year, becomes a tax-free lump sum owned by the
individual for whom it was deposited. Its value is a function of
the individual’s income tax rate.

The value of an MSA to an individual federal employee who
incurred no health care costs and was in a 28 percent income tax
bracket and who itemizes his deductions is greater than it is for
the federal employee, say a GS-5, who is in the lowest tax
bracket and who does not itemize. The regressive nature of this
differential is reason enough for AFGE to object to the
introduction of MSAs into the FEHBP.

In the same way that the incentive and reward for choosing
an MSA is greatest for those with the highest incomes, the cost
to the government in terms of lost tax revenue is highest for

this group as well. Currently the government’s costs for its


30

Mr. SCHUNDLER. The reason we offered them to management,
Jersey City has become a two-party city recently. That is an un-
usual experience in Jersey City, so a lot of things have become po-
liticized that before weren’t quite as political.

The result is, we felt there was—rather than enter this into
unionized contracts, which would require opening all the contracts
and so forth, and that would become very political, we could do it
with management employees, and it would be, practically, much
easier.

Mr. Mica. So it was first done there. But has it expanded to
other employees yet?

Mr. SCHUNDLER. So we're going to be offering it to our unionized
employees this coming year, because we feel, now that we've got
the year to demonstrate—we have a year’s worth of experience
which we can demonstrate for unionized employed that this is
working, and you've got 250, if you will, people who can witness di-
rectly to the fact that it is working, and that will take some of the
politics, if you will, out of the debate.

Mr. Mica. Well, we had sort of a similar problem here, mayor.
This place was run by the same folks for 40 years, and they didn’t
get any option other than what was offered, and sometimes the
unions would block any—or employee groups would block any new
approach. How did you—I guess you did this first with manage-
ment?

Mr. SCHUNDLER. Right.

Mr. Mica. And then—I mean it looks pretty attractive.

Mr. SCHUNDLER. Yes.

Mr. Mica. It looks like you reduced some of the cost.

Mr. SCHUNDLER. Yes.

Mr. Mica. It came down about $200. Now, that $200 had to go
somewhere, so it would actually either reduce your expenditures
somewhere else?

Mr. SCHUNDLER. Right.

Mr. Mica. Or it could have been put back into what you could
provide for medical costs for other employees.

Mr. SCHUNDLER. We could have reduced the costs far more if we
wanted to keep, let’s say, the exposure for the employees at the
same level, or if we had wanted, for instance, not to cover things
like preventative care.

What we've done is we've actually given them an enhanced cov-
erage package, again, where things that previously were not cov-
ered at all are now covered, both by the MSA and also count to-
ward the deductible and the catastrophic policy. We took some
money out, but from our perspective, the long-term interest of the
city is having more employees participate in this, again, having
people who use health care intelligently and not gratuitously, with
the belief that that will reduce our premium growth for the cata-
strophic policy, and that’s where the big savings is to be found. It’s
nice when you can get long-term savings, but you don’t have to
have short-term costs. So here, what we’ve been able to do is actu-
ally take out some cash today, but leave such a nice package for
our employees that it’s almost impossible to say it’s not better for
you. The result is, we expect very high participation, and we expect
the result of that will be significant savings, very significant sav-


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84

But apparently there are people who are saying that DuPont has
implemented an MSA plan and that they are having problems.
That is not the case, according to DuPont.

Mr. Mica. Now, I notice your organization offers it for your em-
ployees.

Mr. MaTTHEWS. That’s correct.

Mr. Mica. How long has that been in place?

Mr. MATTHEWS. We started that in January, and we did it as a
result of wanting to—if we’re going out and advocating this, as we
had for so many years, we felt like we needed to practice what we
preached, so we did this.

This was a lateral move for us at the NCPA. That is, the em-
ployer stated to the insurer, “We do not want to pay any more or
ess out of the company’s pocket to get this plan.” So it has worked
out to be fairly beneficial. I might add that the NCPA’s policy is
to pay the entire premium for the employee. If you have a family
plan, you have to pay that out-of-pocket.

I have a family plan, and I was paying about $330 a month
under our old policy. Under our new policy, my premiums dropped
by $150 a month. So, as a result, I have both a $1,500 contribution
to my MSA at the beginning of the year and the potential to get
back about $1,800 in savings that I was paying last year. So, to-
gether, that’s a potential savings of about $3,300 to the person with
a family plan at the NCPA.

Mr. Mica. Well, I thank the panelists, and I want to defer now
to our ranking member. As you can tell, this has been one of the
busier mornings on Capitol Hill. Don’t come around when we're
about to vote on Bosnia or balance the national budget or deal with
the deficit. If we don’t have those three minor things to deal with,
we can pay even more attention to something that has a great po-
tential, hopefully, for saving money and offering some choices.

With those remarks, I want to welcome our ranking member, Mr.
Moran, and if he has any opening statement and, of course, any
questions, they’re welcome.

Mr. Moran. Well, thank you very much, Mr. Chairman. I won't
go into an introductory statement out of deference to the witnesses.
I do apologize for being late. You've cited the reasons. We've got the
Debt Ceiling bill and Bosnia and several other things that I was
involved in, and they’ve proved to be inextricable commitments.

This issue of whether we ought to make medical savings ac-
counts an option for the Federal Employees Health Benefits Plan
is, at the very least, an intriguing idea, but I have a lot of reserva-
tions about it. The principal reservation is the Congressional Budg-
et Office’s scoring of this option, which is $1.3 billion. Under our
pay-go plans, we would have to come up with $1.3 billion in reduc-
tions and benefits, presumably, someplace else within the account
that it would come out of. So I think that’s the biggest hurdle.

But there are also some very serious concerns as to the ramifica-
tions. One of the problems, for example, is the segmentation of the
insurance market that this would invariably create for those folks
who are less healthy, who are older, who are in a higher risk pool,
what would happen is that their insurance premiums would inevi-
tably go up as those folks who are the youngest and the healthiest
within that pool might choose medical savings accounts. Everybody


12

tus of MSA contributions. I hope that this crucial piece of legisla-
tion sponsored by Chairman Archer, which has received bipartisan
support, will be part of this year’s budget reconciliation package.

The choice is clear. Adding MSA’s to the FEHB program will im-
prove the coverage that Federal employees receive. It will preserve
their choice of their own doctor. It will slow down the rate of cost
growth to the government and to the taxpayers who pay that bill,
and it will do all of this, not by third-party rationing, Bat by giving
individuals an incentive to take an active interest in the quality
and cost of the medical care they receive.

T encourage you to lead us in the direction of higher quality and
expanded consumer choice and lower costs by offering the Federal
employees the MSA option. Thank you very much.

(The prepared statement of Mr. Schundler follows:]


54

The healthier employees receive more benefits from the HMO than they would from their
traditional plan, such as full maternity benefits. The freedom of provider choice for the
poorer risks cost more than if they were restricted to the HMO’s providers. Each
employee chooses in his or her own best interest and the average plan cost increases

Employers who atlow employees to make a choice are providing a more desirable and

more expensive benefit. The reason for the higher cost is the choice available to the
employees.

‘The addition of Medical Savings Accounts to the Federal Employees Health Benefits

Program will help return our health care system to individuals by allowing them to do the
following:

1. Choose their own physicians, facilities and services:

2. Choose and pay for their primary and preventive services; and
3. Save for future health care expenses.
This will have the following benefits:

1. Reduce administrative costs:

Nv

. Help Restore the doctor-patient relationship; and

3. Reduce the upward pressure on the cost of health care and health
insurance, thus saving federal dollars by bringing free market forces
to the health care market

‘The U.S. health care system has been harmed by tax incentives to spend money rather

than to save it. This same situation applies to the Federal Employees Health Benefits
Program.

Medical Savings Accounts will not solve all our nation’s health care problems, but they
could certainly go a long way in improving choice and quality of care for all Americans,

giving them proper incentives to stay healthy, get preventive care, and save for the future

‘Thank you, Mr. Chairman, { would be happy to take any questions.


comes JAMES P. MORAN

; seosinel orunone

Coca” Congress of the United States escrow ores

ssn gn House of Repersentanbes onto an
; Washington, DE 20515~4608 aa “

INTERNATIONAL RELATIONS,

Statement of Representative James P. Moran
On Medical Savings Accounts
Subcommittee on Civil Service
December 13, 1995

Mr. Chairman:

1 am concerned about today's hearing and the focus of the
Subcommittee's inquiry into medical savings accounts. This
Subcommittee should be an oversight and policy connittee that
carefully evaluates all facets of a particular initiative and
carefully analyses the impact it will have on the federal
workforce before acting.

Initially, if I recall correctly, this hearing was scheduled
to tell federal employees about what Congress had passed in the
Budget Reconciliation Act. The original plan for this hearing
was to explain Medical Savings Accounts after they had been
enacted rather than to evaluate them before making any policy
decisions. Fortunately, these plans were defeated.

Now, this hearing is designed as a "pep rally" for Medical
Savings Accounts rather than a review of whether or not such an
initiative is appropriate for the Federal Employees Health
Benefits Program. I hope nobody hear confuses this hearing with
a substantive review of the initiative, No objective parties
have been invited to testify at this hearing and no opponents of
the Medical Savings Accounts. In addition, no party with even a
limited knowledge of the Federal Pmployee Health Benefits Program
has been invited to testify. OPM is not here, nor is the General
Accounting Office, or the Congressional Budget Office. The
structure of this hearing is absurd.

Medical Savings Accounts are the in vogue issue for the
Heritage Foundation and its subscribers. We do not, however,
enact policy in this Congress based on what one think tank
thinks. This is particularly true when the initiative being
considered affects 2 million employees and changes the scope of a
health benefits program that the Heritage Foundation said should
be the model for health care reform. ‘The PEHBP progran was not
created to allow Congress to experiment with different
ideological initiatives on a captive population. It was created
to ensure that federal employees have adequate access to health
care and to ensvre that the government is able to recruit and
retain the best employees. The program works because it is very


15

availability of an expanded array of plan choices for Medicare beneficiaries that range from the
restructured traditional Medicare program to various health plans, such as Provider Service

Organizations, to tax-advantaged MSAs

‘The AMA strongly favors Medicare MSAs because of their potential to enhance the operation
of the medical care market, to promote competition between health care providers, and to temper
the rates of price inflation of medical services. Exercising greater choice may increase the
complexity of the beneficiary's decision-making about medical care, but it will undoubtedly

provide enhanced opportunities for more prudent use of medical care resources.

Likewise, the AMA supports the provision in the Balanced Budget Act Conference Report which
would allow individuals and families to establish tax-favored MSA for unreimbursed medical
expenses, We believe this legislation holds much promise in creating the proper incentives to

wisely use one's health care dollars by promoting cost conscious purchasing of health care.

Criticisms of MSAs
There have been several criticisms of an MSA option, a few which the AMA would be pleased
to address from a physician's viewpoint. It has been argued that MSAS are likely to reduce

incentives to seek preventive medical care. We disagree.

‘The AMA has long advocated the importance of preventive medicine, from routine checkups for
kids to mammograms and prostate screenings for adults. We are aware of no long-term studies

to support the contention that MSAS are likely to discourage individuals from seeking preventive


36

do away with some of the bureaucratic we've seen in the insurance
industry heretofore.

Mr. Mica. Mayor, did you think up this radical approach your-
self, or did you use some other model, private or municipal?

Mr. SCHUNDLER. Actually, I read a book called Patient Power,
which was published by John Goodman of the National Center for
Policy Analysis. That's how I came upon the idea. Then, what we
did was contact the insurance providers and, again, ask them if
they would offer us such a plan. Then we went to the State, itself,
and went through the process of removing ourselves from the State
health benefits plan. So it was step by step, just working with the
insurers, working with the State to set this up.

Mr. Mica. Do you know any State or municipal activities that
have resulted in more cost or lower benefits?

Mr. SCHUNDLER. You know, I've—we actually have been able to
do other things to—I want to make sure J understand the question.
Is it easy to find places where you can do more and spend less?

Mr. Mica. No. You know, maybe this panel is prejudiced. What
I'm trying to do is say, is there some place out there lurking, some
place where they did MSA’s, where they had a bad experience, and
where it drove costs up or people were denied services or access?
Because I want to know about those, and I’m asking you if you
know of any.

Mr. SCHUNDLER. No, I think the ultimate issue with regard to in-
surance plans is the insurance providers themselves, how easy are
they to work with? So we have the same administrator that we had
before, and, again, there has just been no change in experience.

If the Federal Employee Health Benefits Plan offers this as an
additional option, it will be the same person, it will be the same
entity that’s now offering the other options available to Federal em-
ployees. So I don’t think anybody will experience any difference in,
let’s say, the ease with which claims are settled, when you have the
same provider.

Now, ideally, it’s nice if individuals can take the cash value that
the city of Jersey City is putting into that plan and, if they want
to, be able to buy a different insurance policy altogether, because
it has a whole different set of coverages which may conform to
their particular situation more.

You could end up with an adverse selection under that scenario,
potentially, because someone could decide that they want a much
higher MSA contribution and a much, if you will, higher deductible,
because they just figure that they’re going to have very low medical
costs, and they want more cash back at the end of the year.

Now, it’s conceivable that you can design a program if you want
to where you have adverse selection as a problem, and there might
be reasons to do that. There might be reasons where, in the end,
it justifies doing so, because the overall cost to the system could be
less. That’s not the system we've designed, per se, which I’m not
saying is the end-all of all systems, but it’s certainly one which,
without having any change in experience whatsoever on the part
of the employees, lowers our costs and give them better coverage.

Mr. SALMON. Mr. Mica, just one point. There are about 3,000 pri-
vate sector corporations and limited partnerships that have offered
MSA’s to their employees throughout the country. Do you not think


48

House Subcommittee on Civil Service / Page 8

* BY INJECTING 9 MILLION FEDERAL EMPLOYEES, RETIREES, AND
DEPENDENTS WITH MSA’S INTO THE HEALTHCARE MARKET, YOU WILL
FORCE AN EVEN MORE DRAMATIC PRICE-CONSCIOUSNESS AND
COMPETITION INCENTIVE ON HEALTHCARE PROVIDERS, PRESSURING
THEM TO REDUCE HEALTHCARE PRICES IN ORDER TO COMPETE, THEREBY
NOT ONLY SAVING AMERICAN TAXPAYERS CONSIDERABLE AMOUNTS, BUT

RESULTING IN LOWER HEALTHCARE COSTS FOR ALL AMERICANS.

THE DIFFICULTY OF SUCH A DECISION ASIDE, IT 1S IN MY VIEW

UNQUESTIONABLY IN THE BEST INTERESTS OF THE AMERICAN TAXPAYER,

AND IT CLEARLY INDICATES, MR. CHAIRMAN, WHY THE SIMPLE
NOTION OF OFFERING FEDERAL EMPLOYEES THE FREEDOM TO CHOOSE
AN MSA OPTION IF THEY SO DESIRE IS A MODEST STEP WITH WHICH ANY

REASONABLE PERSON SHOULD AGREE.


117

possibility that they may deprive the FEBBP of its ability to use
its purchasing power to maximum advantage both in negotiating with
health plans and in taking advantage of the large managed care
component currently operating in the FEHBP. HMO and PPO networks
currently provide major cost savings in the FEHBP. According to
the Office of Personnel Management, PPO networks in the FEHB in the
1994 contract year alone reduced medical expenses in the program by
$1.3 billion. These savings were realized in large part because of
the access provided these medical providers by the large employee
and retiree group assembled under the FEHBP. It is difficult to
imagine that these discounts would not erode as some FEHBP enrolles
choose MSA coverage and the size of the group is reduced. This
would be particularly true if enrollees remaining in the
traditional FEHBP plans were less healthy than those removed from

the group, as would likely be the case with MSA participants.

In conclusion, although we have not been asked to comment on
a specific legislative proposal, it is doubtful that the National
Treasury Employees Union could support the addition of Medical
Savings Accounts to the current PEHBP. It is difficult to see the
addition of MSAs as an advantage to the current program and, at a
minimum, much remains to be learned concerning the potential impact
MSAs would have on current FEHBP participants -- the healthy as
well as those less fortunate. Much remains to be learned before

such a move can be considered.

Thank you again for this opportunity to share our views.


53

Private employees with regular deductibles or copayments may’ not have sufficient out-
of-pocket funds to access primary or preventive services. MSAs provide them with a
source of funds to pay for these services. and this is particularly important for low income
workers.

During the past three years, several dozen versions of medical savings accounts have
been introduced in the U.S. Congress. Until the dawn of the 104th Congress. most of the
beltway interest groups did not pay much attention to the concept, but in recent months,
CAHI has been flooded by requests from hundreds of organizations trying to get up-to-
speed on the issue. We have been working overtime to educate these interest groups, but
Tam afraid there are still some misconceptions out there.

The biggest concern we are currently hearing is that Medical Savings Accounts may lead
to adverse selection, meaning that only the young and healthy would want an MSA,
leaving the sick and aged behind in traditional health care plans and managed care
settings such as HMO’s. This concern must be clearly addressed and understood because
it is so misleading.

Selection is the process of each person choosing what is in his or her own best interests.
For example, high users of health care services prefer traditional plans over managed
care plans. Why? Because it is important to hem to preserve their personal network of
providers and their ability to choose their own provider. Some observers attribute the
savings generated by managed care to this very process --- the younger and healthier do
not mind going into an HMO because they do not have ties to any particular physician
Therefore the cost of care for a typical HMO patient is lower.

To the extent MSAs help preserve their choice of provider, MSAs will be more attractive
than managed care options to high risk individuals in the federal employee pool.

Under an MSA with catastrophic coverage, the maximum payable out-of-pocket can be
similar to or even less than under a traditional indemnity plan. Therefore, a high risk

person could actually pay less out-of-pocket in a year of high medical expenses than
under a traditional plan.

MSAs will be attractive to a cross section of people, some low cost and some high risk.
Both groups could benefit financially from this choice and high risk individuals may also
place a high value on the ability to choose their provider.

Foster Higgins surveyed nearly 1,000 mid-sized firms in 1993. The average cost fora
traditional indemnity plan by itself or for an HMO plan by itself were both just over
$3,000 per employee and were within 1% of each other. Allowing employees a choice
between an indemnity plan and an HMO increased the average cost by $1,000 per
employee. Their conclusion was that “healthier employees choose HMOs, and the
indemnity plan is left with the poorer risks.” (Highlights, September, 1994).


138

(3) Demonstrate the availability of a sufficient number of qualified health professionals

supported and supervised by apprupriate physicians tc carry out the utilization review activities.

(B) The Secretary may revoke a certificate if the holder does not comply with performance
assurances under this section, violates any provision of this Act, or violates any regulation

adopted pursuant to the Act.

(C) The following procedural requirements shall govern the denial or revocation of a certificate:

(1) Before denying or revoking a certificate under this section, the Secretary shall provide
the cpplicant or certificate holder with reasonable time to supply additional information
demonstrating compliance with the requirements of this Act and the opportunity to request a
hearing.

(2) If an applicant or certificate holder requests a hearing, the Secretary shall send a
hearing notice by certified mail, rerurn receipt requested, at least 30 days before the hearing.

(3) The Secretary shall hoid the hearing in accordance with the procedures set forth under

[relevant state law].

(D) Any aggrieved patient or provider may file a complaint with the Secretary alleging that a
private review agent is not in compliance with this Act or the regulations issued thereunder and
requesting that the Secretary revoke the certificate of such private review agent or require that
such agent comply with the Act and/or regulations. The Secretary's decision with respect

to such complaint shall be subject to judicial review upon appeal by the patient, provider or

i


49

House Subcommittee on Civil Service / Page 9

IT IS INCONCEIVABLE THAT A SINGLE EASTERN CITY AND ONE

RELATIVELY SMALL COUNTY IN THE WEST ARE LEADERS ON THIS ISSUE

I HOPE CONGRESS WILL TAKE ITS RIGHTFUL LEADERSHIP ROLE IN
RESTORING THE PRINCIPLES OF FREE MARKET ECONOMICS TO THE
HEALTHCARE MARKET OF THIS NATION. BY SO DOING, YOU ADDRESS THE
SINGLE LARGEST OBSTACLE TO A BALANCED FEDERAL BUDGET -- THE
COST OF HEALTHCARE -- AND THEREBY ADDRESS PERHAPS THE SINGLE
LARGEST DETERMINANT OF THE KIND OF ECONOMY IN WHICH MY

CHILDREN AND YOURS WILL HAVE TO SUPPORT THEIR FAMILIES.

ISTRONGLY URGE YOU TO FOLLOW THE LEAD OF ADA COUNTY AND
JERSEY CITY, SAVE AMERICAN TAXPAYERS MILLIONS OF DOLLARS, AND
HELP RESTORE COST-CONSCIOUS CONSUMPTION AND PRICE-CONSCIOUS.
COMPETITION TO AMERICAN HEALTHCARE, ALL BY OFFERING EMPLOYEES
OF THE FEDERAL GOVERNMENT THE OPTION OF A MEDICAL SAVINGS

ACCOUNT HEALTH INSURANCE PLAN


78

Mr. Mica. Thank you, Dr. Johnson. I can’t help but start with
you, because first I want to ask you, are you testifying on behalf
of the American Medical Association and not personally?

Dr. JOHNSON. Yes, I am.

Mr. Mica. You are? So you've just testified that these MSA-type
plans, in which, I understand from the studies I’ve seen, there
would actually be less utilization of doctors, because under some of
the other plans there is more incentive to go to the doctor, to utilize
medical services, that actually they would be using doctors less.

Dr. JOHNSON. There is certainly the potential for that, Mr. Chair-
man, and there is also the potential, which is equally important.
for individuals to use the system in a more cost-effective way.

Mr. Mica. So their visits would be more valuable, more directed,
but possibly less frequent.

Dr. JOHNSON. If I may give you just an example of what we're
talking about here, from my own practice, Mr. Chairman. As I indi-
cated at the outset, I’m a practicing diagnostic radiologist. I work
in an outpatient facility that does very expensive high-tech proce-
dures—MRI’s, CT scans, and so forth.

We have been a cost-effective provider of those services for years,
but most people in our community don’t care about that. Now, keep
in mind, the quality issues are determined by whoever refers them
to us. They wouldn’t refer to us unless they’re satisfied that we can
do the job well.

But the referring physicians typically don’t care about the cost,
and the reason is, someone else is paying for this. It’s very unusual
to have anyone care. On the contrary, physicians hear over and
over again, “Why are you worried about the cost, doctor? My insur-
ance will pay for this.” It’s exactly the mindset we've heard.

And so the cost-effective provider of services is not rewarded in
the current environment we have. And so, from my own personal
experience, I suggest to you that we can maintain—through the
quality of the service that we provide, we can see to it that people
get the services they require, but we can do so in a more cost-effec-
tive way, which we consider to be one of the major objectives here.

Mr. Mica. Well, the other thing that has been charged against
MSA’s—and it was interesting to hear your testimony—is the ques-
tion or comment that people say, because folks wouldn't want to ex-
pend the money, they would not seek preventive care. And you're
saying that there’s no study, no evidence, that this would be true,
that there would be any endangerment to preventive care. Was
that a correct assessment?

Dr. JOHNSON. Yes, Mr. Chairman. That’s our understanding of
the current experience, and our view is that, given the opportunity
to realize long-term savings by cost-effective utilization of the sys-
tem today, by doing the preventive things that make sense in order
to reduce the amount of money that will be taken out of their sav-
ings account at a later time, that people should respond.

But suppose we're wrong. Suppose that this assertion that we've
made in our testimony today is wrong. It’s very easy to adjust for
that. It’s very easy to incorporate the various costs of preventive
services which are deemed to be desirable into the insurance, into
the catastrophic side of that, have those benefits paid for.


88

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43

House Subcommiutee on Civil Service | Page 3

* EVENTUALLY, A MAJORITY OF FEDERAL EMPLOYEES WILL CHOOSE
THE OPTION THE BOTTOM LINE WILL BE IMMEDIATE SAVINGS IN THE

MILLIONS OF DOLLARS, WITH LONG-TERM SAVINGS OF MUCH MORE

BY INTRODUCING TENS OF THOUSANDS OF COST-CONSCIOUS
HEALTHCARE CONSUMERS INTO LOCAL MARKETS ACROSS THE NATION,
YOU WILL OVERNIGHT FORCE HEALTHCARE PROVIDERS TO BECOME MORE,
PRICE-CONSCIOUS, WHICH WILL RESTORE MARKET FORCES TO BRING THE

COST OF HEALTHCARE DOWN.

UNDER ADA COUNTY'S MSA PLAN, THE TAXPAYERS SAVE MONEY --
WHICH WAS MY FIRST MOTIVATION IN PROPOSING THE PLAN -- BUT
PLEASE NOTE THAT THE TAXPAYERS WOULDN'T SAVE A DIME IF NO.
EMPLOYEE ENROLLED IN THE PLAN.....AND OF COURSE, THE EMPLOYEES.
WHO ENROLLED DID $O ONLY BECAUSE THEY JUDGED IT TO BE IN THE

BEST INTERESTS OF THEMSELVES AND THEIR FAMILIES.

OUR MSA OFFERS THREE MAJOR BENEFITS TO EMPLOYEES:


129

(A) Promote the delivery of quality health care in a cost effective manner;

(B) Foster greater coordination berween health care providers, third-party payors and others

who conduct utilization review and managed care activities,

(C) Protect patients, employers and health care providers by ensuring that private review agents
are qualified to perform utilization review and managed care activities and to make informed

decisions on the appropriateness of medical care.

(D) Protect patients’ health care interests through public access to the criteria and standards

used in utilization review and managed care activities;

(E) Ensure the confidentiality of patients’ medical records in the utilization review and managed

care activities in accordance with applicable state and local laws: and

F) Provide for nondiscriminatory utilization review of treatments for all illnesses, without

Tegard to whemner an illness is classified as medical/physical or mental.

Section 3. Definitions.

For purposes of this Act:

(A) “Certificate” means a certificate of registration granted by the Secretary to a private review

agent.


118

TESTIMONY OF
ROBERT M, TOBIAS
NATIONAL PRESIDENT

Mr. Chairman, Members of the Subcommittee,

I am Robert Tobias, National President of the National
Treasury Employees Union (NTEU). Thank you for this opportunity to
share the views of the more than 150,000 members of NTEU on the
possibility of Medical Savings Account (MSA) options under the

Federal Employees Health Benefits Program (FEHBP).

As you know, the FEEBP provides health insurance coverage to
more than nine million federal employees, retirees, and their
dependents. While the federal health program certainly has its
flaws, since 1959 it has provided solid health coverage options to
the federal community and has been held out by some in this body as
an example, or model that a national health care plan might

emulate.

The respected 1989 Congressional Research Service study of the
FEHBP continues to offer the most complete analysis of the federal
health plan. (The Federal Employees Health Benefits Program,
Congressional Research Service, May 24, 1989) The CRS study
concluded that perhaps the biggest problem with the FEHBP is one of
risk segmentation. Risk segmentation occurs when plans compete for
enrollees, not through efficiency and reduced costs, but by
attempts to repel those potential enrollees who might require

expensive health care. The study goes on to say that premiums for


122

We believe that this would result in a reduction in unnecessary care and potentially
significant cost savings as Federal employees spend their own discretionary -- not
third party -- health care dollars.

MSAs offer great potential in addressing each of APA's stated objectives in
health insurance market reterms.

First, to the extent that an individual health plan inappropriately imposes --
because of stigma rooted in fear and ignorance -- arbitrary limits on the scope,
duration and coverage of treatment for mental illness, or on the cost sharing required
of a patient, MSAs will allow individuals to offset such discriminatory coverage out
of tax-preferenced savings. While we reiterate that we believe there is no justification
for such limits, MSAs would at least provide a bridge between current coverage limits
and the eventual achievement of non-discriminatory coverage of treatment for mental
illness. “Prudent purchasers” of healtt: insurance could also be assured of a lifeline
against unexpected costs in the event of a sudden onset of severely disabling
psychiatric illness.

Second, MSAs dovetail effectively with APA‘s recommendation of support for
point-of-service and “private contracting” for health care services. Both options
emphasize consumer freedom-of-choice and individual consumer responsibility. Use
of a MSA to cover the additional out-of-pocket cosis to consumers maximizes market
freedom without financia!ly punishing patients for exercising their rights tc select their
health provider of choice.

Third, MSAs would provide a critical safety valve to offset the excesses of
abusive utilization review and subsequent patieit care denials by behavioral health
care companies or other managed care operations which are too-often interested in
cutting outlays at the expense of medically necessary patient care. Patients would
have a lifeline to needed care with their preferred provider, even if they are denied
treatment by their managed care companies. MSAs would also allow patients to
receive treatment pending resoluticn of appeals of claims denials withuut having to
choose in the interim between their physician and their next meal, for example.

Wl. General Design of MSAs

APA believes that an FEHBP MSA plan should be required to meet several key
Federal standards. Tiese include.

1) Definition
For purposes of tax deductibility, MSAs should conform with the current

Internal Revenue Code definition of “medical expense”, a clear-cut definition of
“medical care”. As we understand Internai Revenue Code, it defines medical care as


127

Attachment 8

American Psychiatric Association
1400 K Sweet, N.W., Washington, D.C. 20005 + Telephone: (202) 682-6000

DISCUSSION DRAFT
"THE PATIENT PROSECTION IN UTILIZATION REVIEW
AND MANAGED CARE ACT"

APA STATEMENT: The attached proposed bill, “The Patient Protection in Utilization Review and
Managed Care Act,” is c staff-developed discussion draft. In response to the growing concern
among patients and health care providers about the problems associated with what is typically
unregulated utilization review and managed care. this draft bill was developed in an effort to initiate
physician member participation in the legislative process and respond to these problems, This draft
bill does not represent policy or proposed policy of this organization, As an amalgam of ideas for
addressing deficiencies in the utilization review process, it is a drat document for discussion and
debate.

SUMMARY: All non-hospital affiliated entities performing utilization review or managed care are
to be regulated through a certification/registration process under the state Secretary of Health and
the Commissioner of Insurance.

KEY PROVISIONS

© Requirement that private review agents provide patients and providers with its utilization
review or managed care plan, including review criteria, standards and procedures.

© No determination adverse 10 patient or provider vis-a-vis necessity or justification for any
hospital, medical or other health care service may be made without prior evaluation and
concurrence by a physician,

© Any determination resulting in denial of reimbursement or pre-certification must include
evaluation, findings and concurrence of physician trained in the relevant specialty.

© Prohibition of incentive or contingent fee arrangement based on the reduction of health
services.

© Requirement of nondiscriminatory utilizarion review of treatment of medical/physical and
‘mental illnesses.

© Private review entities must have policies and procedures to ensure compliance with state and
federal confidentiality laws, protecting medical records.

© Aggrieved patient or provider given the right to file a complaint alleging a reviewer's failure
to comply with requirements of law and/or regulations. Judicial appeal available.


CONTENTS

Hearing held on December 13, 1995 ..
Statement of:
Chrysler, Hon. Dick, a Representative in Congress from the State of
ichigan ..
Glenn, Gary, county commissioner, Ada County, Boise, ID; Peter Hendee,
consulting’ actuary, Council for Affordable Health Insurance; Merrill
Matthews, director of health policy studies, National Center for Policy
Analysis; Daniel P. Johnson, Jr., president-elect, the American Medical
Association Board of Trustees
Salmon, Hon. Matt, a Representative in Congress from the State of
Arizona .
Schundler, Bret,
Letters, statements, ete., submitted for “the record by:
Glenn, Gary, county commissioner, Ada County, Boise, ID, Prepared
statement of ..
Hendee, Peter, consulting actuary,
ance, prepared statement of ...
Johnson, Daniel P., Jr., president-elect, the American Medical Association
Board of Trustees, prepared statement of
Matthews, Merrill, director of health policy studies, National Center for
Policy Analysis, prepared statement of
Mica, Hon. John L., a Representative in Congress from the State of
Florida, information concerning a transcript from National Public

Prepared statement of

il Street Journal articles .

Salmon, Hon. Matta Representative in Congress from the State of
‘Arizona, Brepared statement of

Schundler, Bret, mayor, Jersey Cit

a)

Page

28

38

wow

41
52
69
59

92

96
88

13


106

forced to shoulder a larger share of premiums, and higher
deductibles and co-payments. At the same time, restrictions on
utilization have been introduced under the broad heading of
managed care: Under these terms, refusal to acquiesce to the
rationing decisions of health care managers has meant paying for
care independently, with no subsidy from the health plan or the
employer.

Managed care can be and has been a success in cases where
there is an explicit trade-off between restrictions on choices
among providers and an expansion of benefits, lowering of co-
payments, and a reduction in premiums. That people are willing
to accept limitations on their choice of providers in exchange
for more comprehensive benefits and lower out-of-pocket costs
argues for expanding insurance coverage as a means of controlling
aggregate health care spending. Medical savings accounts,
however, move us in the exact opposite direction.

In addition to the lost opportunities for cost savings from
rate negotiations with providers, medical savings accounts create
incentives to forgo preventive care and delay treatment. Under
MSAs, the behavioral incentives would be identical to those of
the uninsured, only stronger because the money not spent on
health care would be tax-free. Consumers would delay medical
treatment until it was absolutely necessary, a practice which has
been shown to be more costly in terms of dollars and health
outcomes than regular preventive care and diagnosis and treatment

in the early stages of disease.


66

patients are in control — and it will be exciting to observe how the health care system will

adapt in the future.

Around the country businesses are already gearing up to meet the needs of
consumers in a health care market that permits them to control part of their health care

dollars. Considering these changes we can assert that the future is here.

@ West One Bank in Idaho has created a Medical Savings Account product for its
customers, using a special money market fund that will allow employers or
employees to make deposits to the account and permits the owners of the

account to draft on it to pay health care expenses.

© Eclipse Consulting Group of Indiana has designed a computer system to
provide electronic banking using “Smart Card” technology that would permit

patients to pay providers directly from their MSAs.

Conclusion

What is important to realize is that businesses are responding quickly and efficiently
to the perceived changes in the health care marketplace by providing more options that
lower costs to patients, employers and society as a whole. Over its 35 years of existence,
Congress has ensured that federal employees also had choice. Indeed, most federal
employees have had more options than their counterparts in the private sector. However,
Congress is on the verge of making tax-free MSAs available to the general public. If
Congress wants to retain the FEHBP’s historic commitment to choice and quality, it should

be leading the fight to make MSAs available for federal employees as well.

I want to thank you for giving me the opportunity to state why federal employees
should have access to Medical Savings Accounts. You are to be commended for holding
this hearing to look into this exciting option, and I will be glad to try and answer any

questions at the appropriate time.

Page 8


52

Statement by Peter Hendee, Consulting Actuary, Odell & Associates, Inc.
for
The Council for Affordable Health Insurance

Mr. Chairman, my name is Peter Hendee and I am the consulting actuary for Odell &
Associates. Inc., of Winston-Salem, North Carolina, and a member of the Council for
Affordable Health Insurance. Lam also a member of the American Academy of Actuaries
and was part of the Academy”s Medical Savings Accounts Work Group.

The Council, also known as CAHI. is an association of 40 small to mid-sized insurance
companies that was formed in March 1992 to fight for free market solutions to the
problems in the health care system. We also represent several hundred individual
members including actuaries, physicians, insurance agents and other Americans
interested in free market solutions to the nation’s health care problems.

Mr. Chairman, I would like to take this opportunity to thank you for conducting these
hearings on creating Medical Savings Accounts as an option for federal employees under
the Federal Employees Health Benefits Program.

Included in the 1995 Balanced Budget Act, now under negotiation, are changes in the
U.S. Tax Code that will provide the same tax treatment for Medical Savings Accounts
now available to other health care financing mechanisms. Once enacted, federal
employees will want, and should have access to, the same health care options and
incentives available to other Americans.

The MSA concept is a popular one both in this Congress and in the state legislatures.
Since the Council was founded in 1992, 13 states have enacted medical savings account
Jaws including Arizona, Colorado, Idaho, Illinois, Indiana, Michigan, Mississippi,
Missouri, Montana, New Mexico, Oklahoma, Utah, and West Virginia.

Two additional states, Washington and Virginia, have recently enacted MSA laws that
rely on further federal action to make them effective. Medical Savings Account
legislation is also pending in an additional 16 states. Medical Savings Accounts are
proving to be a popular approach in the states.

Medical Savings Accounts, coupled with high deductible health insurance plans would
offer the nation’s federal employees the security of funds to pay for the first dollar of
health care expenses. Unlike other first dollar programs, however, this coverage has a
built-in financial incentive not to over-utilize health care. By switching to an MSA,
federal employees could use the MSA as a source of funds for primary and preventive
care and have the opportunity to save unspent MSA funds for future health care needs.


101

not required to spend the money on health care costs at the end of the year.
Preliminary CBO estimates have indicated that the Medical Savings Account
provisions would be costly, and I also ask that today’s witnesses address the

issue of cost.

Before adding Medical Savings Accounts as an option to FEHBP, it is
critical that these concerns are addressed. I hope that today’s witnesses will
speak to the issues of adverse selection, the catastrophic plan, the cost of MSAs
to the federal government, and the likelihood that recipients will forgo health
care. I look forward to a continuing dialogue to examine the benefits and

potential problems associated with the inclusion of MSAs in FEHBP.


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105

operating FENBP will ri:

Adverse selection costs money
Virtually all the negative effects of medical savings accounts
can logically be traced to competitive health care markets’
natural tendency toward adverse selection. It is worth
enumerating these effects separately in order to understand just
how insidious they are.

First and perhaps most ironic is that MSAs deprive the FEHBP
of its ability to use its huge purchasing power to maximum
advantage in negotiating with health plans. Although proponents
of MSAs are often the same individuals who have quite recently
extolled the virtues of managed care health insurance
arrangements, the economic gains from managed care would be the
first casualty of any proliferation of medical savings accounts.

All the gains from aggressive negotiating on price and
coverage with managed care insurance carriers are lost to those
with an MSA. Proponents envision individuals shopping around
freely for the best deal they can get, comparing price and
quality from a multiplicity of providers. But the reality is
something quite different.

Indeed, the idea of Medical Savings Accounts is best
understood as one more step in the continuing process of shifting
costs and responsibilities for health care away from employers
onto workers. As health care costs have risen at rates which far
exceed the general rate of inflation, employers have responded by
reducing the scope of employer-paid health insurance benefits

Thus over the past two decades, more and more workers have been


34

And the private sector—this MSA is very good for private sector
insurance companies, because they can offer the MSA, which
means they have control of this pool of money that the employer
and/or the government puts into it, and that’s a pool of money that
the private sector insurance companies will control.

They will be able to offer IMA’s—Individual Medical Accounts—
to their employees, which is another product they can offer, plus
they will be selling the high deductible health care insurance poli-
cies, which is another product that they will earn profit on, plus
it has very, very low administration costs. When we understand
that 30 cents out of every dollar we spend in health care is spent
on paperwork, this can eliminate 80 percent of those costs.

Mr. Mica. Now, Mr. Chrysler, we’re going to have a vote. I'm
going to give the next 5 minutes to the vice chairman. But you
have to tell me and the subcommittee, was there any cost-shifting?
In fact, this was offered to everyone?

Mr. CHRYSLER. Yes.

Mr. Mica. The management, employees, and retirees?

Mr. CurysLer. Yes.

Mr. Mica. Was there any cost-shifting?

Mr. CHRYSLER. Absolutely not.

Mr. Mica. Were the premiums increased? Say, after introduction
of MSA, was there any—I mean could you cite—there may have
been some normal increases, but was there anything that showed
that one group versus another group were penalized by the intro-
duction of MSA’s in your private sector experience?

Mr. CHRYSLER. No, our health care premiums went down by over
14 percent when we went to medical savings accounts, and after
the first year, when we started the second year, there were no in-
crease in premiums for the medical savings accounts for the sec-
ond.

Mr. Mica. You're not under oath, but you're telling us the truth
about this radical idea, right? Thank you.

Mr. CHRYSLER. Only real-life experience.

Mr. Mica. I want to yield to our vice chairman, and we'll go until
it’s time for the vote.

Mr. Bass. Sure. Thank you very much, Mr. Chairman, for yield-
ing. My question will be short, and we'll make our vote.

One question to Congressman Salmon. I understand that, in a
prior life in Arizona, that you were responsible for or participated
in the passage of legislation which provided for MSA’s for Arizona
State employees. Could you give this subcommittee some observa-
tions about the type of program that you proposed and that was
accepted, and how has it worked in Arizona?

Mr. SALMON. Thank you, Mr. Bass. The bill that we passed actu-
ally opened MSA's up as an option with a State tax incentive, like
a State-based IRA, to basically all citizens at large. It was not des-
ignated just for the State employees. Let me say, if I had every-
thing to do all over again, it would have been the logical next step,
or maybe even first step, because, frankly, here we are as stewards
of the taxpayer dollars.

I believe, as Mr. Schundler said, we have an opportunity to ex-
pand the employees’ opportunities when it comes to the health care
arena, to give them more options, give them the ability to take


115

low-deductible, traditional FERBP plans would necessarily increase,
and eventually could be expected to soar out of reach for most

federal employees and retirees.

An October, 1995 study by the American Academy of Actuaries
probably summarizes our concerns best. The Actuaries’ report
concluded that if medical savings accounts were adopted for all
Americans, the sick and the elderly would be hurt. Conversely, the
young and the healthy would be better off. Since 1959, the FEHBP
program has attempted to provide health coverage at reasonable
rates for the entire federal community -- young families, the
elderly, the healthy and the frail. Any effort to alter this basic
premise will not have the support of this Union. Yet, absent other
dramatic changes in the basic operation of the FEHBP, it is
difficult to imagine how the addition of MSAs could avoid this very

same effect envisioned by the American Academy of Actuaries.

Conventional health plans participating in the FEHBP would
find themselves caring for the old and the ill. Young and healthy
individual federal employees and their families would be attracted
to the possibility of the extra cash that MSA’s would offer. This
would allow insurance carriers to practice the very worst kind of
health care practice ~- often referred to as cherry picking --
seeking only those risks that are considered to be the best risks.
There is little question that this would upset the delicate balance
inherent in the FEHBP and perhaps lead to the demise of the FEHBP

as it currently exists.


186

(2) The policies and procedures to ensure that all applicable state and federal laws to

Protect the confidentiality of individual medical records are followed;

(3) A copy of the materials designed to inform applicable patients and providers of the

requirements of the utilization review or managed care plan; and

(4) A list of the third-party payors and business entities for which the private review agent
is performing utilization review or managed care in this state and a brief description of the
services it is providing for each client, and a statement regarding whether the payment system for

such services contains an incentive or contingent fee arrangement.

Section 6. Renewal of Certification.

(A) A certificate expires on the second anniversary of its effective date unless the certificate is

renewed for a two-year term as provided in this section.

(B) Before the certification expires, a certification may be renewed for an additional two-year

term if the applicant;

(1) Otherwise is entitled to the certificate;

(2) Pays to the Secretary the renewal fee set by the secretary through regulation; and


58

The family policy, you get $1,500, as the chart shows over here.
You get a $1,500 contribution to your medical savings account, and
a $2,000 deductible policy, and that is not per person in the family,
that’s a one-time deductible.

As a result, under our old plan, you were at risk for $1,500 per
individual in the family, for a total of three individuals, $4,500.
Under our plan now, the single individual is at risk for $375 after
the MSA is spent or $500 total for the family after the $1,500 in
the MSA is spent.

The existence of these plans like the NCPA’s refutes most of the
criticisms against MSA’s. Some actuaries have argued that MSA’s
are not actuarially feasible. The fact is, as has already been testi-
fied today, some 3,000 businesses already have them in place. They
are working today.

Others argue, as you know, that they would result in adverse se-
lection, that healthy people would chose them, sick people would
not. Again, as most of the testimony has indicated and the NCPA’s
plan testifies, people are better off financially, whether you're sick
or healthy, by moving into the MSA plan.

And finally, there has been some criticism that MSA’s would de-
stroy the foundation of managed care, that managed care has been
making great gains in saving health care money, and that the im-
plementation of MSA’s would destroy that progress made by man-
aged care.

But, in fact, many of the MSA plans out there actually have a
managed care element. Ours has at the NCPA. That is there is a
network of physicians that you can go to. There is a network of
hospitals. There is an encouragement to try to go to certain provid-
ers, but you have the freedom of access to go to others if you want
to.

When you’re in the insurance part, after you’ve met the deduct-
ible and you’re in the insurance, you may have to pay more out-
of-pocket to do that, but you can use the MSA money to make those
expenditures.

In conclusion, what is important to realize is that businesses are
responding quickly and efficiently to the perceived changes in the
health care marketplace by providing more options that lower costs
to patients, employers, and society as a whole.

Over 35 years of existence, Congress has ensured that Federal
employees also had a choice. Indeed, most Federal employees have
more options than their counterparts in the private sector. How-
ever, Congress is on the verge of making tax-free medical savings
accounts available to the general public. If Congress wants to re-
tain the FEHBP’s historic commitment to choice and quality, it
should be leading the fight to make MSA’s available for Federal
employees, as well.

I want to thank you for giving me this opportunity to state why
Federal employees should have access to medical savings accounts.
You are to be commended for holding this hearing to look into this
exciting option, and I would be glad to try and answer any ques-
tions at the appropriate time. Thank you.

{The prepared statement of Mr. Matthews follows:]


112

Centralizing, rationalizing and administering decisions like
these constitutes a large part of what makes traditional group
insurance more efficient and less costly than individualized
arrangements. With every health care dollar being so precious,
we cannot afford to waste money on dubious experiments like

medical savings accounts

Conclusion

ARGE opposes introducing medical savings accounts into the
FEHBP. They will raise costs for the program, and the burden of
these inflated costs will be borne by those least able to afford
it: the elderly, the ill, young families, and low-income
workers. Medical Savings Accounts are inefficient and costly,
and should not be distributed as an extra bonus to those already
blessed with good health and high income.

The FEHBP has been held up as a model employer-sponsored
health insurance program on the basis of its success in using
competition among similar plans to hold down costs in recent
years. Introducing MSAs into FEHBP would rob the program of this

strength and we urge you to abandon this proposal.

11


16

medical care. In fact, MSAs could be a source of funds for services such as preventive care not
always covered by ‘raditional health insurance. Moreover, anecdotal 2vidence from employers
suggests that employees are most interested in seeking preventive care including wellness

programs to avoid greater health risks and costs down the road

It has also been argued that an MSA option is not likely to reduce costs because consumers are
not in a position to bargain for reductions in costs as are managed care plans and insurance
companies. Again, we disagree. An MSA option would provide the opportunity and the
responsibility for patients to make wise treatment choices and to reap the rewards of their
savings for future unreimbursed medical expenses. Patients, in consultation with their doctors,
would manage the patient's care -- not a third-party payor. Consumers can and will make
prudent decisions about their health care just as they decide the type of mortgage to purchase,
the kind of car to buy or the amount of life insurance to carry. As Thomas Sowell, an
economist and a senior fellow at the Hoover Institution, wrote during the health care reform
debate last year, "No freedom can be more personal than to decide for yourself what should be

done to preserve your health and your life.”

Recognizing the importance of preserving patient choice in health care, a number of states have
recently passed measures authorizing the use of tax-free MSAs for medical expenditures. As
a result, there is now an increased availability of MSAs, usually combined with high deductible,
catastrophic health plans. To date, over ten states have enacted MSA laws, including Arizona,

Colorado, Idaho, Illinois, Michigan, Mississippi, Missouri, New Mexico, Utah, Virginia and


28

Mr. Mica. I thank you again, mayor, for both your testimony and
your patience this morning.

I'll turn now to our distinguished colleague from Michigan, some-
one who comes from the private sector and offered his expertise,
not only on this issue but on the important reorganization issues,
provided tremendous leadership as a new Member of Congress,
again bringing new ideas to the new Congress. So welcome, Dick
Chrysler, and you’re recognized.

STATEMENT OF HON. DICK CHRYSLER, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MICHIGAN

Mr. CHRYSLER. Thank you, Mr. Chairman. It is a pleasure to be
with you today, and thank you for taking the time to learn about
medical savings accounts for Federal employees.

As the Nation’s largest employer—as the world’s largest em-
ployer—the Federal Government should prove itself as a leader in
innovative, cost-effective health care management. I believe it is
imperative that Congress approve MSA's as a health care insur-
ance alternative, and, in my opinion, should be the only option for
Federal employees. That eliminates all the adverse selection prob-
lems.

I have a long personal experience with medical savings accounts.
My company in Brighton, MI, has enjoyed tremendous success with
MSA’s. RCI is an automotive specialty manufacturing company
which has had a traditional health insurance program until 2 years
ago, when we replaced the traditional plan with MSA's.

In the plan, employees are free to choose where they want to go
for their medical care. They make choices based on the quality of
care, while negotiating a reasonable price. Even though employees
have a higher level of benefits with the MSA’s, a higher level than
with our previous health care insurance program, the company’s
annual health care costs were reduced from $4,800 per family to
$4,200 per family, a 14.3 percent savings.

At the end of the first year, RCI did not even receive a premium
increase for the high deductible policies used in conjunction with
the account. This kind of cost cutting means real savings for busi-
nesses, let alone the potential savings for a huge employer like the
Federal Government.

Bringing MSA’s to RCI was not an easy process, because MSA
arrangements do not share the same tax benefits as traditional
health insurance plans. Therefore, I look forward to the passage of
H.R. 1818, the Archer-Jacobs bill, to bring tax equity to MSA’s. I
can guarantee that MSA’s will quickly develop a strong presence in
the marketplace.

Employees need to have a direct role in seeing their health care
dollars spent wisely. Personal involvement provides an incentive to
be conscientious consumers of health care and utilize preventive
health care to avoid costlier medical procedures. MSA's are an ex-
tremely cost-effective way to offer health care benefits to employ-
ees, because they put the consumer back in the decisionmaking
process.

At RCI, employees use an MSA health ID card to pay for all of
their medical, prescription, dental, and vision expenses. We find
that employees shop around for their health care needs, and what


94

Mr. Moran. There are a lot of quotes from Peter Overby and
Patrick Rooney, who is the owner of Golden Rule, and John Good-
man. Those seem to be credible sources.

Mr. Mica. I would unanimously seek approval for that and any-
thing else that should be part of the record, and I always keep our
subcommittee open to any line of questioning. Sometimes I even go
beyond the bounds of being proper on the floor, but we won't get
that far.

Mr. Moran. No, we're not going to get into that.

Mr. Mica. We will allow this, without objection.

Mr. Moran. Actually, I think it’s a response to some of the criti-
cisms that have been made.

Mr. Mica. The other thing, too, Mr. Moran, you haven’t been
here. I have some of the same questions, because I have the same
concerns. I’ve heard the questions raised about cherry picking or
adverse selection, however you term it, and what would the impact

e.

I think it was mentioned by either previous panelists or this
panel that, in fact, some people with prior existing conditions did
choose to stay in. I don’t know of anyone who has testified where
this has been the only choice offered. In fact, I think anywhere this
has been done, they did, in fact, offer this as a choice.

I kept asking if there was any indication of any increase in pre-
mium, lessening of benefits to all of the panelists, trying to find
some example. Now, granted, too, Mr. Ranking Member, that there
doesn’t seem to be a long-term track record for this, so we don’t
know.

But I hope you get a copy of Dr. Johnson's testimony and ques-
tions. I’m sure you will have it. I asked the same questions, too,
about isn’t this going to stop preventive care? In fact, I said,
shouldn’t you go to the doctor regularly and seek preventive medi-
cal attention? So I share the same concerns and raised some of the
questions.

It has been a very interesting panel. I think we'll have some ad-
ditional questions. We may want the opportunity, too—there are
some groups that aren’t represented, that we didn’t hear from
today, that should be heard, and we should hear their objections
or their input as we move forward. But we do have a vote. Did you
have any other final questions?

Mr. Moran. No, that’s fine. I’m glad that you raised those issues,
as well, and I appreciate it, Mr. Chairman. I appreciate the fact
that we’re having a hearing on this.

Mr. Mica. The other thing, too, I would like to leave the record
open at least for 2 weeks and invite groups—there were some folks
that were here; I saw the NARFE, the National Association of Re-
tired Federal Employees—representatives were here earlier. I
would like them to raise any questions and also submit them to the
panel members or previous panel members, and anything else that
may be necessary be part of the record, because we would like a
fair, full, and open hearing on this and see if it does have potential
for being beneficial to our Federal employee health benefit pro-

gram.
With that, we've had the second bell on this vote. I would like
to thank our panelists and those who participated for your testi-


9

Mr. Mica. I thank you, Mr. Salmon, for your testimony. I’m now
going to call on Mayor Schundler.

Mayor Schundler, I should tell you that our subcommittee is part
of a general oversight and investigations committee of the Con-
gress, and it is customary that we do swear in our non-congres-
sional witnesses, so if you wouldn’t mind, would you stand, mayor,
and raise your right hand.

{Witness sworn.]

Mr. Mica. Thank you. The record will reflect that I’m not only
out of breath, but the mayor answered in a positive fashion.

We are again delighted to have you, for you to take time to come
before a subcommittee. You, in fact, are one of the shining lights
in the national municipal and local government arena. You've
brought a breath of fresh air to some outdated and often clouded
thinking and approaches in a city that has suffered a great deal
of pain and setbacks and problems in the past.

Your innovative approaches to some of their problems, we think,
can serve as an example here, too, to what we're attempting to do
in Congress in trying to do a better job with less and redo some
of the programs that just sort of chugged along, SOP, in the past.

But, again, we're delighted to have you. We look forward to your
testimony, and I also apologize for the interruption. So, with that,
you're recognized.

STATEMENT OF BRET SCHUNDLER, MAYOR, JERSEY CITY, NJ

Mr. SCHUNDLER. I very much appreciate the invitation and the
opportunity to speak to the subcommittee. I do strongly recommend
that you include medical savings accounts as an option for Federal
employees. Last year, Jersey City was the first governmental entity
to offer MSA’s to its employees, although there have been thou-
sands of private entities which have already done so, and the re-
sults have been extremely positive for us.

We offered the option to our management employees, and over 60
percent chose the option in its first year, and we expect a substan-
tially greater percentage to opt in next year, after the checks go out
on December 31, refunding what is, on average, going to be almost
$1,000 for the employees participating.

Now, the city was able to achieve immediate budgetary savings
while also allowing employees to reduce their out-of-pocket health
care costs and continue choosing their own doctor. So this was a
win/win for all of us.

Why has the program proved so successful? In the past, Jersey
City covered its management employees through the New Jersey
State Health Benefits Plan. Most chose the traditional indemnity
or fee-for-service option, where employees had to pay a $200 up-
front deductible, and then they had exposure for a 20 percent co-
payment for the next $2,000 of medical expenses per family mem-

er.

That means if you have a four-person family and have a very bad
year, where everyone gets sick, you could have, potentially, $400
worth of expense in co-payments per family member, plus that
$200 deductible, which adds up to $1,800 of potential out-of-pocket
expense.


7

West Virginia. Although such action demonstrates the continued enthusiasm for MSAs in the

health care marketplace, federal tax changes are needed to measure their true worth

While the private sector health care market and the Medicare program may soon be touting tax-
free MSAs among their array of plan offerings, the FEHBP will not. This is ironic considering
many have praised the FEHBP as a model for other health care delivery systems and have
advocated opening the program to non-federal workers. In the interest of furthering consumer
choice and competition in the FEHBP and enhancing a proven program, Federal employees
should have access to an MSA option now, and we stand ready to help this Subcommittee

achieve this sensible reform.

Mr. Chairman, we are grateful for the opportunity to share our thoughts with you and look

forward to working with you as this important issue moves forward.


83

services, by your review of this proposal? I guess there are 3,000
private plans, I heard someone say, so I guess there is some track
record, maybe not in the public sector, but in the private sector.

Mr. HENDEE. I don’t foresee that HMO’s or traditional indemnity
plans will for some reason not be able to continue to carry out their
function. I do see that this will be an additional competitor on a
market and, just like in any situation where you have an addi-
tional competitor, it will make you run harder.

Mr. Mica. Are you familiar with the private plans that have been
instituted and offered? Is there any evidence of costs being driven
up by instituting this for HMO participants or, for any other type
of activity, or anyone being excluded as a result of this option being
offered?

Mr. HENDEE. There is not much information available in the
public domain on the private plans that have these programs, and,
for the most part, those programs are not very old.

Mr. Mica. So there’s not much information first, and there’s not
a long track record. So that’s the biggest problem you're dealing
with. But you’re not aware of, say, an example of one MSA that
has been instituted, Mr. Matthews or any of the panelists, where
there has been a bad experience and where HMO’s or doctors or
other health providers have been hurt by institution of this ap-
proach?

Mr. HENDEE. I am not aware of any instance where the other—
where there has been a choice provided and the other plans ended
up with higher-cost individuals and a cost spiral resulted. I am not
aware of any situation of that type.

Mr. Mica. Mr. Matthews, have you anything to add?

Mr. MATTHEWS. No, sir. Let me do address one issue, though. In
a press conference about a month ago, a member of the press ad-
dressed to one of the NCPA people that he had heard that DuPont
Corp. had implemented MSA’s and that they had had only 2 per-
cent of their people take it, as I got the message, and that they had
had problems with adverse selection.

So I talked to people at DuPont. In fact, I talked to them just
a couple of days ago, one of their chief administrators, and he
said—to find out if that was, in fact, the case. I was having trouble
imagining that was the case, because I talked to DuPont human re-
source people back in the summer, and they had not considered im-
plementing MSA’s at that time, and they were considering some-
thing like that.

In fact, they do not have anything like an MSA. They do have
what they call a plan C option, which offers people the ability to
take a $1,000 deductible policy. As I recall, I think he said they
would give them a couple of hundred dollars in income, not an
MSA, and that they had had about 4 percent of their employee
work force take that.

So it had not been very popular, but there was no adverse selec-
tion element that they could recognize. But he did not characterize
this as really an MSA plan. I think that’s probably right. It’s not
a high enough deductible, and there’s not enough premium savings
in the plan that that would go to, to really warrant many people
moving to it.


5

MSA’s will not increase out-of-pocket costs for Federal employees.
They actually limit out-of-pocket costs, because any funds spent out
of the MSA’s are applied simultaneously to the catastrophic deduct-
ible, and if the deductible is met, the catastrophic policy kicks in.

So, virtually, it’s better than any other plan when it comes to
out-of-pocket costs, because they can pay for prescription coverage
or go to virtually any provider that they desire, and they have first-
dollar coverage from their medical savings account.

Opponents of the MSA cite a few arguments—one, postponing
preventative care. Simply put, that has not been borne out in the
real world. The 3,000-some companies, like Quaker Oats, Fortune
magazine, Dominion Resources, and Golden Rule Insurance Co.,
just to name a few, have not found that people skimp on preventa-
tive care.

Again, I think that the MSA’s would encourage people to live
healthier so they don’t need expensive medical care, but there’s ab-
solutely no reason to think that anyone would jeopardize their en-
tire MSA nest egg or their life just to save the cost of a doctor visit.
I think we all recognize that that’s pretty ludicrous.

In fact, private sector companies who offer MSA’s have found no
evidence, as I mentioned. Rather, middle and lower income workers
are more likely to get preventative care, since they don’t have those
out-of-pocket costs or deductibles that they currently have.

Let’s talk a little bit about the adverse selection process, the con-
cerns that predominantly are being shared by the insurance indus-
try. Adverse selection problems have never been found in the pri-
vate sector.

MSA’s are actually attractive to the very sick, as they will expe-
rience, again, much lower out-of-pocket costs, as compared to tradi-
tional plans. I don’t understand the rationale that only healthy
people would go to medical savings accounts. Again, they’re operat-
ing under the assumption that you don’t have a catastrophic care
policy with your medical savings account, so that’s just fallacious.

Mr. Mica. Mr. Salmon, I hate to interrupt. I want to give you
this choice. There is a secret ballot going on in the conference. I
would like to recess the hearing and accompany you over there im-
mediately. So, if you don’t mind, we will return within 10 minutes.

I will recess the hearing, and I apologize so much for the incon-
venience to you, Mr. Mayor. Thank you.

Recess.]

Mr. Mica. I will call the hearing of the House Civil Service Sub-
committee to order and reconvene the meeting here after that
quick run. We're testing whether Mr. Salmon will get to use his
MSA or not. We are pleased to be back and also to have our col-
league, Mr. Chrysler, join us.

We left off with Mr. Salmon, and you were finishing your state-
ment. We apologize again to the mayor for his patience and under-
standing. Mr. Salmon.

Mr. SALMON. Thank you, Mr. Chairman. I’m just going to observe
that, after having run across the street, run back, and walked in
the cold and sweated and all that, I would like to have an MSA
to cover my out-of-pocket expenses when I go see the doctor today.

Let me conclude that the adverse selection issue was where we
kind of |. ft c#?. that folks on the other side of this ‘:sue believe that



lu

there be a cap on the dollar value of the government's
catastrophic premium payment?

If costs rise in the traditional "low deductible" plans as a
result of the introduction of MSAs as we have predicted, will the
government’s contribution to these traditional plans be augmented
to compensate? If costs rise in the traditional "low deductible"
plans as a result of the introduction of MSAs as we have
predicted, is the government committed to maintaining its 100
percent catastrophic premium payment?

AFGE believes that MSAs are a potential administrative
nightmare for the Office of Personnel Management. In effect,
MSAs would function like thousands and thousands of individual
self-insured plans that OPM would be required to administer and
oversee. For example, would there be explicit restrictions on

what constitutes a "qualified" disbursement from the MSA? Which

types of health care expenditure would be "covered?" Would
abortion services be allowable? Would it be constitutional to
deny disbursements for abortion services or to refuse to count
these expenditures toward the deductible? Is OPM equipped to
make these decisions?

If part of the point of MSAs is to expand the freedom of
federal employees to design their own unique insurance plan, on
what basis could non-mainstream health care services be denied?
Would experimental therapies count against the deductible? would
visits to a homeopathic practitioner count against the

deductible? Is OPM equipped to make these decisions?

10


81

ligation, if all six of my family members were in a car wreck or we
all six got sick at the same time, I would be looking at having to

ay $5,100 out-of-pocket after taxes in my copay and deductible ob-
ligation.

"Gnder the MSA, I will have a $3,000 deductible for my family,
no copay, and the county will give me $2,100 in cash per year. The
worst-case scenario I would ever face out of my own pocket under
that plan is $900, State income tax-free, because Idaho is one of
the States that has already made these deductibles against State
income tax. And that’s just the first year.

If I'm smart enough to have money left over at the end of the
ear, and I am smart enough not to go to Hawaii with it but to
leave it in my account and roll it over—let’s say I leave $900 in

my account after the first year—the second year, the county gives
me $2,100 again.

Now I’ve got $3,000 in my account, and my deductible is $3,000.
My maximum out-of-pocket risk that year is $0, and it can only get
better as each year goes by for those who are responsible and pru-
dent consumers, as we expect most of our employees will be.

Mr. Mica. These sound like horrible alternatives—cost less to the
government, less out-of-pocket potential for the beneficiary, fewer
choices.

Mr. GLENN. Yes, Mr. Chairman.

Mr. Mica. I mean the parade of horribles goes on. It sounds like
even in the proposal stage there were people opposed to this. What
kind of opposition did you have and how did you overcome it?

Mr. GLENN. Mr. Chairman, there was little, if any, opposition
based on merit or arguments against the medical savings account.
In fact, that passed unanimously.

Mr. Mica. Was it just fear of the unknown?

Mr. GLENN. Well, we did focus groups of our employees after-
wards and asked them, “Why didn’t you enroll?” and it was fear of
the unknown. I can’t remember a single employee who said it
sounded like a bad plan. The litany was, “It sounds good, but we're
going to let somebody else be the guinea pig for the first year.”

But now we figure we’ve got 170 salesmen who, as I said, will
brag about the money left over. But there was no philosophical op-
position to the plan. It was all more something unique to the poli -
tics of my little county, in which we are a dysfunctional little fam-
ily, politically.

But we actually had the circumstance where one member of the
Commission’s immediate reaction was that this would be harmful
to the employees until it was shown him how his family would ben-
efit. He had two children, and he used to have $3,500 maximum
out-of-pocket exposure, and now he has $900, so he was wiling to
vote for it.

The third member of the Commission realized it was going to

ass 2 to 1, or he could make it 3 to nothing, so it was 3 to nothing.

ut then, the majority of my Commission, actually, Mr. Chairman,
threatened to fire the director of our personnel department if he in
any way attempted to promote this plan to our employees.

Thereby, there are hundreds of our employees who don’t even
know in detail that we offer it. Basically, whatever communication
was done to our employees, our 900 employees, I did, without sec-


107

Another likely outcome of the financial incentives created
by MSAs would be to "game" the system. OPM has warned that
continuing the annual open season in the context of an MSA option
would invite enrollees to join a traditional plan any year when
they would anticipate health care costs greater than or equal to
the "high" deductible in under the MSA plan. This would only
exacerbate adverse selection in FEHBP and compound the extra
costs that the MSAs would impose on other enrollees in the
system,

The cost impact of this gaming of the system is likely to be
considerable. It is already possible to exploit the fact that
FEHBP plans offer dissimilar benefits, encouraging workers to
switch from plan to plan depending on the particular type of
service they may need in a particular year. CRS found in 1989
that the lack of uniformity among FEHBP plans imposed costs on
the system from this type of behavior, and they recommended
standardization of benefits in order to forestall it. But MSAs
would create an even greater incentive than now exists. It is
not difficult to imagine someone waiting until after a new open
season to schedule non-emergency surgery or even spacing out
regular check-ups or treatments over a thirteen-month interval in
order to preserve the cash in a medical savings account.

Not only would the introduction of MSAs worsen the rate of
growth of costs of the FEHBP, it creates its own new costs. AFGE
finds it odd that after a year of relentless assaults on the pay

and benefits of federal employees and retirees in the name of


92

ational Public Radiat 635 Mansochuters Ave NW.
‘Washington, OC 20001

S33
{ ‘AIR DATE Thursday, October 26, 1995
N ORIGINATION Washington, OC
EXECUTIVE PRODUCER Ellen Weiss
CONDITION OF PRESS USE’ Credit National Public Radio
>) All Things Considered
4)

Copyright 1995, National Public Radio All Rights Reserved. This transcript may not
[be reproduced in whole or in part without written permission For further information,

please contact NPR's General Counsel's Office at (202) 414-2040, Transcript inquiries
only. (202) 414-3232

‘ALL THINGS CONSIDERED has expanded is broadcast 19 two hours - bringing you more live coverage, more spon, and
rare commmentators ftom America’s premier radin newsmagazine

For more on the expanded broadcast and an earlier East Coast sta, check out the NPR home page at hiip:/www.npr.org/

Segment # 11 Congress Embraces Radical’ Medical Savings Proposal

LINDA WERTHEIMER, Hos! The medical savings account, a sort of IRA that could replace
conventional health insurance for many peoole, may be an idea whose time has come I's a pet cause of
Tree market conservatives. and 1's inciuded sn both the Senate and tiouse buduet reconciliation bills Hut

the medical savings account proposal has had more than just philosophy behind wt, as NPR's Peter Overby
repons

PETER OVERBY, Reporter When House Speaker Newt Gingrich was teaching his for-credit college

course in February of 1994. he yave one af his highest accolades to an advocate of medical savings
accounts

Rep NEWT GINGRICH (I8-Ga), House Speaker Maybe the most radical view in how to take care of
health in America today and take care of health care What do you think?

NPR's All Things Considered October 26, 1995



60

FSAs would be a positive reform for the FEHBP, they do have a problem: the “use it or

lose it” provision.

We have a Flexible Spending Account at the National Center for Policy Analysis

(NCPA). Every December I have to look at my account to see if I have money left over.

if

so, I must figure out a way to spend that money before December 31 of I will lose every
unspent penny. 1 begin to think about a getting physical, eye glasses or dental care —

whether I really need these services or not — just so I will not lose the money.

Mr. Chairman, what Congress has done is create a law that encourages me to spend
money on health care at a time when I don’t need it rather than save for a time when I do.
The idea of setting aside pretax dollars in a Flexible Spending Account is good, but it can
be made better: by moving to a Medical Savings Account (MSA). Like FSAs, Medical
Savings Accounts would provide federal employees the option of setting aside pretax
dollars to pay for health care and health insurance, while avoiding the inefficiencies
inherent in Flex Accounts. As a result, those departments of the federal government

considering FSAs would likely switch their attention to MSAs instead.

The National Center for Policy Analysis believes that federal employees would

appreciate having that option and that they and the federal! government would benefit from it

significantly.

The Future of Health Insurance. The traditional, low-deductible fee-for-
service health insurance policy — one that lets people choose any doctor or select any
diagnostic test and send the bill to someone else — is being priced out of the market. Most
people can no longer afford it, and most employers won't offer it. As a result, in the future
most people will have to settle for one of two options: (1) they will enroll in a health

maintenance organization that restricts their choice of physicians and limits their access to

Page 2


56

Question #4: Have MSAs helped to constrain the rate of growth in health care
costs?

Answer: Significant reductions in the annual rate of health care programs cost increases
have been reported

Question #5: Are you aware of employees delaying necessary or preventive care to
save money in their Medical Savings Account?

Answer: There has been no indication that participants in MSA type arrangements have
delayed or skipped any needed care or have less favorable health outcomes than
participants in other health care programs. Anecdotal evidence indicates that primary
care is more accessible. Other plans typically require some type of out-of-pocket
payment (a deductible or copayment) the first time services are received in a year. but
under an MSA, the first dollar of health care expense comes out of the account.


18

The Honorable Bret Schundler

Testimony to the House Subcommittee on Civil Service
December 13, 1995

Page 6

expanded consumer choice, and lower cost, by offering federal employees the opportuni

to enroll in MSAs. Thank you!

Bret Schundler
Mayor, Jersey City, New Jersey


47

Hous ittee on Civil Service / Page 7

LET ME STAKE OUT THE MOST FAR-REACHING STEP YOU HAVE IT
WITHIN YOUR AUTHORITY TO TAKE, COMPARED TO WHICH A DECISION TO
SIMPLY OFFER MSA‘S AS AN OPTION TO FEDERAL EMPLOYEES PALES IN

SIGNIFICANCE AND SCOPE.

1 URGE YOU, AS STEWARDS OF THE TAXPAYERS’ MONEY, TO DECIDE
THAT AN MSA-BASED HEALTH INSURANCE PLAN WILL BE THE ONLY PLAN
YOU OFFER FEDERAL EMPLOYEES AT SOME POINT IN THE FUTURE --
(PERHAPS AFTER A PHASE-OUT PERIOD FOR OTHER PLANS) --

* YOU WOULD ELIMINATE ALL CONCERNS ABOUT SO-CALLED
"ADVERSE SELECTION,” SINCE ALL FEDERAL EMPLOYEES WOULD BE ON

THE PLAN.

* WITH A WELL-DESIGNED PLAN, YOU WOULD IMMEDIATELY SAVE
TAXPAYERS TENS OF MILLIONS OF DOLLARS ON PREMIUMS.


51

proportion of expenses paid by third-party payers increases. So a
financing arrangement like MSA’s, that decreases the proportion of
health care costs paid by third parties, could help reduce health
care inflation.

Thank you again, and [’ll be happy to take any questions.

(The prepared statement of Mr. Hendee follows:]


80

It’s our anticipation that, now, we have 170 salesmen—170 en-
rollees—90 percent of whom we expect will have money left over
by the end of the first year and who will brag to their coworkers
about that money left over. So we are already preparing to double
the number of enrollees next year. I think by the third year we'll
have more than half the county’s employees.

Mr. Mica. So this is presented as an option.

Mr. GLENN. Yes, sir.

Mr. Mica. It has less than a year track record.

Mr. GLENN. Yes.

Mr. Mica. What kind of savings do you anticipate from 170 em-
ployees?

Mr. GLENN. From 170 employees, the calculation is that we will
immediately save just over $37,000 per year in up-front premiums.
That will be the reduction in the premiums that we enjoy.

If we were to be exempt from Federal FICA, being exempt from
Federal taxation would automatically exempt us from the State of
Idaho’s Public Employee Retirement System, and we would just
about triple our savings to over $90,000 per year on premiums just
on 170 enrollees.

Because it appears that the likelihood of congressional approval
of Archer-Jacobs is delayed a bit, we are going to be introducing,
the very first week of the legislature in January, a bill to take care
of separately the State Public Employee Retirement Exemption, so
that will put us up in the $60,000-per-year range.

And that’s really not even the savings. The bulk of the savings
will be in the comparative reduction in premiums over the long
term, we anticipate, because fewer claims will be filed by individ-
uals who are having to spend their own money. So we anticipate
hundreds of thousands of dollars in savings, even if it remains just
an option, even if as small as 20 percent of our work force was all
that ever enrolled, which we’re confident will grow year by year.

Mr. Mica. Did you say there was an 86 percent reduction? Was
that in out-of-pocket costs for those participating?

Mr. GLENN. Mr. Chairman, I specifically said that there was an
82 percent reduction for my family, and that differs depending on
the size of family.

Mr. Mica. OK.

Mr. GLENN. Now, all this concern about adverse selection, the
way our plan is designed—and I think that everybody is aware
that you can design these things any number of ways. The way
that ours is designed, the young and healthy have an incentive to
enroll in our plan. That is they get a shot at $1,100 in cash per
year, which, iP they are in fact healthy and don’t spend, is theirs.
They have a good Christmas, they make a down payment on a new
car, or they go to Hawaii.

But the older and the odds-on sicker members of our employee

opulation, those with families of at least two members or more,
fave two incentives to enroll. They get the shot at the cash—in
fact, they get a shot at $2,100 in cash per year.

But, even more significant—and I can just use my own family as
an example—with a wife and four children, under the old $100 de-
ductible, $300 maximum per family, and an 80/20 copay plan that
we had, where we were subject to $800 per person on the copay ob-


135

Section 5. Application for Certification.

(A) An applicant for a certificate shall:

(1) Submit an application to the Secretary, and
(2) Pay to the Secretary the application fee established by the Secretary through

Tegulation.

(B) The application shall:
(1) Be on a form and accompanied by any supporting documentction that the Secretary
requires; and

(2) Be signed and verified by the applicant.

(C) The application fees required under subsection (A)(2) of this section or section 6 of this Act
shall be sufficient to pay for the administrative costs of the certificate program and any other

sts associated with carrying our the provisions of this Act.

(D) As part of the application, the private review agent shall submit information required by the

Secretary, including but not limited to:

(1) A utilization review or managed care plan that includes specific review or managed
care standards, criteria and procedures to be used in evaluating delivered or proposed hospital,
medical or other health care services, and the citations to the scientific literature relied upon in

establishing such standards, criteria and procedures.


13

CITY OF

JERSEY CITY

CITY HALL
JERSEY CITY, NJ 07302
(201) 547.5200

BRET SCHUNDLER
MAYOR

Chairman Mica and Members of the Subcommittee on Civil Service:

Good morning. I am appearing before you today to strongly recommend that you
include Medical Savings Accounts (MSAs) as an option of the Federal Employees Health
Benefit (FEHB) Program, which is responsible for providing health insurance to over nine
million federal employees, retirees, and their families.

Last year Jersey City, New Jersey was the first governmental entity to offer MSAs
to its employees. Thus far, the results have been extremely positive. We offered the

option to our management employees, and approximately 60% of them chose the MSA

‘over their previous coverage -- and we expect that percentage to increase substantially

next year. Meanwhile, the City was able to achieve immediate budgetary savings w!
also allowing employees to reduce their out of pocket health care costs and continue

choos

1g their own doctor.
Why has this program proved so successful?
In the past, Jersey City covered its management employees through the New Jersey
State Health Benefits Plan. Most chose the traditional indemnity or “fee-for-service”

option, where employees had to pay a $200 front-end deductible and 2 20% co-payment

on the next $2,000 of medical expenses for each covered family member. That means a


187
(3) Submits to the Secrerary:
a. A renewal application on the form that the Secretary requires. including a list
of all complaints made to the private review agency by patients or providers and a description of

how such complaints were resolved; and

b. Satisfactory evidence of compliance with any requirements under this Act for

certificate renewal.

(C) If the requiremenis of this section are met, the Secretary shail renew a certificate.

(Dj The Secretary may delegate to the Commissioner the authority to renew a certificate to any
health insurer, nonprofit health service plan, health maintenance organization or other third party
regulated under the insurance !aws of this state that meets the requirements of the Act and all
applicable regulations of the Secretary.

Section 7. Denial/Revocation Of Certification.

(A) The Secretary shall deny a certificate to any private review agent whose application fails to:

(1) Provide information required by the Act and regulations adopted pursuant to the Act;

(2) Provide satisfactory assurance of the ability to comply with the Act and regulations

adopted pursuant to the Act; or


55

Council for Affordable Health Insurance
Addendum to Mr. Hendee’s Testimony

This addendum to Mr. Hendee’s testimony provides additional information on specific
issues the Subcommittee on Civil Service requested regarding Medical Savings Accounts
currently in the market and their impact on health care cost and access.

Question #1: How have employers offering MSAs structured this health care
option?

Answer: Medical Savings Accounts, as currently envisioned, have not been possible
because of their tax status. Contributions to an MSA are currently treated as wages
subject to withholding and payroll taxes. This is very different from employer paid
health benefits which are received tax free by the employee. Consequently a variety of
MSA type arrangements are currently being used to provide employees with a financial
incentive to consume health care economically. If MSAs are given the same tax
treatment as other health care financing mechanisms then the structure of MSA programs
is likely to be tailored to meet the requirements of the law.

Question #2: What is the average cost of the catastrophic insurance policy that
accompanies the MSA and what is the deductible?

Answer: The cost for an employer to provide comprehensive coverage and the savings
from shifting to catastrophic coverage will vary dramatically depending on many factors
such as: geographic area, age, sex, income, etc., and health characteristics of the work
force, managed care features in the coverage provided, discounts negotiated with
providers, any health care choices or options available to t he employees, program
expenses other than claims. types of services covered under the program, and, the
difference in exposure to out-of-pocket costs under the comprehensive versus the
catastrophic coverage. The American Academy of Actuaries’ Medical Savings Accounts

work Group report provides examples of the cost of various deductibles based on 1995
medical cost levels.

‘There is little information in the public domain about experience with MSA type
programs. The following are based on the information that has been reported

Question #3: Has the introduction of MSAs been viewed by employees as a benefit?

Answer: The percentage of employees who have selected MSA type benetits when
another option was available has varied from a very high percentage to a very low
percentage. Factors that can affect this decision include requirements for voluntary
contributions, the level of benefits in the available plans, the degree of satisfaction with
existing plans, and how new options are communicated.


2

already works very well, and we wouldn't want to do anything that
would harm our Federal Employees Health Benefit Program.

While providing personal choice, MSA’s also foster individual re-
sponsibility for health care spending. I think that’s an important
factor to look at. MSA’s are essentially savings accounts for unin-
sured medical expenses, which are coupled with a high deductible
health insurance cover plan to cover catastrophic illnesses. An
MSA allows the employer or an individual to contribute to the ac-
count and roll over the unused funds at the end of the year, much
like an IRA, and it’s pretty much incentive-driven.

MSA’s provide a number of advantages over other health insur-
ance plans. Economists across the political spectrum have con-
cluded that one of the major factors driving health care costs is our
third-party payment system. Because a third party, the insurance
company, pays the bills, patients often are insulated from the cost.
As a result, they do not choose doctors and hospitals on the basis
of cost effectiveness, and they do not balance cost versus quality.
Rather, they seek to maximize quality without regard to cost. The
patient has no incentive to avoid unnecessary care or tests, nor to
shop for the most reasonably priced care. Since consumers lack
market incentives, which are so important to control costs, doctors
and hospitals are not driven by competition to reduce costs.

MSA’s address very specifically these problems by giving people
greater control over their own health care dollars. With the realiza-
tion that it is either their own money they are spending—and a
very stark realization that in fact it is their own money—employees
are much more careful and selective about the medical services
they use. This increased price sensitivity results in more effective
use of health care resources and in turn, we hope, will lower health
care costs, and in fact do lower health care costs.

At a recent hearing before this subcommittee, the president of
the American Federation of Government Employees, John
Sturdivant, testified that “the FEHBP’s relatively high premium
costs for employees have left roughly 400,000 Federal employees
uninsured.” That number is undoubtedly high, but there are unin-
sured Federal employees, and MSA’s in FEHB could, in fact, help
eliminate this problem. The currently uninsured who select an
MSA could use the government'’s contribution to health care to pur-
chase a catastrophic coverage without to incur payroll deductions.
The balance of the government’s contribution would be deposited in
the savings account of the MSA.

MSA’s can be completely portable. Workers should be able to
take their MSA’s with them if they leave Federal employment, for
example. MSA’s, unlike traditional employer-provided health insur-
ance, should follow the individual regardless of employment status.
MSA’s allow individuals to maintain designated savings accounts
for health care expenditures and insurance, in fact, during tem-
porary lapses in employment.

To help the subcommittee further explore these issues, we've con-
vened two panels this morning. Our first panel includes Congress-
man Matt Salmon, who has been a leader in the Congress on this
issue and really taken the forefront in bringing the benefits of
MSA's to the attention of the Congress and the Nation, and he is


12

on providers for economic efficiencies as they would if they were paying the full cost of medical
care directly out of their own pockets. The result is that many prices may be higher than they

otherwise would be and many providers are less efficient than they could be

‘Companies searching for more innovative and cost-effective ways to provide health care benefits
for their employees have learned first-hand the benefits of putting employees in control of their
health care dollars through the use of MSAS. It has been reported that Forbes magazine health
costs fell 17 percent in 1992 and 12 percent in 1993. Likewise, in the first year of an MSA plan
for its employees, health costs for Golden Rule Insurance Company were 40 percent lower than
they would otherwise have been, Dominion Resources and Knox Semiconductors have had
virtually the same experience with their MSAS -- the cost of the premiums for their employee's
health insurance fell significantly. In short, it is estimated that more than 1000 businesses have
adopted some form of the MSA concept. But, federal tax law changes are needed to achieve

even greater and more effective use of MSAs.

We believe tax-advantaged MSAs will spur even more competition in the FEHBP and in the
health care marketplace as a whole. MSAS represent a market approach, rather than a
regulatory approach, to reducing health care costs by encouraging prudent health care buying
and saving. Rather than achieving cost containment through global budgeting or price controls,
which usually leads to gaming or other distortions in the health care system, MSAs would create
incentives to wisely use one's own health care dollars, rather than continue the present perverse

incentives to freely consume someone else's.


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10

to remain at the center of the health reform debate: Should we favor more bureaucratic control
over our health care dollars or more freedom for all of us as consumers of health care to make
our own decisions? The answer from the American people is clear, and an MSA option in the

FEHBP will help to provide enrollees with that freedom.

For more than a decade, the AMA has been on record as supporting the adoption of MSAs as.
a choice among various types of health plans in our health care system. In fact, a longtime
AMA health policy economist, Jesse Hixson, PhD, is credited by the National Center for Policy
Analysis (NCPA) with the original concept of medical savings accounts. We believe an MSA
option not only represents a cost effective approach to providing health care, but also strengthens

the market for medical care by assuring patients more freedom of choice.

The FEHBP provides health insurance coverage for over 9 million Federal Government
employees and their families. Participants choose from roughly 400 competing health plans
nationwide in the FEHBP, with anywhere from ten to thirty health plan options available in any
particular area. Such choices range from traditional health insurance plans to managed care
plans with varying benefit packages and premium costs. With the fixed dollar amount
contributed by the Government, FEHBP enrollees decide what health plan is best for them and
their families. With enrollees making cost conscious decisions in choosing among competing

health plans, it is no wonder that the FEHBP has had a positive track record of cost

effectiveness.


63

FIGURE I

Options for NCPA Employees

Family
Conventional Medical Savings
Policy! Account Policy
Deductible $500 $2,000
Maximum
2 -0-
copayment $1,000: 0
MSA deposit -0- $1,500
|To tl out-of-pocket n
exposure $1,500 $500

' The figures in this column are per family member up to a maximum of three people.

2.20 percent of the first $5,000 of expenses above the deductible.

In the future, the buildup of MSA funds will give the employees important options

with respect to expensive medical procedures, For example, as mentioned, the health plan

will pay the full costs above the deductible only if the procedure is done by a network

doctor in a network hospital. But employees will be able to go outside the network and use

their MSA funds to pay that portion of the bill not covered by insurance.

Benefits of Medical Savings Accounts. Widespread use of MSAs would

create the following benefits.

@ People would have first-dollar coverage for primary or preventive care, using their

MSA funds; this would be particularly beneficial for lower-income workers who may

be short on funds and may be tempted to avoid basic care.

Page 5


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37

that if the other side, those who oppose medical savings accounts
vociferously, who probably are the same ones that got to the retir-
ees to stir up some fervor against it, do you really think that they
wouldn’t have paraded them forward or gotten some kind of a Dear
Colleague letter, talking about their horror story? Three thousand
companies across the United States—if the other side could find
one example of where they haven’t worked, they would be trumpet-
ing that to the nth degree right now, and everybody knows that.
But they can’t find it.

Mr. Mica. Mr. Chrysler, a last word. We’ve got about 1 minute.

Mr. CHRYSLER. Yes. Just to answer your original question, the
answer is no with our employees. I had over 1,200 employees, and
MSA's for them was just an outgrowth of a program that we start-
ed, where we had monthly caps on our premiums. You know, we
paid, as a company, the first $20,000 in medical costs, and then the
insurance company kicked in after that. I can say that our 1,200
employees, they were extremely delighted with our health care ben-
efits.

Mr. Mica. I would like to pursue this, but what we will do is ask
additional written questions of the panel. I want to thank the panel
for coming down, for your patience, for your contribution, leader-
ship, and innovative approaches at the municipal level.

We do have a vote, so we will recess the hearing and reconvene
in 15 minutes.

[Recess.]

Mr. Mica. I would like to call the Subcommittee on Civil Service
to order and turn to our second panel and call them forward. We’ve
got Gary Glenn, who’s the county commissioner of Ada County,
Boise, ID; Peter Hendee, consulting actuary of the Council for Af-
fordable Health Insurance; Merrill Matthews, director of Health
Policy Studies, National Center for Policy Analysis; and Dr. Daniel
Johnson, member of the American Medical Association Board of
Trustees.

I welcome our panelists, and I want to tell you again that this
is an investigations and oversight subcommittee of the Congress
and of the full committee, and it’s customary to swear in our wit-
nesses.

[Witnesses sworn.]

Mr. Mica. Thank you. The witnesses answered in the affirma-
tive. We will call first on the Honorable Gary Glenn, who is the
county commissioner in Boise, ID. We'll call on you, sir, and you’re
recognized for 5 minutes. It’s the custom of the subcommittee, if
you have a lengthy statement, without objection, it will be made
part of the full record, and we ask you to try to summarize in 5
minutes so that we can have questions and exchange. So welcome,
and you’re recognized.


57

Mr. Mica. Thank you, Mr. Hendee. We'll get back for questions.
I want to first recognize the balance of our panelists. Mr. Merrill
Matthews, director, Center for Health Policy Studies, the National
Center for Policy Analysis. You’re recognized and welcome.

Mr. Matruews. Thank you, Mr. Chairman, for the opportunity
to address this committee on this important subject. The NCPA has
been supporting the idea of medical savings accounts for about 11
years now. We were one of the first organizations to come forward
with that idea and promote it.

Established in Congress in 1960, the Federal Employee Health
Benefits Program provides health insurance coverage to about 9
million Federal employees and their families. The program pro-
vides employees with a wide range of choices, from fee-for-service
policies to health maintenance organizations.

However, there is recognition among FEHBP administrators and
Federal employees that the program could be made even more com-
petitive. For example, some of the departments have been consider-
ing implementing flexible spending accounts, which give employees
the opportunity to set aside pre-tax dollars for health care and
health insurance, and the Postal Service has had these flexible
spending accounts, or FSA’s, for years.

But while adopting FSA’s would be a positive reform for the
FEHBP, they do have a problem. That’s the “use it or lose it” provi-
sion.

We have a flexible spending account at the NCPA, where I work,
and at the end of the year, you always look at your account to try
to determine how much money you have left in it because of that
“use it or lose it” provision. You begin to ask yourself, “Do I need
to get a physical?” or “Do I need to get some glasses? Do I need
to go get dental work? What can I do to spend the rest of that
money?”

What Congress has done in creating the flexible spending ac-
count is created a program that encourages me to spend money
now when I don’t need it, rather than save it for a time when I
do need it. The medical savings account is simply this flexible
spending account without that “use it or lose it” provision. It per-
mits me to save the money for a time when I do need it.

Mr. Chairman, Congress needs to consider this. Like the flexible
spending accounts, the medical savings accounts would provide
Federal employees with the option of setting aside pre-tax dollars
to pay for health care and health insurance while avoiding the inef-
ficiencies inherent in these flex accounts. As a result, those depart-
ments of the Federal Government considering FSA’s would likely
switch to MSA’s instead.

We have medical savings accounts at the NCPA, where I work.
Many people have talked about how their plans work. Last year,
we had a policy in which you had a $500 deductible, 80/20 copay
for the next $5,000 of expenses or $1,000 out of your own pocket.

Under the new plan, the single individual gets $1,125 deposited
in their medical savings account at the beginning of the year—
that’s after-tax dollars so that it’s considered compatible with cur-
rent law—and you get a $1,500 deductible that pays for everything
above the deductible.


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90

Mr. Mica. I didn’t know that, but thank you.

Mr. Moran. But what I was particularly concerned about is, in
the article, it cited the relationship, the proportion of revenue that
went into medical care, and almost 40 percent of the revenue went
into corporate profit, really, and only about 60 percent or, at best,
$2 out of $3, in terms of insurance premiums, actually went to pay
for medical care.

Now, some of that may get fixed as you expand the population,
but the clear point that was being made was that this is one of the
most successful ways of targeting, segmenting the market to the
lowest risk portion of the population, and that’s a concern when
we're looking at a plan that has so many retirees in it and that
we're trying to make not only efficient and affordable, but acces-
sible to as many people as possible.

So I have a lot of reservations is the point, and I think it might
be useful to put into the record a couple of the articles that have
been in the Wall Street Journal on the medical savings accounts
and how they work.

Would any member of the panel like to respond to some of those
concerns?

Mr. Mica. Without objection, we’ll make those articles a part of
the record.

(The information referred to has been retained in the subcommit-
tee’s files.)

Mr. Moran. Thank you, Mr. Chairman. Mr. Matthews.

Mr. MaTTHEWS. I think I can, if I understand, Mr. Chairman and
Mr. Moran, the concern that you have. When Golden Rule estab-
lished a—Golden Rule is an insurer, as you know, and so they, in
essence, when they provide a policy, they are just self-insured.
They underwrite—I mean when somebody brings a claim, they're
underwriting it themselves.

When they established the medical savings account, they ex-
pected savings in the lower dollar ranges, where people are operat-
ing on their own. What really surprised them was there was some-
thing like a 40 percent savings in the higher dollar ranges, where
they really had not anticipated a great deal of savings. Their expla-
nation for that was that perhaps the idea of being most cost-con-
scious actually impacts even in the higher dollar ranges, but that’s
just a speculation. the reason that goes into profits, though, for
them is that by virtue of the fact that they did not spend that, they
did not have the claims filed on medical care. That ends up not
going out to paying in employee benefits; it therefore becomes em-
ployer profits, and so they had to pay higher taxes on that as a

rofit.
p In other words, they could have—if I understand your concern,
they could have conceivably channeled that money onto employees
in other ways, and I think Mayor Schundler is saying that that’s
what they're trying to do. But by not spending the money on health
care because they didn’t have the claims, it ended up raising their
profit ratio, so they have to pay more taxes.

Mr. Moran. That does lend light onto it. I’m glad you put that
explanation into the record. It seems to me, as I recall in the arti-
cle, one of the criticisms also—or at least areas of controversy—was
that not even all the employees of the Golden Rule Insurance Co.


44

House Subcommittee on Civil Service / Page 4

1, THE OPPORTUNITY TO RECEIVE UP TO $2,100 IN CASH PER YEAR
FROM THE COUNTY, ANY PORTION OF WHICH NOT SPENT ON
HEALTHCARE EXPENSES IS THE EMPLOYEE’S TO KEEP AND SPEND AS HE

OR SHE SEES FIT.

BECAUSE MONEY THEY CAN OTHERWISE KEEP IS NOW AT STAKE, WE
EXPECT THE COUNTY'S MSA ENROLLEES TO BECOME COST-CONSCIOUS
SHOPPERS FOR HEALTHCARE SERVICES -- FILING SUBSTANTIALLY FEWER
CLAIMS FOR NON-ESSENTIAL HEALTHCARE, RESULTING IN EVEN LOWER
PREMIUMS LONG-TERM, AND FORCING PROVIDERS TO BECOME MORE

PRICE-CONSCIOUS IN ORDER TO COMPETE.

2. BASED ON THE SIZE OF THEIR FAMILIES, THE OPPORTUNITY TO
DRAMATICALLY REDUCE THE MAXIMUM AMOUNT OF MONEY THEY FACE
HAVING TO PAY OUT OF THEIR OWN POCKETS IN THE WORST-CASE
SCENARIO...(IN MY FAMILY’S CASE, AN 82 PERCENT REDUCTION IN

MAXIMUM OUT-OF-POCKET RISK).


85

makes their own risk/reward calculation, and if you’re young and
relatively healthy, you’re probably going to take a chance at MSA's,
at least until you get into your 40’s. But those people who are in
their 40’s and who are retired or who have some medical history
of illness, even within their family, are more likely not to take the
risk, and their options, though, are very much affected by those
who choose to take the risk, because their insurance premiums are
going to go up. The pool of people who are going to be choosing the
more expensive fee-for-service premiums is going to be smaller and,
in fact, is going to be much less heterogeneous, much less diverse,
and that has got to be a serious consideration when we entertain
this idea of making MSA’s an option.

One of my problems with the testimony that we have is that it
is not, to my mind, sufficiently representative of an organization as
large and diverse as the Federal Government. We are talking about
2 million active employees and, I guess, another—what?—3 mil-
lion? So we're talking about a total of 9 million in a pool. That’s
quite a different pool than the insurance pools that are being rep-
resented in the testimony.

In terms of the private sector, I think that we have a similar con-
cern in terms of the size of those corporations that have chosen
MSA’s, and I would like to look at some of the demographic charac-
teristics to see what kind of behavioral patterns occur when people
are faced with these options on not just the micro scale, the anec-
dotal scale, but the macro scale of the large organization.

So those are some of my concerns. I noticed, Mr. Glenn, your ex-
perience, which, while it is interesting, is not necessarily com-
parable to the scale of millions of public employees that we're talk-
ing about with FEHBP. But you had a vote on your County Com-
mission, did you?

Mr. GLENN. Yes, sir, Mr. Moran.

Mr. Moran. And what was the vote?

Mr. GLENN. Mr. Chairman, Mr. Moran, the vote was unanimous
in favor of offering this as an option.

Mr. MoraN. And was it considered to make it the only option?

Mr. GLENN. Mr. Chairman, Mr. Moran, that was never consid-
ered because I'm surprised that it got passed as an option. There
was no question that there was no support for making it the only
option.
wu Moran. And what percentage do you now have that are in

’s?

Mr. GLENN. Mr. Chairman, Mr. Moran, we have about 20 percent
of our work force voluntarily enrolled, which I believe is a very
much held-down figure, in the sense that, certainly, not 100 per-
cent of our employees were even aware, in a meaningful manner,
of the option they had before them.

Mr. Moran. OK. Thank you, Mr. Glenn. I would like to ask Dr.
Johnson, some of the discussion that has gone on within the
AMA—obviously, the AMA’s view on this is going to be persuasive
in terms of national legislation. Has there been consideration of the
impact we would have on the status of our national health if there
is a clear incentive to avoid the kinds of optional care that are gen-
erally more preventive in nature?


62

Some employers and their employees are tuning to MSAs for the same reason
others are turning to managed care: to control rising health care costs. Since employees get
to keep any MSA money they do not spend, they have a financial incentive to shop
prudently in the medical marketplace. In general, they won't spend a dollar on health care
unless they get a dollar's worth of value. Employer experiences with MSA plans show that

the incentives work: employees curtail health care spending significantly.

The NCPA’s Employee Health Plan. In 1994 the employees of the National
Center for Policy Analysis had a conventional fee-for-service health plan with a $500
deductible and a 20 percent copayment. Under this policy, an employee was at risk for up
to $1,500 out of pocket. If three members of the same family all became seriously sll, the

family was at risk for $4,500 in medical bills.

This year the NCPA adupted an MSA plan that limits the exposure of the employees
and at the same time gives them more control over their health care dollars. Afno extra cost
to the employer, the plan creates 4 $1,500 deductible and deposits $1,125 to an MSA for
individual employees. For family coverage, the deductible is $2,000 and the MSA deposit
is $1.500. [See Figure 1] The total out-of-pocket exposure is $375 under the individual
policy and $500 under the family policy. (See Figure I1.]

NCPA employees may ure their MSA funds to see any doctor, enter any hospital or
pay any medical bill. However. spending counts toward satisfying the deductible only if
the service or procedure is covered under the health plan. For example, employees can pay
for dental care or eye glasses with their MSAs, but those expenses do not apply toward the
deductible. Furthermore, after they have exceeded the deductible, if they go outside the
Preferred Provider Organization (PPO) affiliated with the plan, only 75 percent of “usual

and customary” fees are counted.

Page 4


86

In other words, if people are paying for medical care, for visits,
out of their own pocket, they’re less likely to avail themselves of
checkups and the kind of preventive maintenance care, if you will,
than if it is covered, particularly those insurance plans, like many
managed care plans, that encourage you to make those preventive
maintenance visits and, in fact, offer them for free so that you
will—just like a machine, the bodies of machines—so that you'll
maintain yourself and avoid acute problems that oftentimes arise
because there has been inadequate preventive care.

Can you address that, some of the dialog that has gone on within
the AMA on this?

Dr. JOHNSON. Yes, thank you, Mr. Congressman. This is a very
important issue. I did touch briefly on it before, but perhaps I can
present it in a different way. Most of us own automobiles, and most
of us realize that we should change the oil in the automobile at a
fairly frequent 3,000 to 5,000 miles in order to maintain the integ-
rity of the engine and have it function over a long period of time.

Few of us, however, purchase insurance to cover the cost of oil
changes. Why not? Because the cost of the insurance adds an ad-
ministrative layer so the oil change becomes more expensive. Now,
what we have, then, are two kinds of mechanisms that you've dis-
cussed for financing those oil changes, in terms of preventive serv-
ices within health insurance.

One is that we can build in the cost of that into the plan and
encourage people to have it because it’s free to them. They can
have it, as you mentioned. The other is, we can allow the individ-
uals to purchase those services at a lower cost to them by doing
it on their own initiative.

Now, before you came in, I specifically raised this point in my
testimony and urged that we believe that individuals, when they
stand to benefit from cost-effective use of the system over a long
run, will avail themselves of the appropriate preventive techniques,
such as prostate screening for men, mammograms for women, the
immunizations for children, and so forth and so on.

They will avail themselves of those things in order to not only
live longer, healthier, and happier lives, but to save money over the
long run. However, we recognize the possibility that we could be
wrong in that, that that may not, in fact, occur, and the solution
to that is very simple within the MSA framework.

It’s to do the same thing that the HMO does, to pay for this serv-
ice up front, to not have it included in what’s covered under the
deductible, but to actually pay for the service as a part of the insur-
ance. So if we’re wrong about what we think would happen in the
MSA option for those people who choose the option, it’s very simple
to correct for that.

We don’t think we're wrong, obviously. We've proposed dealing
with the oil changes such as you and I do, as opposed to buying
insurance for the oil changes, in the MSA option. But understand-
ing that we might be wrong, we don’t think the fix is very difficult
for that.

Mr. Moran. That’s interesting. So you could, after a couple of
years’ experience, you would modify the plan and build in preven-
tive measures?

Dr. JoHNSON. If circumstances indicate it, yes.


121

to seek treatment with any provider -- at no cost to the health plan -- while
maintaining absolute confiaentiality of medical history and patient data.

3) Protection Against Abusive Managed Care Tactics

The patients of psychiatrists, perhaps more than any other medical patients, are
subjected to unwarranted and unreasonable managed care practices designed simply
to frustrate -- through inappropriate intrusions, requirements and administrative
burdens -- the efforts of these patients to seek and receive medically necessary care.
Health insurance reform legislation should include a variety of patient and provider
protections against egregious and abusive utilization review and patient care
management tactics used by some managed care companies.

Some of the most abusive managed care tactics psychiatrists have confronted
include: gate keeping and financial incentives used to clamp down on access, claims
denials with no appeal, failure to make utilization review criteria and treatment
Protocols/ screens publicly available, inappropriate soecialists/patient ratios, utilizing
“economic credentiallingTM -- lowest utilization and lowest use of high tech or costly
procedures -- as a criteria for provider participation in networks, “gag rules” which
prohibit advising patients of any limitations on providing treatment, and arbitrarily
decertifying providers from networks when those providers advocate for additional
coverage authorization for their patients. In order to guard against these practices,
APA recommends that any health insurance reform legislation include meaningful
Patient and provider protection standards such as those articulated in our attached
model managed care and utilization review legislation (Attachment B).

Il. Medical Savings Accounts Legistation

While Medical Savings Accounts (MSA)s are not in and of themselves an
answer to all of the problems confronting health care planners and policy makers, we
believe that they are an important health care option which -- if properly designed -~
will provide consumers with greater choice, quality, flexibility and affordability in
health care. Incorporating MSAs into the Federal Employee Health Benefits Program
(FEHBP) would allow Federal employees and their dependents to manage their health
care in a cost-effective manner and would relieve them from paying administrative and
profit charges to a third party.

For example, MSAs would bring market forces to bear by encouraging patients
to “shop” carefully for the health care plan which best meets their anticipated health
needs. Patients would now be financially responsible for managing their own health
care dollars, not simply passing health costs on to a third party payor.


5) Risk Pooling & Reinsurance Requit

APA believes that there may be some initial risk of adverse selection if Federal
employees perceive MSAs as a means of guaranteeing coverage of health care
services that are, in the traditional FEHB program, subject to limits on scope and
duration, or differential patient cost sharing, To guard against threats to solvency,
APA believes that the Congress should impose reasonable reinsurance requirements
‘on MSAs, and should also facilitate risk pooling between various MSA plans in order
to minimize the risk of insolvency.

6) Coverage Requirements for Catastrophic Plans

APA recommends that Congress require MSA catastrophic plans to cover all
medical conditions. Absent a meaningful coverage requirement, APA is concerned
that MSA/catastrophic plans may “cherry pick” by deliberately excluding specific
illnesses or conditions.

IV. Conclusion

‘There are a wide range of options for coverage of treatment of mental illness
in the current FEHBP system and APA believes that MSAs properly designed, subject
to the recommendations we have made in this testimony, offer an important adjunct
benefit. While MSAs would not in and of themselves end discrimination by diagnosis
in coverage of psychiatric patients within the FEHB program, they would help reduce
the financial burden our patients must routinely address.

While APA continues to urge the Congress to end all health insurance
discrimination against our patients, APA believes in the near-term, MSAs could be a
significant step in the right direction.


31

ings, through claims experience reductions, translating into pre-
mium reductions on the catastrophic part of the package.

Mr. Mica. So your radical approach has actually worked.

Mr. SCHUNDLER. Yes.

Mr. Mica. And you’ve caught the attention of the employee
groups.

Mr. SCHUNDLER. Right.

Mr. Mica. So they want to be dealt in.

Mr. SCHUNDLER. Right.

Mr. Mica. Are they going willingly now?

Mr. SCHUNDLER. Yeah. I think, over the course of the next year,
we'll be able to have all of the different employees’ unions. We
have, I believe, 16 different unions. I think we'll be able to have
them all.

Mr. Mica. I’m sure we could match you.

Mr. SCHUNDLER. True.

Mr. Mica. The other group that I have to be concerned about is
our Federal retirees.

Mr. SCHUNDLER. Right.

Mr. Mica. When this was first unveiled by Mr. Salmon, myself,
and others, the sky immediately began to fall for Federal retirees.
At least their representatives felt that there would be cherry pick-
ing, this adverse selection, that their people, who would be the
most likely to use the services, would be somehow denied, and that,
in fact, their premiums would go up.

Now, you only have a short-term experience with this. How do
you respond to those people, who may indeed have very legitimate
concerns?

Mr. SCHUNDLER. I think the—again, the way we've tried to re-
spond is by holding all other things constant so other variables
don’t get into the equation. For instance, we offered them the same
three options—we offer our employees the same three options they
had before, plus a fourth.

We didn’t require that they take the fourth. They didn’t lose any
of the options they had. They just got a new option. We used Blue
Cross-Blue Shield as the provider, who was the administrator of
the State plan. So the people they deal with are actually the same
people as they were dealing with before.

Our management employees are no longer in the State plan at
all. You know, they’re now under a plan directly from Blue Cross-
Blue Shield, but that’s the person who was administering the State
plan for them before. So they don’t change the person they’re deal-
ing with on the health insurance side.

So, by doing all of these things, the only issue becomes, since you
are guaranteed the same benefits plus a few extra, since you’ve re-
duced your costs if you have high expenses, since you get cash back
if you have low expenses, don’t you think this is a pretty good deal?
And again, 60 percent in the first year already said, “Yes,” and I
think we'll be over 90 percent in the second year.

The only reason why some people, I can imagine, might not
choose to go this route is because—let’s say you’re part of an HMO
right now. You can make an HMO fit into a medical savings ac-
count type of approach. But the way we—again, we just offered


7

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§ aif a
Hah
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commen om Suey
Congress of the United States eee Ea a

Douse of Representatives

‘Scacoune te om Peocuntarnt Earns, ‘Dashington, BE 20515-0301

TESTIMONY OF REP. MATT SALMON (R-AZ)
Committee on Government Reform and Oversight
Subcommittee on Civil Service
December 13, 1995.

Last month we passed legislation that will make medical savings accounts
available to almost all Americans. 1 am here today to say that they should also be
available to federal employees, and my bill, H.R. 2341 will do just that.

H.R. 2341 would simply permit the federal contribution to an employee’s
health benefits to be used to purchase a catastrophic plan and make a contribution
to an MSA. This MSA choice would be completely optional. Federal employees
could choose an MSA plan, if offered by the private sector, or they could continue
with any of the other plans offered in the FEHBP.

‘An MSA option for federal employees would reduce health care cost
inflation for the federal government, and empower federal employees to take
control of their own health care decisions.

MSA's will NOT increase out-of-pocket costs for federal employees. They
actually limit out-of: pocket costs because any funds spent out of the MSA are
applied simultaneously to the catastrophic deductible. And if the deductible is
met, the catastrophic policy coverage kicks in,

‘The opponents of MSA's for federal employees fall into two camps. One
camp is made up of advocates for federal employees who have heard some of the
histrionics against MSA's and are naturally concerned for their constituencies.
am confident these folks will become enthusiastic supporters of MSA's once they
hear the truth about them. Of course, even if they decide MSA’s are not right for
themselves, they will find in H.R. 2341 that the bill compels absolutely no one to
choose an MSA. H.R. 2341 simply permits MSA’s to be among the choices
offered federal employees. No advocate for federal employees could oppose that!


1389

private review agent, If the Secretary fails to render a decision upon a complaint brought by @
patient or provider within ninety (90) days, the patient or provider shall have the right to bring a
Judicial action to compel the Secretary to revoke the certificate of the private review agent or to

require the private review agent to comply with the Act and/or regulations,

(E) Nothing in this section shall be deemed to deprive a patient or provider of any other cause

of action available under state law.

Section 8. Waiver of Certification.

‘The Secretary may waive the reauirements of this Act for a private review agent that operates

solely under contract with the federal government for utilization review of patients eligible for

hospital services under Title XVIII of the Social Security Act, Title XIX of the Social Security

Act and the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS).

Section 9. Reporting Requirements.

The Secretary shall establish reporting requirements te:

(A) Evaluate the effectiveness of private review agents; and

(B) Determine if the utilization review or managed care programs are in compliance with the

provisions of this Act and applicable regulations.

12


46

use itlee on Civil Servive / Page

MR CHAIRMAN, I HAVE INCLUDED SPECIFIC INFORMATION IN MY
WRITTEN TESTIMONY AS TO THE DESIGN OF ADA COUNTY'S PLAN, WHICH
~ BECAUSE I KNOW YOU KNOW GENERALLY HOW MSA's WORK -- 1 WILL

DISCUSS IN DETAIL ONLY IF YOU SO DIRECT ME DURING QUESTIONING.

HOWEVER, GIVEN THE FACTS I'VE DESCRIBED, MR. CHAIRMAN
PLEASE ALLOW ME TO SPEAK FOR A MOMENT AS A TAXPAYER MORE

THAN AS AN ELECTED OFFICIAL.

BECAUSE. THANKFULLY, YOU AND YOUR COLLEAGUES REJECTED
THE SOCIALIZED MEDICINE SCHEME PUT FORTH BY THE WHITE HOUSE
LAST YEAR, THERE IS NOTHING IN FEDERAL LAW WHICH REQUIRES YOU
OR ANY OTHER EMPLOYER TO PROVIDE HEALTH INSURANCE TO YOUR

EMPLOYEES, MUCH LESS THAT YOU MUST PROVIDE A MENU OF OPTIONS

IF 1 HAD A SECOND VOTE ON THE ADA COUNTY COMMISSION, THE

MSA PLAN WOULD BE THE ONLY PLAN WE CFFER


6

if we institute medical savings accounts, that only the healthy peo-
ple will flock toward medical savings accounts, which the very sick
would be stuck in the old system, and it would go broke. That’s one
allegation.

If that was borne out by a real-life example, they might have a
point. Again, let me mention, there are about 3,000 companies that
I know of throughout the country that have instituted medical sav-
ings accounts as an option. I know Mr. Chrysler will talk about his
company as one of those examples. It simply hasn’t been borne out
by historical facts. They have not found the adverse selection to be
true.

This argument is being promulgated chiefly by those in certain
facets of the insurance industry that are deathly afraid that they're
going to have to compete for a living and they’re going to lose mar-
ket share. So let’s be very clear, as we understand who is making
the arguments and why they’re being made, the facts simply do not
bear out the assertions that are made.

Again, if a person is very ill, they would want to go to a medical
savings account with a catastrophic care policy, because they would
have first-dollar coverage. By the time they expend, if they're a
very ill person, their medical savings account dollars, then the cat-
astrophic care policy kicks in, so there’s really no reason that they
wouldn’t have to or they wouldn’t want to pursue a medical savings
account as others.

Now, your staffers and mine, they deserve an MSA option now,
and the taxpayers deserve a break. Let’s not discriminate against
the Federal employees, and let’s give them the same option that we
believe is a viable option for all other Americans. I would urge the
eventual passage of this bill, H.R. 2341, the Federal Employee
Health Benefit Plan/Medical Savings Account Promotion Act of
1995. Thank you.

[The prepared statement of Hon. Matt Salmon follows:]


40

You would eliminate all concerns about so-called adverse selec-
tion. You would immediately save taxpayers tens of millions of dol-
lars in premiums. If I had a second vote on the Ada County Com-
mission, it would be the only plan we would offer our county em-
ployees. With 900 employees, we would save nearly a quarter mil-
lion dollars a year in premiums, if that was all we offered.

By injecting 9 million Federal employees, retirees, and depend-
ents with MSA’s into the health care market, you will force an even
more dramatic price consciousness and competition incentive on
health care providers, pressuring them to reduce health care prices
in order to compete, thereby saving not only American taxpayers
considerable amounts, but resulting in lower health care costs for
all Americans.

It is my view that it is unquestionably in the best interests of
the American taxpayer, who has to pay the bill, to do so, but it
clearly indicates, Mr. Chairman, why the simple notion of just of-
fering Federal employees the freedom to choose an MSA option if
they desire is a modest step with which any reasonable person
should agree.

Mr. Chairman, if I can just close by indicating that, in my opin-
ion, it’s inconceivable that a single eastern city and a small county
in the west are leaders on this issue. We are, to my knowledge, the
only two public employers in the Nation, and we don’t have to pay
some of the Federal taxes that the thousands of private sector em-
ployers have to pay to enlist in these plans.

I hope Congress will take its rightful leadership role in restoring
the principles of free market economics to the health care market
of this Nation. By so doing, you will address the single largest ob-
stacle to a balanced Federal budget, the cost of health care, and
thereby address perhaps the single largest determinant of the kind
of economy in which my children and yours will have to raise their
families.

I strongly urge you to follow the lead of Ada County and Jersey
City, save American taxpayers millions of dollars, and help restore
cost-conscious consumption and price-conscious competition to
American health care, all by offering employees of the Federal Gov-
ernment at least the option of a medical savings account health in-
surance plan. Thank you, Mr. Chairman, for this opportunity.

{The prepared statement of Mr. Glenn follows:}


120

The American Psychiatric Association

The American Psychiatric Association (APA), a medical specialty society
representing more then 40,000 psychiatric physicians nationwide, is pleased to
present this statement for the "Medical Savings Accounts in the Federal Employee
Health Benefits Program” hea.ing.

|, APA’s Position on Heaith Insurance Reform Legislation

The APA's efforts with respect to health care legislation are guided by 12
principles approved by the APA Assembly of District Branches and the Board of
Trustees (See Attachment A). For purposes of today’s testimony, three of those
principles form the core of our views at today’s hearing:

1) Non-Discriminatory Coverage of Treatment for Mental Illness

APA's overarching objective is to seek the elimination of any and all arbitrary
imits on scope, coverage, duration, or patient cost-sharing of treatment for mental
illness, including substance abuse. We believe there is no rationale or justification for
imposing any such limits based on the patient’s diagnosis. Psychiatric patients -- like
all other patients requiring medical treatment - should have access to the full array of
services available for their treatment throughout the fuil continuum of care, including
inpationt, outpatient, partial hospitalization, and home and community-based services,
as the patient’s medical and clinical needs require. These services should be included
as a uniform health benefit in any health care reform proposal, subject only to the
same scope and duration, cost containment, and reviews/protocols es are applied to
non-psychiatric medical illness.

2) The Right to Seek Treatment from the Physician of Choice

Under any health care pian, patients should be guaranteed the right to seek
treatment from their physician (or other health provider) of choice. There are
numerous reasons patients need the ability to see a provider outside of their regular
insurance plan. For psychiatric patients, for example, confidentiality is often a leading
reason prompting patients to seek treatment outside any approved network of
providers, since they wish to ensure that no record -- including no claims form -- is
registered when treatment is initiated.

APA believes that there are two simple and effective means available to the
Congress to ensure that patient freedom of choice is protected. First, patients should
be given at least the option of electing a point-of-service feature at time of enrollment
in their health plan. A reasonably designed point-of-service feature -- without
deliberately penurious cost sharing by the health plan -- would allow health plans to
encourage their enrollees to stay within the designated provider network, but give
patients the freedom to seek care when needed or desired outside the network.
Second, “private contracting” for medical services would allow patients the freedom


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14

The Honorable Bret Schundler

Testimony to the House Subcommittee on Civil Service

December 13, 1995

Page 2

family of four had to pay up to $1,800 in out-of pocket expenses annually.

Under the MSA plan, the city purchases a catastrophic insurance policy that covers
100% of a family’s medical costs above a $2,000 deductible. The city then places an
additional $1,800 in a medical savings account that the employee can draw upon for
family medical expenses. Added together, this means that a family of four enrolled in the
family plan would, at most, have to pay a $200 back-end deductible, And if that same
family’s total health care costs fall below $1,800, the money remaining in the MSA
account will be refunded to the employee at year's end.

It’s not hard to see why the MSA plan is more attractive. If family health care
costs are high, family out-of-pocket expenses will be less under the MSA. If family health
care costs are Jow, the family will actually get the money left in the MSA rebated back
fo them, which doesn't happen under the State Plan.

The critics of MSAs will argue that employees will delay necessary medical
procedures or refrain from preventive care to insure that they receive a large refund at
year-end. [ disagree. We believe that Jersey City’s MSA plan actually encourages our
employees to access preventive care because it offers first dollar coverage for medical
expenses, as opposed to the traditional indemnity plan, which requires employees to spend

considerable deductible dollars before their insurance is activated.

Further, we have included a “wellness benefit" as part of our MSA plan, which

allows employees to use their MSA funds for routine medical expenses, like doctor visits


3

going to speak to us from his personal knowledge and experience
of MSA’s in Arizona.

He will be joined eventually by Congressman Dick Chrysler, and
he is going to share with us the positive experiences his private
company enjoyed with MSA’s.

We also are privileged today to have one of the true leaders in
municipal and local government, someone who is a star of innova-
tion at the local government scene and who has made a tremen-
dous impact on the thinking of how government should operate in
the new environment that we find ourselves, with the new innova-
tion, new approaches and cost consciousness, the very distin-
guished mayor of Jersey City, NJ, Mr. Bret Schundler. We’re
pleased to have him, and he can tell us specifically how MSA’s
were chosen as a health care option for employees of his very inno-
vative city, again with his leadership.

Our second panel will be led by Gary Glenn, a county commis-
sioner from Boise, ID. Despite firm opposition, Mr. Glenn was able
to pass legislation allowing county employees access to MSA’s. He
will be followed by Peter Hendee, a consulting actuary with the
Counsel for Affordable Health Insurance. The council is a trade as-
sociation representing 40 insurance companies involved in the indi-
vidual and small group market. Then we will hear from Mr. Merrill
Matthews of the National Council for Policy Analysis of Dallas, TX,
and, finally, from a distinguished representative of the medical
community, Dr. Daniel P. Johnson, member of the Board of Trust-
ees and president-elect from the American Medical Association.

I look forward to the testimony of our witnesses and hope that
we can thoroughly examine the possibility of adding medical sav-
ings accounts to the Federal Employee Health Benefit Program,
also institute MSA’s in any other levels of government or govern-
ment activities where, in fact, they can bring better health care, re-
duce costs, and provide another option to Federal employees or
beneficiaries.

With that, again, I will welcome our two panelists. I think what
we'll do is go ahead and start off. I know Mr. Salmon would like
to go back to the conference, and then we'll hear from the mayor.
So, with that, we'll recognize you again, Mr. Salmon.

STATEMENT OF HON. MATT SALMON, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF ARIZONA

Mr. SaLmon. Thank you, Mr. Chairman. I appreciate this oppor-
tunity. Medical savings accounts are definitely an idea whose time
has come.

Three years ago, when I was a State senator in the State of Ari-
zona and was working on legislation to provide medical savings ac-
counts for our citizens at large in the State of Arizona, we realized
very early on how meaningless it really is without the kinds of Fed-
eral assistance and benefits that we can provide and tax benefits
that we can provide at the Federal level.

I guess maybe “meaningless” isn’t the right word. It’s a good
start, in that some 3,000 companies across the country, as well as
municipalities that have instituted medical savings accounts for
their employees, have found tremendous savings and happier em-
ployees, as well.


132

(C) The Secretary may delegate the authority to issue a certificate 10 the Commissioner for any
health insurer, nonprofit health servize pian or heaith maintenance organization or other third

Party regulated by the insurance taws of this state that meets the requirements of this Act and all

applicable regulations of the Secretary;

(D) A certificate issued under this Act is not transferable;

(E) The Secretary shall adopt regulations to implement the provisions of this Act. No later than

one year after the effective date of this Act the Secretary shall adopt regulations establishing:

(1) The requirement that the private review agent provide patients and
providers with its utilization review or managed care plan including the specific review criteria
and standards, procedures and methods to be used in evaluating proposed or delivered hospital,

medical or other health care services;

2) The requirement that no determination adverse to a patient or to any affected health
care provider shall be made on any question relating to the necessity or justification for any form
of hospital, medical or other health care services without prior evaluatiun and concurrence in the

adverse determination by a physician;

(3) The requirement that any determination regarding hospital, medical or other health
care services rendered or to be rendered to a patient which may result in a denial of third-party

reimbursement or a denial of pre-certification for that service shall inciude the evaiuation,


110

contributions to FEHBP are unrelated to the worker’s income:
premium contributions are the same for GS-15s as they are for GS-
2s. With MSAs, it is as though the government were giving the
GS-15s a 15 percent higher health insurance benefit along with
his income differential. AFGE opposes these regressive measures.
Because MSAs are only a prudent option for the highest
income federal employees, AFGE also fears that their introduction
will serve to reduce support for the FEHEP among the entire
federal employee population. Currently all federal employees,
from the rank and file General Schedule and Federal Wage System
workers to high-level political appointees have a stake in the
integrity of the FEHBP. MSAs will fracture support for the FEHBP
along the lines of income, turning it into an increasingly
expensive program serving a decreasing and lower income
constituency. It will thus be ever-more vulnerable to further

cuts in funding and oversight.

ons

The idea of introducing Medical Savings Accounts into the
FEHBP raises several questions which need to be fully considered
before their real impact can be foreseen. Some are basic: What
benefits would be in a catastrophic plan? Would these benefits
be subject to change or would they be a standard package? would
there be a choice among catastrophic plans? Would the

catastrophic plan be entirely paid for by the government? would


69

STATEMENT
of the
AMERICAN MEDICAL ASSOCIATION
to the
Committee on Government Reform and Oversight
Subcommittee on Civil Service
United States House of Representatives
Medical Sayings Accounts: A Viable Option for Federal Employees?
Presented by: Daniel H. Johnson, Jr., MD

December 13, 1995

Mr. Chairman and Members of the Subcommittee.

My name is Daniel H. Johnson, Jr., M.D, and [ am a diagnostic radiologist from Metairie,
Louisiana. I also serve as President-Elect of the American Medical Association (AMA). On
behalf of the 300,000 physicians and medical students of the AMA, I am pleased to have this
opportunity to testify before you today to express our overwhelming support for including a
Medical Savings Account (MSA) option in the Federal Employee Health Benefit Program

(FEHBP). We commend Subcommittee Chairman John Mica for holding this important hearing.

An MSA option, combined with a high deductible catastrophic insurance plan, represents a
refreshing and rational reform of our health delivery system. Empowering individuals with the

responsibility to choose the type of health care they will purchase and from whom has continued


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10

Under the MSA plan that we’ve provided our employees, the city
purchases a catastrophic insurance policy that covers 100 percent
of a family’s medical costs above a $2,000 deductible. The city then
places an additional $1,800 in a medical savings account that the
employee can draw upon for family medical expenses.

Added together, this means that the family of four enrolled in
the family plan would, at most, have to pay $200. The $1,800 MSA
would cover the first $1,800, then they would have a $200 back-
end deductible that they pay after they've expended the money in
the MSA, and after that, the catastrophic insurance plan kicks in
and covers 100 percent of costs above that $2,000 deductible.

Now, if that same family’s exposure under the old plan was
$1,800, and now it’s reduced to $200, if they have high medical
costs, it’s clearly a better plan for families which are at risk of suf-
fering high medical costs.

And it’s not hard to see why the MSA is attractive for families
with low medical costs, because the way our plan works, if they
have money left over in the MSA at the end of the year, money
comes back to them. Again, for our participating employees, the av-
erage that will be coming back to them on December 31 is almost
$1,000. That’s a fairly sizable amount.

The critics of MSA’s argue that employees will delay necessary
medical procedures or refrain from preventative care to ensure that
they receive a large refund at the year end, which I think is crazy.

We believe that Jersey City’s MSA plan actually encourages our
employees to access preventative care, because it offers first-dollar
coverage for medical expenses, as opposed to traditional plans
where the employee has to spend considerable deductible dollars
before they get any coverage.

Again, it’s the difference between having a front-end deductible,
which is the traditional plan’s approach, versus a back-end deduct-
ible, which you only have any out-of-pocket expense after the MSA
is expended.

Further, we’ve also included wellness benefits as part of our
MSA plan, which allows employees to use their MSA funds for rou-
tine medical expenses like doctor visits and immunizations. These
services were not covered by our traditional indemnity plan, nor do
they count toward an employee’s deductible or co-payment require-
ments.

All of these basic preventative procedures had to be covered di-
rectly out of pocket without counting toward their insurance cov-
erage whatsoever. Now, they’re covered through the MSA, and they
do count toward the deductible of that catastrophic plan.

Let me also share a personal experience about how MSA’s save
money, not by encouraging employees to defer necessary medical
treatment, but by eliminating gratuitous medical spending. Two
years ago, I had back surgery. After completing the necessary phys-
ical therapy regimen, my back felt absolutely fine, but I was told
by the physical therapist I could continue coming for the various
treatments, many of which felt very nice, actually, and they would
waive all the co-payments.

Now, I responded that it was not proper for them to make that
offer, and I declined the offer, but 1 could easily see someone else


141

Section 13. Annual Report.

The Secretary shall issue an annual report to the Governor and the legislature concerning the
conduct of utilization review and managed care in the state. Such report shall include:
description of utilization and managed care programs and the services they provide: the type of
criteria and standards used to perfcrm utilization and managed care review; the ‘easibility of
adopting uniform criteria and standards for one or more aspects of utilization and
managed care review; an analysis of compiaints filed against private review agents by patients or
providers; and, an evaluation of the impact of utilization review and managed care programs on

Patient access to care.

Section 14. Effective Date.

This Act shall take effect January 1, 19__


29

better way to control the costs than through competitive free enter-
prise? Remember that no system of free enterprise works without
a participating consumer.

RCI employees are proud to point out that they have saved
money by comparing costs, a relatively new experience for employ-
ees used to blindly handing over their insurance cards. They often
save hundreds of dollars for routine procedures, several dollars on
prescription drugs by finding the lowest price. A managed care sys-
tem provides an added feature to our employees. They may choose
to utilize the PPOM to lower their medical expenditures. However,
the preferred providers are only an option. Employees are free to
go to any health care provider they wish.

Employees are enthused and excited about MSA’s because they
have the freedom to go to any doctor, hospital, or pharmacy they
like. They control how their health care dollars are spent, and they
can buildup a pool of money in their MSA to pay for health care
later on in their lives or when they are out of work. MSA’s provide
employees a financial incentive to stay healthy.

RCI is pleased with MSA’s because we increased the level of ben-
efits to the employees while reducing our health benefits expense
by over 14 percent. Putting the consumer back in the loop keeps
health care expenses to a minimum. Paperwork is significantly re-
duced. Since 75 percent of our employees don’t spend more than
the amount in their MSA’s, these payments are not subject to the
scrutiny of reasonable and customary determinations, pre-existing
conditions, and other administratively cumbersome and expensive
reviews. The expenses are simply paid out of the MSA’s. Future
premium levels have already proved to be stable.

I know of no health plan that is such a win/win for both employ-
ers and employees.

Based on my first-hand experience with medical savings accounts
at RCI and research on health care alternatives, I know that
MSA’s work. I strongly believe there is no other health care pro-
gram that compares to the MSA concept when it comes to provid-
ing a high level of employee benefits, employee satisfaction, cost
control, and freedom of choice and administrative efficiency.

In allowing the individual, not a third-party insurance company,
to choose a physician, plan, treatment, and range of services, com-
petition will increase in the health care marketplace while simulta-
neously increasing consumer access. MSA’s allow individuals to be-
come educated consumers of health care, practice preventive health
care, and improve the quality of health care while forcing the mar-
ket to react to their choices.

MSA’s can and should play a major role in reducing health care
costs and improving health delivery nationally. Now is the time to
expand MSA’s as the choice for all Americans, starting with Fed-
eral employees.

Mr. Mica. I thank you for your testimony and thank all of our
panel witnesses this morning for their insight.

Let me turn first, if I may, to the mayor.

You said that you dealt first with management.

Mr. SCHUNDLER. Right.

Mr. Mica. Are MSA’s now offered both to management and other
employees?


98

Mr. Mica. There being no further business to come before the
House Civil Service Subcommittee, this meeting is adjourned.

(Whereupon, at 12:30 p.m., the subcommittee was adjourned.]

[Additional information submitted for the hearing record follows:]


140

Section 10. Confidentiality.

A private review agent may not disclose or publish individual medical records or any other
confidential medical information obtained in the performance of utilization review or managed

care activities.

Section 11. Penalty for Violation.

A person who violates any provision of this Act or any regulation adopted under this Act or
who submits any false information in an application required by this Act is guilty of a

misdemeanor and on conviction is subject to a penalty not exceeding $5,000 [or penalty under
relevant state aw for submission of false information}. Each day a violation is continued after

the first conviction is a separate offense

Section 12. Appeal by Aggrieved Party.

(A) Any person aggrieved by a final decision of the Secretary in a contested case under this Act

may take a direct judicial appeal.

(B) The appeal shall be made as provided for the judicial review of final decisions under

[relevant state law].


91

itself were eligible to participate in MSA’s, that some of them
weren't healthy enough. Are you familiar with that at all?

Mr. MartHews. I do not recall that at all. My understanding was
that about 80 percent went in initially, and, after the first year, an-
other 10 percent went over, and it is my understanding that they
felt that the 10 percent or so who did not were probably getting
health insurance through a spouse, that they wanted to stay in
that plan, that they would rather stay in that plan. But about 90
percent ultimately went in there.

I can’t imagine that Golden Rule or any insurer would exclude
their own employees from that plan, though. So I would be sur-
prised if that was the case.

Mr. MoraN. You're from the Center for National Policy Analysis?

Mr. MATTHEWS. National Center for Policy Analysis. I was just
given a piece here, and I guess I have a few minutes. Thank you,
Mr. Chairman. But I was just given an interesting paper here. Mr.
Goodman is the president of the National Center for Policy Analy-
SIs.

Mr. MATTHEWS. That is correct.

Mr. Moran. He says, “I think fee-for-service medicine probably
won't survive, no matter what Congress can do. And, in the future,
people will probably have to go into managed care, where someone
else restricts your choice of doctor access, or if you want to make
those choices for yourself, you're going to have to manage some of
your own health care dollars through a medical savings account,
and that’s where the market's going to go.”

And then he also said that, “According to Mr. Goodman, it was
the MSA concept, not Golden Rule’s Washington money, that sent
medical savings accounts sailing through Congress this year.”

I think that’s important to point out, because it references what
I recall reading in the Wall Street Journal, that Golden Rule gave
Newt Gingrich’s campaign committee $42,000, and Mr. Rooney, the
president of Golden Rule, gave $117,000 to GOPAC, the political
action committee connected by Mr. Gingrich, and between 1993 and
1994, Golden Rule gave the Republican Party almost $524,000.

Well, that obviously is the source of that controversy I was read-
ing about in the Wall Street Journal. But, as it says here, he says
that that’s really not the reason that this is getting as much play
as it is. It’s because of the national trend toward more managed
care and, in many areas, the kind of individual choice that medical
savings accounts optimizes. This is a transcript from National Pub-
lic Radio. Shall we put the context of this in the record?

Mr, Mica. I’m not sure, Mr. Ranking Member, about National
Public Radio as a source, but, without objection, that will also be
entered in the record. I want to be perfectly clear, and we'll put it

in.
[The information referred to follows:]


il

saying, “Yes,” because under most health benefits plans, there are
no financial incentives to decline such an offer.

Medical savings accounts address this problem. As I mentioned
previously, the MSA has provided immediate budgetary savings to
the city. The cost of the family coverage that we had under the
State health benefits plan was $6,775 per year, and it was rising
every year. The premiums have doubled in just the last 5 years.

The cost of the MSA option is only $6,500—$4,700 for the cata-
strophic insurance policy and $1,800 for the cash contributions to
the medical savings account. Therefore, in the first year alone,
we're saving $275 for every management employee’s family that
chooses the MSA over the traditional indemnity plan.

I might add, obviously, that if we were able to restrain health
care costs even to zero, that that would be an amazing feat for my
State, in that we've actually reduced our costs, even while reducing
the out-of-pocket exposure of our employees.

That’s a great deal—better coverage for our employees, maintain-
ing their ability to choose their own doctor, and lowering the poten-
tial out-of-pocket expenses for our employees, combined with lower
cost to the taxpayers of Jersey City.

Because of the MSA’s rebate potential, we expect even larger
budgetary savings in the future, as our employees are incentivized
to avoid gratuitous expenses and the reduced claims experience by
the insurance company results in lower premiums going forward.

For example, Forbes, Inc., has been able to reduce its health in-
surance premium by close to 10 percent per year in its first 3 years
by offering MSA’s to its employees, while employers with tradi-
tional fee-for-service insurance plans have continued to see their
premiums increase.

Our employees aren't afraid to make informed decisions about
their own health care needs—as consumers, we make thousands of
decisions each and every year—but our employees are afraid of los-
ing the right to make choices for themselves through third-party
rationing.

They don’t believe government or any employer should have the
power to determine what level of health care they’re eligible to re-
ceive or which physician they can see. They want and deserve the
right to make those decisions for themselves.

That’s why MSA’s are so popular with our employees. They keep
the power to choose in the hands of the patient, instead of putting
it into the hands of government, employers, insurance companies,
or health care providers.

I just want to add one last point. Congress should pass legisla-
tion that will end the foolish practice of treating funds that an em-
ployer deposits into medical savings accounts as taxable income.
Only the unspent funds an employee is rebated at year’s end
should be treated as taxable income.

Further, individuals enrolled in an MSA should be given the op-
portunity to start a medical IRA, whereby funds that are left
unspent can accumulate in the MSA, tax free, for future medical
expenses,

In June, I testified in favor or H.R. 1818, the Family Medical
Savings and Investment Act of 1995, before the House Ways and
Means Subcommittee on Health, which would change the tax sta-


97

cautiously managed and very deliberate. We should not abandon
those successful principles to validate an ideology.

I am not convinced that Medical Savings Accounts will be a
positive addition to the FEHBP. T do not think the biased
approach to this hearing today will convince me of otherwise.
Unless we objective and reliable parties testify as to the value
of this initiative, I do not think this Committee should go
forward with this initiative unless and until we have complete
and accurate information of the impact our actions will have on
the employees and on the plan as a whole. This is too important.

I look forward to the testimony of our witnesses.


102

JOHN N. STURDIVANT
NATIONAL PRESIDENT

#MERICAN FEDERATION OF GOVERNMENT EMPLOYEES, AFL-CIO

Mr. Chairman and members of the Subcommittee: My name is
John Sturdivant, and I am the National President of the American
Federation of Government Employees, AFL-CIO (AFGE). On behalf of
the more than 700,000 federal and District of Columbia employees
our union represents, I thank you for the invitation to testify
on the question of whether the Federal Employees Health Benefits
Program (FEHBP) should include the option to set up a Medical
Savings Account (MSA)

Medical Savings Accounts were first proposed as a solution

to the problem of the uninsured during the ill-fated 1993 debates
on national health care reform The idea was to allow the
uninsured to pay for health care costs out of tax-free money set
aside in a special account designated solely for this purpose.
In that context MSAs were merely a woefully inadequate response
to the shameful fact that, according to the most recent Census
Bureau figures, some 40 million Americans -- over 15 percent of
the nation-- have no health insurance

Today it seems that the momentum behind the campaign for the
establishment of MSAs has more to do with the belief in
simplistic free-market, individualized answers to every public
policy question. The ideology is apparently so sacred that its
adherents are willing to sacrifice efficiency and cost-
containment, ideals they otherwise profess to value above all
others. In the case of introducing MSAs into FEHBP, these ideals

as well others would surely be compromised


118

@NTEU

‘The National Treasury Employees Union

FOR IMMEDIATE RELEASE CONTACT: (202) 783-4444
December 13, 1995 Jim Watkins, Ext, 2604
Kathy Walsh, Ext. 3747

MEDICAL SAVINGS ACCOUNTS COULD “WREAK HAVOC’ ON FEHBP
NTEU SUPPORTS SOLID HEALTH COVERAGE FOR FEDERAL COMMUNITY

Washington, D.C

National Treasury Employees Union (NTEU) President Robert M
Tobias said adding Medical Saving Accounts (MSA) to the Federal Employees Health Benefits
Program (FEHBP) could “wreak havoc” on the highly successful program

In testimony submitted today to the House Subconuuttee on Civil Service, Tobias said the
combination of MSA's and the yearly FEHBP “open season” could place a strain on the program
of unimaginable proportions

“Enrollees would be tempted to join a traditional health care plan in years in which they
anticipated high health care needs Once the needed health care procedures were completed,
these same individuals would have an incentive to join the MSA option the following open season
This practice cannot help but wreak havoc with the FEHBP,” said Tobias

‘While there are those who suggest that these problems can he combated by imposing
‘waiting periods or pre-existing condition requirements on FEHBP, Tobias said the addition of
these type of restrictions would “destroy yet another strength of the FEHBP and would certainly
‘ot have the support of this Union

(OVER)



65

Under the NCPA plan, for example. the insurance company has established the
PPO and has negotiated discounted rates with hospitals and other providers. But the
employee is free to use that MSA money for the purchase of any type of medical care.
Patients who go outside the network can pay for the full cost of the service from their

MSAs.

Business Experience with MSAs. The NCPA is not the only organization to
adopt Medical Savings Accounts. As I have mentioned, more than 1,000 businesses have
adopted some form of the MSA concept, with positive results. Recent studies by the
Heritage Foundation, the Evergreen Freedom Foundation and Dr. Steve Barchet have been
looking into the companies that have implemented an MSA concept. Ron Thompson of
Thompson and Associates created an MSA-type plan ten years ago which experienced an

average increase in health care expenditures of about 4 percent, with no managed care.

Tax Fairness. If MSAs have all of these benefits. why haven’t they become
more widespread? The reason is the tax system. When an employer spends a dollar on
health insurance, the employee escapes federal and state income taxes. But if the employer

puts that dollar in an MSA to pay medical bills directly, it is taxed as income.

Because of this distortion, 15 states have passed MSA legislation under their state
income tax systems to create a level playing field between self-insurance and third-party
insurance. Those states are letting people avoid the state income tax on money they set

aside in a Medical Savings Account.

However, states have no control over federal tax Jaw, which is why America needs

the tax changes proposed in the Medical Savings Account legislation before Congress.

Health Care in the Information Age. The direction of health care reform is

changing — from imposing a large bureaucratically-controlled system to one in which

Page 7


71

‘The AMA believes that the FEHBP can be further enhanced by expanding the array of choices
in the FEHBP and allowing ensollees the opportunity to choose an MSA option combined with

a high deductible catastrophic policy

There are many advantages to using MSAs and I would like to touch on several reasons we
believe an MSA option in the FEHBP would be beneficial to federal employees and their

families.

‘The Advantages of MSAs

MSAs are cost-effective. A fundamental problem exists today in the way we finance our health
care. Because many of us receive our health care insurance from an employer-provided plan,
we do not personally experience the need or the desire to pay attention to the cost of a medical
procedure. With traditional insurance, consumers are insulated from prices and do not perceive
the full cost of consuming health care resources, Numerous studies provide evidence that third
party payment for health care shields patients from cost awareness and the responsible
consumption of health care dollars. In fact, a Rand Corporation study found that individuals
who had access to “free care” consumed at least 30 percent more than those who had to pay a

substantial portion of the bills up to a maximum amount out-of-pocket.

‘One might ask a simple question: Is it more desirable to link the patient to the cost of health
care or insulate the patient from the cost? Unfornunately, the lack of this direct linkage has led
to systematic overuse by consumers who have had little incentive to limit spending or

thoughtfully weigh the cost/benefits of services. Consumers are not exerting as much pressure


‘The Honorable Bret Schundler

‘Testimony to the House Subcommittee on Civil Service
December 13, 1995

Page 4

That's a great deal: better coverage for our employees, which maintains their

ability to choose their own doctor and lowers thi

potential out-of-pocket expenses,
combined with lower cost to the taxpayers of Jersey City!

Because of the MSA’s rebate potential, we expect even larger budgetary savings
in the future as our employees are incentivized to avoid gratuitous expenses, and the
reduced claims experience that results is translated into lower premiums. For example,
Forbes, Ine. has been able to reduce its health insurance premiums by close to 10% per
year by offering MSAs to its employees, while employers with traditional fee-for-service
insurance plans have continued to see their premiums increase.

Our employees aren't afraid to make informed judgements about their own health
care needs. As consumers, they make thousands of purchasing decisions each and every
year, However, they are afraid of losing the right to make choices for themselves through
third-party rationing. They don’t believe goveroment, or any employer, should have the
power to determine what level of health care they are eligible to receive, or which
physicians they cam see, They want, and deserve, the right to make those decisions for
themselves.

That's why MSAs are so popular with our employees — they keep the power to
choose in the hands of the patient, instead of putting it into the hands of government,

employers, insurance companies, or health care providers.


99

CONGRESSWOMAN CONNIE MORELLA
:RO SUBCOMMITTEE ON CIVIL SERVICE
OPENING STATEMENT: HEARING ON MEDICAL SAVINGS ACCOUNTS

I would like to thank Subcommitiee Chairman Mica for convening today’s
hearing, I welcome this opportunity to learn more about Medical Savings
Accounts as we determine whether they could be successfully incorporated into
the Federal Employees Health Benefits Program. While Medical Savings
Accounts could expand federal employees’ health care choices, I am concerned

that they could potentially weaken FEHBP’s existing health insurance options.

The Congress has already included Medical Savings Accounts in the
budget reconciliation package, and they have the potential to improve our health
care system. Medical Savings Accounts encourage health care consumers to be
smart shoppers and spend health care dollars wisely. They provide a pool of
money that can be spent on preventative care, and they provide dollars that can
be saved for long-term care. But it is important to recognize that the Federal
Employees’ Health Benefits Program is unique. It has a large percentage of
federal retirees, and it is underwritten by multiple insurers. {It is important that
we evaluate the impact that MSAs would have on our existing plans before

adding them as an option to the FEHBP.


21

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50

Mr. Mica. I thank the gentleman, and we'll turn now to Mr.
Peter Hendee, consulting actuary of the Council for Affordable
Health Insurance. You're recognized, sir.

Mr. HENDEE. Thank you, Mr. Chairman. | am a consulting actu-
ary, and I’m a member of the American Academy of Actuaries and
was part of its work group on medical savings accounts.

The Council is an association of small and mid-sized insurance
companies that was formed to fight for free market solutions to our
country’s health care problems. We also represent several hundred
individuals, including actuaries such as myself, physicians, insur-
ance agents, and other Americans that are interested in free mar-
ket solutions.

I thank you for conducting these hearings on creating a medical
savings account option for Federal employees. I agree with many
positive things that have been said about MSA’s. Rather than re-
peat them, I’m going to address the concern that MSA’s will cause
adverse selection.

Selection is the process of each person choosing what’s in his or
her own best interest, and there’s concern that all the young and
healthy people will want an MSA, and all the aged and sick will
be left behind in the other health plans.

Certainly, MSA’s will appeal to the young and the healthy. It of-
fers them a financial gain. They can keep the funds if they don’t
use health care that year. But MSA’s can be financially beneficial
to high-risk individuals, also. Catastrophic coverage may have a
$2,000 or a $3,000 deductible and all expenses above that paid in
full. This is similar to the maximum out-of-pocket amounts under
several of the Federal employee plan options.

But with an MSA arrangement, the funds from the account can
be applied toward those maximums, so a high-risk person with an
MSA could actually pay less out-of-pocket in a year of high medical
expenses than under a traditional plan.

Also an MSA could be more attractive than managed care options
to high-risk individuals who want to preserve their choice of pro-
vider, rather than disrupting their existing provider relationships.

Another reason someone may want an MSA is because funds are
available for the first dollar of primary care. Other arrangements
require some type of out-of-pocket, either the deductible or a_co-
payment when services are received. But under an MSA, the first
dollar of health care expense can be paid out of the account, and
this can be important for a low-income worker.

Now, one last thought on selection. The Academy of Actuaries
work group suggests that there’s not going to be an Oklahoma land
rush into MSA’s. People are cautious in their response to change,
and the pace of the shift into MSA’s is likely to be slow, and it will
give HMO’s, insurers, and employers time to adjust to the new en-
vironment.

One other point for your attention is some research by the
Health Care Financing Administration’s Office of the Actuary. This
research shows that health care inflation is accelerated when the


95

mony and for coming here and sharing with us your experiences.
We look forward to working with you, and if you have additional
information, without objection, that will be made part of the record.
So we thank you again for your testimony.

I also have a statement from Mr. Moran, the ranking member,
that will be entered without objection as part of the record.

(The prepared statement of Hon. James P. Moran follows:]


33

Mr. SCHUNDLER. That’s right.

Mr. Mica. You’re telling me that the premiums did not, in fact,
go up for the retirees or for the full-time employees?

Mr. SCHUNDLER. That’s right. What you have here is you’ve got—
again, Blue Cross-Blue Shield, which was administering the State
plan, is also administering our MSA plan with mirror image plans.
We've gone from the State health benefits plan now, and we've of-
fered our employees an HMO option, a PPO option, and a standard
indemnity offered by Blue Cross-Blue Shield which mirrors the
plan that the State offered them and Blue Shield administered be-
fore.

So they have the exact same coverage being administered by the
exact same administrator, simply a different pool of cash, if you
will, standing behind those policies with, now, a fourth option.

Blue Cross-Blue Shield had all of the claims experience before,
because they were administering the plan, so you have someone
who, right away, knows whether or not they’re suffering any ad-
verse selection and whether or not they’re going to have to adjust
the premiums for the different plans. The reality is they are not
suffering adverse selection. We are not going to see costs going up
on those other three options that the employees are able to choose
from.

Mr. Mica. Well, I only graduated from a State university, and I
didn’t do well in math, but according to my calculations, about
$275, I think you said, per person that got in this. So it obviously
could have been used somewhere else.

Mr. SCHUNDLER. Right.

Mr. Mica. It was available to reduce your cost of government or
something.

Mr. SCHUNDLER. And I have to say that our deficit was never as
great as yours.

Mr. Mica. It’s hard to match.

Mr. SCHUNDLER. But it was bad enough. And, all too often, we
get into this situation where we are looking to have to cut services
because have to begin to live within our means. It’s nice when you
can actually expand services and cut spending at the same time.

Mr. Mica. I thank you. Mr. Chrysler, now you cited, again, before
the subcommittee the same type of experience with the private sec-
tor. Did this—was it RCA?

Mr. CHRYSLER. RCT.

Mr. Mica. RCI. I’m sorry. Trying to get you bigger than you
were. Was that offered to all employees, this MSA, or was it to
management or a select group, and were there retirees that could
also choose from this? How expensive was your coverage?

Mr. CHRYSLER. It’s very simple. You know, most companies offer
a health insurance plan. We had a Blue Cross plan prior to this,
and when we looked at MSA’s, we offered a plan—MSA’s—to all
employees, salaried, hourly, retirees, same plan to everyone.

That’s the reason why I guess I don’t understand the adverse se-
lection issue, is because most companies offer an insurance plan to
their employees. This is a benefit. You should only offer one plan.
And the thing about MSA's is you will have, when the Federal Gov-
ernment finally gets around to passing MSA’s this year, you will
have the market that will respond to MSA’s.


133

findings, and concurrence of a physician trained and experienced in the relevant specialty or
subspecialty to make a final determination that care rendered or to be rendered was. is, or may

be medically inappropriate;

(4) The circumstances, if any, under which utilization review may be delegated to a

hospital utilization review programm:

(5) The provisions by which patients, physicians or hospitals may seek prompt
reconsideration by or appeal to an indepencent panel of physicians of adverse decisions by the

private review agent;

(6) The type, qualifications and number of personnel required to perfcrm

utilization review or managed care;

(7) The requirement that no determination that care rendered or to be
rendered is medically inappropriate shall be made until an appropriaiely qualified review or
managed care physician has spoken to the patient's anending physician concerning such medical

care;

(8) The requirement that any determination that care rendered or to be
rendered is medically inappropriate shall include the writen evaluation and findings of the

reviewing or managed care physician;


17

The Honorable Bret Schundler

Testimony to the House Subcommittee on Civil Service
December 13, 1995

Page 5

I do want to add one last, very important point. Congress should pass legislation

that will end the foolish practice of treating funds that an employer deposits into an MSA

as taxable income. Only the unspent funds that an employe:

rebated at year's end
should be treated as taxable income.

Further, individuals enrolled in an MSA should be given the option of starting a
“medical IRA," whereby unspent funds accumulated from their MSAs could be saved,
tax-free, for future medical expenses.

In June, | testified in favor of HR 1818, the "Family and Medical Savings and
Investment Act of 1995," before the House Ways and Means Subcommittee on Health,

would change the tax status of MSA contributions. I hope that this crucial piece

of legislation, which was sponsored by Chairman Archer and received strong bi-partisan

support, will be part of the «

is year’s budget reconciliation package.

The chi

hefore you today is clear. Adding MSAs to the FEHB Program will
improve the coverage your beneficiaries receive, preserve employee choice, and slow down
the rate of future cost growth ~ again, not by third-party rationing, but by giving

juals an incentive to take an active interest

indi

the quality and cost of the medical
care they receive.

As the trustees of the FEHB Program, the largest employee-sponsored health
insurance program in the nation, you have an opportunity to be a leader in national

health care reform. I encourage you to lead us in the direction of higher quality,


61

medical services; or (2) if they want to make these choices for themselves they will have to

manage their own health care dollars through Medical Savings Accounts.

Currently, the Internal Revenue Service taxes MSA deposits. although employer
payments for third-party insurance are tax free. However, that may change soon since a
version of Congressman Bill Archer's bill to create MSAs is currently in the House Budget

Reconciliation Bill.

How Medical Savings Accounts Work. Medical Savings Accounts give
people the opportunity to move from a conventional, low-deductible health insurance plan
to one with a high deductible (say $2,000 to $3,000) and to put the premium savings in a
Personal savings account. These accounts are used to pay for routine and preventive
medical care, and are combined with a high-deductible health insurance policy that pays for
major expenses. Employees and their families pay all medical bills up to the deductible

from their MSAs and out-of-pocket funds. Catastrophic insurance pays all expenses above
the deductible.

FIGURE I

Catastrophic
insurance

Medical Savings Account

< Frequency —>

Page 3


180

(B) “Commissioner” means the Commissioner of Insurance.

(C) "Health care provider” means any person, corporation, facility or institution licensed by
this state to provide health care services, including but not limited to a physician, hospital cr
other health care facility, dentist, nurse, optometrist, podiatrist, physical therapist or
psychologist, and officer, employee or agent of such provider acting in the course and scope of

employment or agency related to health care services;

(D) “Health care services” means acts of diagnosis, treatment, medical evaluation or advice or

such other acts as may be permissible under the health care licensing starutes of this state:

(©) “Physician” means 2 person licensed to practice medicine in alt of its branches;

(F) “Private Review Agent” means a nonhospital-affiliated person or entity performing
utilization review or managed care that is either affiliated with, under contract with, or acting on

behalf of:

(1) A business entity in this state: or

(2) A third party that provides or administers hospital, medical or other health care
benefits to citizens of this state, including a health insurer, nonprofit health service plan, health
insurance service organization, health maintenance organization or preferred provider

organization authorized to offer health insurance policies or contracts in this state;


114

plans in the FEBBP continue to be little reflection of the value of
benefits offered by a particular plan, but rather are a reflection
of the enrollees of that plan. In the opinion of this Union,
efforts to alter the FEHBP, such as through the addition of an MSA
option, could have the unintended effect of exacerbating existing

risk segmentation problems within the program.

The premise behind MSA’s is that they allow consumers to
choose a health care option with a high deductible that provides
coverage for catastrophic medical expenses only above a certain
level. The consumer would also receive a pool of money to be used
for medical expenses of his or her choosing. Medical expenses
incurred over and above this pool of money, but below the level at
which the catastrophic coverage becomes available would be the
responsibility of the medical consumer. If the pool of money is not
spent, it can usually be rolled over and used the following year,
or even revert to the consumer for personal use . While this might
provide some medical consumers with a greater financial stake in
purchasing their health care, in the FEHBP it is likely to expose

health care consumers to greater health care costs in the future.

If an MSA option were made available under the current FEHBP,
the healthiest individuals would be most likely to choose this
approach. Those health care consumers choosing to remain in
traditional health care plans with lower deductibles would
logically be the less healthy and elderly FEHBP participants. In

a relatively short period of time, the per person premiums for the


116

The combination of MSA’s and the annual FEBBP open season
could place a strain on the program of unimaginable proportions.
Enrollees would be tempted to join a traditional health care plan
in years in which they anticipated high health care needs. Once
the needed health care procedures were completed, these same
individuals would have an incentive to join the MSA option the
following open season. This practice cannot help but wreak havoc
with the FEHBP. Some observers have suggested that these problems
can be combated by imposing waiting periods or pre-existing
condition requirements on the FEHBP. However, the addition of
restrictions such as these would destroy yet another strength of

the FEHBP and would certainly not have the support of this Union.

Furthermore, it is not inconceivable that federal workers or
retirees currently enrolled in MSAs, upon discovering that they
require a particular medical service might wait for the next open
season to switch to a traditional medical plan and thus avoid using
their own “banked health fund" for the procedure. The issue of
consumers delaying health care treatment until absolutely
necessary, (or in this case until the next open season) has been
shown time and again to add untold costs both in terms of dollars
and health outcomes to medical spending in this country. I
seriously question whether this is the direction in which we want

to take the FEHBP.

Yet another aspect of MSAs which must be considered is the


4

It’s based on the premise that made this country great. This
country operates on a capitalistic economy. Would anybody out
there really disagree or say that capitalism doesn’t work?

If the free market works in every other industry in America, why
should we say that it’s not going to work in the health care indus-
try? Why do we believe that incentives drive human behavior in
virtually everything else that we do, but incentives won't drive
human behavior when it comes to the health care dilemma? I think
nothing could be further from the truth.

In fact, I think it’s the same kind of arrogance that pervades this
city, that Washington is the font of all knowledge, and it has the
right answers for everything, and that individuals, left to their own
devices, will harm themselves and other people. If we don’t step in
and mandate and tell people how to do things, that they won't get
the job done.

That’s typified in a lot of the arguments about adverse selec-
tion—which I'll talk about a little bit later—that if you give people
that much control, almost total control over their own health care
destiny and health care decision and the ultimate control in choos-
ing their provider and making decisions regarding their family’s
health issues, that they will make wrong decisions, because, appar-
ently, they aren’t as smart as the bureaucrats in the insurance in-
dustry, or they aren’t as smart as we here in Washington.

They don’t care about themselves. They would rather be knock-
ing on death’s door than spend a couple of extra dollars out of their
medical savings account for preventative care.

Now, I say this kind of tongue in cheek, and we all know that
that’s ludicrous. There’s nobody out there that’s going to skimp on
their own health care so that they can save an extra few bucks for
their medical savings account so they can buy that big-screen TV
at the end of the year. That’s just nonsense, and I think we all
know it.

Last month, we passed legislation that will make medical sav-
ings accounts available to almost every American—almost every
American. I’m here to say they should also be available to Federal
employees, and I have a bill, H.R. 2341, that would do just that.

Under this plan, the Federal contribution to an employee's health
benefits will be used to purchase a catastrophic plan and a con-
tribution to an MSA. This MSA choice would be completely op-
tional. I emphasize that again, optional. Nobody is forcing anybody.

The beauty of this kind of an idea is that most people, as Mayor
Schundler will probably tell you in a few minutes, as most compa-
nies that offered MSA’s to their employees, you will have probably
well over 50 percent of the employee base that’s going to opt to-
ward medical savings accounts, because they kind of like freedom.
They kind of believe that they can make the health decisions for
their families, and they like the incentives that go along with the
MSA option.

Federal employees could choose this plan, or they could continue
with the other plans that are offered in the Federal employee
health benefit plan. An MSA option for Federal employees would
reduce health care cost inflation for the Federal Government and
empower Federal employees to take control of their own health
care decisions.


93

18

PETER OVERBY That radical thinker was Patrick Rooney [sp}, president of an insurance company
called Golden Rule, a company that's counting on medical savings accounts for its financial health,
Gingrich played his stuclents a videotape of Rooney explaining how savings accounts would work

PATRICK ROONEY [excerpt from videotape} Have you ever heard of a sale on mammograms? Well
Fnever have But if people were spending their own money, pretty soon, there would be clinics offering
sales on mammograms to get the business because now the consumers are spending their own money
There would be nothing so powertul (o control the cost of medical care as having 200 million Americans
‘that started asking the price ahead of time

PETER OVERBY And now, less than two years later, medical savings accounts, or MSAs, are in both
the House and Senate reconciliation bills, to be available to anyone in Medicare or under age GS An
MSA would lel you opt out of conventional health insurance and get cheaper insurance covering just
catastrophic costs, with a yearly deductible of $3,000 to $10,000. Below that amount, you'd pay medical

Hot ws account by your employe c 5. YO.
‘you spent from that account, the more you'd get to keep Critics say MSAs would encourage people to
put off medical cate. They also say MSAs undermine the concept of group insurance, letting compatties
hike Golden Rule sell MSAs to healthy people and leave the less healthy ones to managed care plans
‘That would drive up costs for managed care, which is why the congressional budget office said last week
that MSAs in Medicare would cost the government money

So how diel MS-A5 move from radical notion to national policy? tn large part, it was because of Patrick
Rooney and Golden Rule Deborah Solet [sp]. an analyst with a Washington think-tank called the Alpha
Center for Health Planning, says that’s because Golden Rule did not follow bigger insurance companies in
the switch to snanaged care

DEBORAII SOLEIL, Alpha Center for Health Planning And large insurance explicitly cl this in the
"70s and 80s. They went off and developed HMOs, they developed managed care networks, and put a
lot of money into doing that. So we've developed a kind of dichotomy in the business, and Golden Rule
really represents the end of the business that has tried to maintain a conventional financial insurance
business, without investing in, e<semially, holding sick patients and managing their care cost effectively

PETER OVERBY. Instead, Golden Rule invested in Washington. For a relatively small company, its
political spending has been sizable and well-placed. According to Common Cauise, the government
watchdog group. Golden Rule's executives. their families, and the corporate political action committee,
gave Newt Gingrich’s campaign committee $42,000 between 1989 and 1994 Golden Rule supports the
Progress and Freedom Foundation, the think-tank that produced Gingrich’s college course Rooney has
given $117,000 to GOPAC, the political action committee connected to Gingrich And, between 1993
and 1994, Golden Rule gave the Republican Party almost $524,000. Rooney could not be reached for an
interview. Golden Rule has also helped to finance the National Center for Policy Analysis, a free-market
think-tank that has long advocated medical savings accounts. And, Rooney has been on the center's
board

John Goodman, the center's president, says he thought of MSAs before Rooney came along He says
Golden Rule is just defending its business.

Oi CCODMAN, Pres, National Center for Policy Analysis. I think fee-for-service medicine probably
won't survive, nc matter what Congress can do. And, in the future. people wil! probably have 10 go into
managed care, where someone else restricts your choice of doctor access, of if you want to make those
cchoices for yourself, you're going to have to manage some of your own health care dollars through 4
medical saving: account, and thas where the market's going to go.

PETER OVERBY And, according to Goodman, it was the MSA concept, not Golden Rule's
Washington money, that sent medical savings accounts sailing through Congress this year I'm Peter
Overby in Washington,

(The preceding text has been professionally transcribed, However. in order to meet rigid distribution and
transmission deadlines, has not been prooftead against audiotape and cannot, fur thal reasary, he
guaranteed as to the accuracy of speakers) words or spelling |


38

STATEMENTS OF GARY GLENN, COUNTY COMMISSIONER, ADA
COUNTY, BOISE, ID; PETER HENDEE, CONSULTING ACTU-
ARY, COUNCIL FOR AFFORDABLE HEALTH INSURANCE;
MERRILL MATTHEWS, DIRECTOR OF HEALTH POLICY STUD-
IES, NATIONAL CENTER FOR POLICY ANALYSIS; DANIEL P.
JOHNSON, JR., PRESIDENT-ELECT, THE AMERICAN MEDICAL
ASSOCIATION BOARD OF TRUSTEES

Mr. GLENN. Yes, sir. Thank you, Mr. Chairman. Mr. Chairman,
Ada County, ID, is the first county in the Nation and, as incredible
as it is to me, only the second public employer in the Nation to
adopt an MSA plan, second to Mayor Schundler’s Jersey City.

Mr. Chairman, the bottom line I can offer you and the members
of your panel today is that if Ada County and Jersey City, having
proven that a government employer can design an MSA plan that
will reduce costs to the taxpayers to insure public employees, if
Mayor Schundler and I can do it, certainly the esteemed Members
of this body can do it.

The only difference is that if you do it, you will immediately save
American taxpayers millions of dollars a year, rather than the tens
and then hundreds of thousands of savings we'll experience at the
local level.

Based on Ada County’s experience, Mr. Chairman, I feel con-
fident in predicting the following regarding your inclusion of an
MSA option in the FEHB. Tens of thousands of Federal Govern-
ment employees will enroll in a well-designed MSA option the first
year.

The main reason for those who don’t will be the simple fear of
change—any change, at least based on the focus groups that we did
with our own employees, which we believe will evaporate after the
first year’s tens of thousands of enrollees brag to their coworkers
about all the cash they've got left over at the end of the first year.

Eventually, a majority of Federal employees will choose the op-
tion, I would predict. The bottom line will be immediate savings in
the millions of dollars, with long-term savings of much more to the
American taxpayers.

By introducing tens of thousands of cost-conscious health care
consumers into the local markets across the Nation. you will over-
night force health care providers to become more price conscious,
which will help restore market forces to bring the cost of health
care down for all Americans

Under Ada County’s MSA plan, the taxpayers save money, which
was the first motivation that I had in proposing the plan. But
please not», Mr. Chairman, the taxpayers would not have saved a
dime if no employee had enrolled. Therefore, by definition, the em-
ployees who enrolled did so only because they judged it to be in the
best interests of themselves and their families. This is, as described
earlier, a win/win situation. In fact. they win/win/win, because it’s
good for the taxpayers; it’s good for the employees, themselves; and
good for our health care economy.

Our medical savings account offers three major benefits to em-
ployees, and I would offer as evidence of the fact that it is a benefit
to our employees the endorsement of this plan by our AFL-CIO af-
filiate and the Service Employees International Union member, the
Ada County Sheriffs Employees Association. You have a letter to


125

Attachment A

THE AMERICAN PSYCHIATRIC ASSOCIATION
RECOMMENDS THE PURSUIT OF THE FOLLOWING PRINCIPLES AS PART OF
NATIONAL HEALTH CARE REFORM

‘The American Psychiatric Association views national reform of the health care
system as an opportunity to correct historic inequities in access to health care, particulariy
for the mentally ill. Transition to the new system must accommodate the ‘needs of
idemtified vuinerable populations, especially the third of the 37 million uninsured under the
age of 18, the working poor, the mentally ii homeless, and minorities. The reform must
provide quality of care, medically necessary, appropriate, and cost-effective treatment of
mental disorders, and prevent harm to patients.

‘The foltowing principies shall apply to national health care reform:

1) We shall first advocate for nondiscriminstory coverage of all madicai disorders
including memal iliness {which inciudes substance abuse) for any medicaliy necessary
‘treatment under health care reform legisiation. Uniform benefits in all fitty states for the
‘treatment of mental iliness si.ould assure universal coverage and should be equal to other
mecical illnesses with respact to dollar limits (annual and lifetime), deductibles,
coinsurance, and stopioss provisions. Rather than arbitrary limits on hospital days or
outpatient visits, professional standards shouid govern the intensity and curation of
‘Yreatment.

2} We recommend consideration of the development of a pricritization process for
all medical services. including memtal health services, based on common criteric for
outcome and usefuiness to patients.

3) We shall relentiessiy pursue, at state or federal levels, non-discriminatory
catastrophic coverage for patients with severe mental iinesses, irrespective of the basic
defined benefit.

4) As the professional organization responsible for the Diagnostic and Statistical
Manus! of Mental Disorders (DSM-III-R), we urge adoption of a definition of severity that is
‘based not only on diagnosis, but also on other criteria, including duration, danger to life
(self or others), pain, imerferonce with functioning, and imerferance with emotional and
‘memal development in children and adolescents. The definition should be applicable, on a
case by case basis, to severe cases of both Axis | (including substance abuse) and Axis II
mental disorders in children, adolescems, and adults, including the elderly.

5) Utilization management should be no more stringent for mental iliness than for
other medical illnesses and should incorporate safeguards against clinically unrealistic,
inetficiem, abusive or unethical review practices. A mechanism for impartial appeal of
decisions is essertial. Utilization management procedures must protect the physician-
patient relationship to avoid harm to the patient. The quality of care should be carefully
monitored in all payment systems, in a timely fashion.

6) Provision must be made for cost-effective preventive services.


100

FEHBP is widely regarded as one of the best group health insurance plans
‘n the country, and FEHBP sets the standard for what an employer-sponsored
health insurance plan should be. OPM is able to negotiate favorable contracts
with hundreds of health insurance plans to offer a wide range of choices to
FEHBP’s 9 million beneficiaries. While some federal employees may benefit
from a Medical Savings Account, it is critical that we do not compromise the

current program to add a new health insurance option.

{ have concerns that the inclusion of MSAs in the FEHBP could lead to a
two-tiered health care system in which very healthy recipients pay little for their
care, and those who are less healthy are forced to pay higher premiums for
expensive care. If the healthiest in the system opt for MSAs, the risk pool will
shrink, and insurance carriers may raise their premiums or drop out of FEHBP.
Adding MSAs will have a ripple effect on all of the other insurers, and I worry

that many will drop FEHBP or raise their premiums.

I also have concerns about the catastrophic plans issued to those using
MSAs. It is not clear what health expenses will go toward the deductible, what
the catastrophic package would include, and what its co-payment would be. In
the case of medical emergency. the catastrophic plan may not be such a good
teal after all. I also worry that MSA enrollees will forgo preventative health

care in order to save their money for other things, as those who have MSAs are


41

COMMISSIONERS
OFFICE

ADA COUNTY sete O52

3662303

Gary Glenn.
Commissioner, First District

November 30, 1995

COMMISSIONER GARY GLENN
ADA COUNTY, IDAHO.

TESTIMONY BEFORE THE U.S. HOUSE SUBCOMMITTEE ON CIVIL SERVICE

MR. CHAIRMAN, MEMBERS OF THE COMMITTEE, I SUBMIT THE
FOLLOWING INFORMATION ON ADA COUNTY'S "MEDICAL SAVINGS

ACCOUNT” PLAN FOR THE OFFICIAL RECORD:

ADA COUNTY IS THE FIRST COUNTY AND THE SECOND PUBLIC

EMPLOYER IN THE NATION TO ADOPT AN MSA PLAN.

MR. CHAIRMAN, HERE'S THE BOTTOM LINE I CAN OFFER YOU
TODAY. ADA COUNTY AND JERSEY CITY HAVE PROVEN THAT A
GOVERNMENT EMPLOYER CAN DESIGN AN MSA PLAN THAT WILL RESULT

IN LOWER COST TO THE TAXPAYERS TO INSURE PUBLIC EMPLOYEES.