39

Figure 1
$500 Health Care Bill

Love Deductible tan Marion Deductible lan
Plan Pays $240 Pian Pays $0

‘Cateutatons

$800 cost
+5200 deductible
= $300

$300
1.80% comsurance
= Plan payment of $240

Possibly, the $260 out-of-pocket expense of the employee enrolled in the low-deductible plan could
encourage hinvher to use less health care services. On the other hand, the employee with an MSA
balance of at least $500, which he/she views simply as another form of insurance—not part of
personal savings—may actually be encouraged to use more health care, because he/she would
assume that their out-of-pocket expenditures had actually decreased by $260.

Second, if an employer offers the MSA/high-deductible plan within a benefit program that includes
other options for health insurance coverage, the healthiest people would tend to select the high-
deductible plan; the less healthy people would most likely continue using the low-deductible plan.
Since health care costs for the employees who opt for the high-deductible plan would be lower than
average, the premium savings from moving to a high-deductible plan would also be lower than is
shown in the Table 1.

‘Another factor that could affect how much money is actually saved is the interaction between the
MSA/high-deductible plan and managed care. If H.R. 1818 were enacted, employers would need
to review their health benefits programs to determine how to integrate the MSA option with their
current benefit plans. One concem employers have mentioned is the interaction between an
MSAhigh-deductible plan and current managed care plans, such as health maintenance
organizations. Employers have expended a great deal of effort in applying strict management to
their health insurance programs to maximize savings, with recent trends in health premiums
suggesting that much of this effort has been successful. Some of these savings could be lost if the
MSA high-deductible plan were to attract significant numbers of enrollees.

Impact on Employees

The work group's analysis shows that, on average, employees would benefit financially from


103

Where would those families go for their insurance? Would any private insurer be
willing to stop in and provide for such a high risk group? If they did step in and provide
insurance, would it be prohibitively priced?

The answer is that those families could not obtain affordable insurance. The
result would be that either the government would have to assume the cost of their
coverage or those families would be added to the growing number of uninsured
Americans.

We don’t need to speculate about the harmful effects adverse selection has upon
insurance markets and-more importantly—upon the fives and health of the persons who
seek to buy insurance. ‘Those effects are evident in insurance markets today.

Right now, the business of insurance is to a large extent an exercise in identifying
the healthy people to whom to sell policies and excluding those who actually need the
insurance. That is particularly true in the individual market, to which MSAs would be
primarily directed.

MSAs would make this unwelcome trend much worse: they are tailor-made for
identifying healthy persons who may be profitably insured--it makes no sense for a sick
person to utilize an MSA.

In addition to causing adverse selection, MSAs would not achieve the individual
savings which their advocates claim.

If one accepts the argument that MSAs leads health care consumers to shop for
bargains because they would have something to gain, that is, the savings they would
retain in their accounts, then one must accept the corollary: consumers will make no
effort to limit utilization and contain costs once they exceed a catastrophic deductible
because they would have nothing to gain. Those expenses would be borne by the
insurer.

Significantly, the great majority of health care costs in our country are incurred
beyond typical catastrophic deductibles, costs which would be wholly unaffected by
MSAs.

CBO estimates that 83% of health care goods and services are consumed by
persons whose medical expenses exceed $2,500 year. Our study yielded similar data:
the healthiest 68% of the families smdied consumed only 16% of the health care
resources, while the- remaining 32%. of. the. families with members who. suffered. from
serious illness spent a stunning 84% of the total. Almost all of the latter amount
consisted of health care costs which exceeded catastrophic deductibles.

What's more, MSAs would not even effectively contain costs below catastrophic
deductibles. Individual consumers aren’t in a position to insist on more productive and
efficient medical goods and services. MSAs are based on the inaccurate premise that
consumers have sufficient information and expertise to make sound medical purchases.
MSAs would provide them with neither.

Reform is induced by informed purchasing by employers and other groups, which
MSAs would not promote. Instead, MSAs would weaken the bargaining position of large
groups by encouraging healthy individuals to seek health care on their own. If a large
employer or other group sought to negotiate only on behalf of the relatively unhealthy,
who likely would run up substantial medical expenses, providers would have no reason to
offer those groups favorable rates.


5

H.R. 1818 provides Americans with more choices. Combined with
the freedom to make their own medical care decisions, these
choices can make health care more affordable for those with MSAs
while increasing the awareness of health care costs.

I look forward to the testimony not only from our distinguished
colleagues but from the other panels today to shed more light on
MSAs and how they work.

Ordinarily Chairman Archer, the sponsor of the bill, would lead
off the testimony. He is unavoidably delayed until a little bit later

the hearing, and, therefore, before hearing from our colleague,
the principal cosponsor of the bill, Andy Jacobs of Indiana, I would
recognize the Ranking Member, Mr. Stark.

Mr. STARK. Well, Mr. Chairman, since it is raining this week, I
will include a little rain on the parade.

I appreciate your having these hearings, but I think medical sav-
ings accounts are a scam. They would transfer money from people
who are sick or are liable to become sick or pregnant to those who
have the good fortune to be healthy.

They are especially skewed to benefit healthy people in high tax
brackets at the expense of taxpayers in general. And, worse, if they
caught on, they would undermine the entire health care system by
making insurance less affordable for anyone who has a high prob-
ability of having high medical expenses.

MSAs are a brilliant scheme to skim healthy people out of the
insurance pool, leaving those who are sick or who are planning a
baby at increasingly expensive traditional plans. And the MSAs
would force traditional plans to increase their premiums to make
up for the money that MSAs take out of the pool.

MSAs allow people to pay for otherwise uninsured’s medical ex-
penses out of tax free income. Insurance companies that would ben-
efit financially from these plans have been quick to tout the advan-
tage of this approach. In fact, one of the major proponents is a com-
pany already notorious for its efforts to exclude sick people from its
insurance pool. But more objective analysts, including the Amer-
ican Academy of Actuaries, have Pointed out that while MSAs may
be great for people who are both healthy and in a high tax bracket,
those who are sick and taxpayers in general will be paying for the
windfalls that go to those rich folks. And while the healthy and
wealthy few save money, resources available for health care in gen-
eral will shrink, and most families will risk paying much more in
health care costs out of their own pockets.

The proponents of MSAs rest their arguments on a large fallacy,
and the fallacy is that overall health care expenditures will be re-
duced if tax preferred medical savings accounts are made available.
There is no evidence to this effect, and certainly no evidence that
the public in general has any concept of how to purchase health
care or what it costs.

Health care decisions are made in large part by health care pro-
viders, not the patients. In fact, there is a potential for health care
costs to actually rise for the individuals that move out of highly
managed HMOs or move out of plans with significant provider dis-
counts and into MSA plans with very loose utilization and fee
controls.


COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois SAM M. GIBBONS, Florida
BILL THOMAS, California CHARLES B, RANGEL, New York

E. CLAY SHAW, JR., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ANDY JACOBS, Jn., Indiana

JIM BUNNING, Kentucky HAROLD E. FORD, Tennessee

AMO HOUGHTON, New York ROBERT T. MATSUI, California
WALLY HERGER, California BARBARA B. KENNELLY, Connecticut
JIM McCRERY, Louisiana WILLIAM J. COYNE, Pennsylvania
MEL HANCOCK, Missouri SANDER M. LEVIN, Michigan

DAVE CAMP, Michigan BENJAMIN L. CARDIN, Maryland
JIM RAMSTAD, Minnesota JIM McDERMOTT, Washington

DICK ZIMMER, New Jersey GERALD D. KLECZKA, Wisconsin

JIM NUSSLE, Iowa JOHN LEWIS, Georgia

SAM JOHNSON, Texas LF. PAYNE, Virginia

JENNIFER DUNN, Washington RICHARD E. NEAL, Massachusetts

MAC COLLINS, Georgia
ROB PORTMAN, Ohio
PHILIP S. ENGLISH, Pennsylvania
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
PHILLIP D, MOSELEY, Chief of Staff
JANICE Mays, Minority Chief Counsel

SUBCOMMITTEE ON HEALTH
BILL THOMAS, California, Chairman

NANCY L. JOHNSON, Connecticut FORTNEY PETE STARK, California
JIM McCRERY, Louisiana BENJAMIN L. CARDIN, Maryland
JOHN ENSIGN, Nevada JIM McDERMOTT, Washington
JON CHRISTENSEN, Nebraska GERALD D. KLECZKA, Wisconsin
PHILIP M. CRANE, Illinois JOHN LEWIS, Georgia

AMO HOUGHTON, New York
SAM JOHNSON, Texas

ap


99

Improving the Doctor-Patient Relationship

By giving consumers the ability 1 make their own decisions about the value of the health care
they will purchase, we believe the Archer-Jacobs bill 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.
‘As recognized by the NCPA, patients and doctors would be encouraged to manage the care ~~
not a third-party payor. Moreover, MSAs would empower patients to make prudent and sensible
treatment choices, and reap the reward of their savings. Savings accrued 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, plan, treatment, and range of services that best meet his/her needs.

‘The Archer-Jacobs legislation would provide a responsible way to pay for future health care
expenses including long term care costs. MSAs have unlimited potential in our health care
system. From the private sector to Medicare and Medicaid, MSAs are a viable option in the
health care marketplace as well as an important savings mechanism for furure undetermined
medical expenses.

MSAs and Medicare Transformation

The AMA fervently believes that the Medicare program must be transformed. An important
‘component of this transformation should be the availability of MSAs as an option for Medicare
beneficiaries to choose as we recognize is envisioned in the Archer-Jacobs legislation. We
believe that each Medicare beneficiary should have an expanded set of choices that range from
the restructured traditional Medicare program to various health plans to Medical Savings
Accounts. A Medicare Medical Savings Account option should be funded by a defined
government annual contribution with the requirement that part of these funds be applied toward
purchase of a high-deductible, catastrophic insurance policy each year. The AMA would
advocate that contributions to the MSA in the amount of the value of the government
contribution amount be exempt from federal and state income taxation, Further, we believe
distributions from a Medicare MSA should be tax advantaged if used for medical expenses,
‘catastrophic health insurance premiums or long term care premiums as also foreseen in the
Archer-Jacobs MSA bill.

‘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.

‘There have been several criticisms of MSAs, a few which the AMA would be pleased to address
from a physician's viewpoint. It has been argued that MSAs like those proposed in the Archer-
Jacobs legislation 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 prostrate screenings for adults. We are aware of no long-term studies
{0 support the contention that MSAs are likely to discourage individuals from seeking preventive
medical care. In fact, MSAs could be a source of funds for services such as preventive care not
always covered by traditional health insurance. Moreover, anecdotal evidence 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 MSAs are 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.
This argument overlooks the fact that a significant number of employee benefit plans are self-
insured. While many of these plans contract with insurers as third party administrators, such
plans are increasingly recognizing that direct contracting with physician groups can avoid
insurance costs. Further, 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 wrote during the health care reform debate last year,


48

Testimony of

Peter Hendee
Consulting Actuary
Odell & Associates, Inc.
1400 Old Mill Circle, Suite A
Winston-Salem, NC 27103
(910) 768-8217

on H.R, 1818
The Family Medical Savings and Investment Act of 1995

before the
Subcommittee on Health
of the
Committee on Ways and Means
of the
United States House of Representatives

June 27, 1995

Mr. Chairman, thank you for this opportunity to testify regarding
the Family Medical Savings and Investment Act of 1995 (H.R. 1818).

My name is Peter Hendee and I am a Member of the American Academy
of Actuaries, a Fellow of the Society of Actuaries and a Fellow of
the Conference of Consulting Actuaries. I am here as a consulting
actuary who practices in the health care financing market.

Enacting this bill into law will encourage the use of a promising
health care financing mechanism. It will eliminate the handicap
imposed by current tax law on health care saving by giving saving
the same tax treatment now reserved for health care spending. This
will make it practical for employers to provide these accounts for
their employees.

These accounts enable individuals to make their own health care
purchasing decisions and to accumulate the funds that they do not
spend. This makes the patient a buyer as well as a user of health
care and provides an incentive to seek cost effective quality
health care. It will restore free market characteristics to the
provision of health care.

Authority over health care spending is given to the patient instead
of imposing third party controls on the patient. This reduces
third party intrusion into the provider-patient relationship

Not only will medical savings accounts be put on a level playing
field with other mechanisms for providing employee health care, the
bill also counters the current tax law's bias against the self-
employed and individuals who purchase their own health insurance.
Although these people will continue to be at a tax disadvantage for
the catastrophic insurance portion of their health care financing,
their medical savings accounts will be treated on a consistent
basis with employer provided health care. They will not have to
fund these accounts with after tax dollars

Distributions

The proposed distribution rules are responsible but are not
onerous. Taxes on distributions not used for health care are
significant enough to encourage responsible behavior. Very
importantly, they are not excessive; the account holder will feel
the money is available for an important need. This is necessary
for the account holder to have an incentive to be a careful
purchaser of health care.

Inflation
This bill includes an automatic inflation adjustment for the

minimum catastrophic deductible. This provision will make sure
that this critical plan feature receives the periodic attention it


59

Section 4 COVERAGE INFORMATION FOR NEW EMPLOYEES )
‘A, Waiting penod fr ew employees. You must chonsa one 0 Days* __ 30 oays* X90 bays

“Hat avatabie to groups with 3:50 employees.
8. Life Insurance and Accidental Death and Dismemberment Insurance (AD8O)

‘Amount of Weekly Disabilty

molgyer Casineaton +i vere trcome insurance (optional)
ae 7

©. Oedvctle Option (Single employes. Coreurane Open pPe €,/optonal Coverage

et desvctle ‘You sect ches oe Merit (Same as ay ioass)

You mutt choeee ove i 100% coverage afr the deduce G Week Disability income

Flan 1.500 Sng'82.000 Fam C}.BD20 consrence to $5,000 per cove person} Deperent Life ~ Option A
[5 rena S00 Sew 00 Fa 1 oped L-opto
(‘Seeton 5 EMPLOYER AGREEMENT AND REPRESENTATIONS. )
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cannot bind coverage or change oF modty conditions of coverage: and

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XIX
16

terms ‘eligible individual’ and ‘medical savings ac-
count’ have the respective meanings given to such
terms by section 220.

“(2) NO CONSTRUCTIVE RECEIPT.—No amount
shall be included in the gross income of any em-
ployee solely because the employee may choose be-
tween the contributions referred to in paragraph (1)
and employer contributions to another health plan of
the employer.

“(3) TRANSFERS FROM FLEXIBLE SPENDING
ARRANGEMENTS.—

“(A) IN GENERAL.—A flexible spending ar-
rangement for health shall not cease to be
treated as such an arrangement, and no
amount shall be includible in the gross income
of the employee, solely because amounts not.
paid out as reimbursements under such ar-
rangement are contributed to a medical savings
account of such employee.

“(B) FLEXIBLE SPENDING ARRANGE-
MENT.—For purposes of this paragraph, a
flexible spending arrangement is a benefit pro-
gram which provides employees with coverage

under which—


108

Statement by Greg Scandlen, Executive Director
Council for Affordable Health

Mr. Chairman, my name is Greg Scandlen and I am Executive Director of the Council for
Affordable Health Insurance. The Council, also known as CAHI., is an association of
small 10 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 some of the nation’s leading actuaries, physicians,
insurance agents and Americans interested in free market solutions to the nation’s health
care problems.

Mr. Chairman, 1 would like to take this opportunity to thank you for conducting these
hearings on H.R. 1818, the Family Medical Savings and Investment Act of 1995. T would
also like to thank Chairman Bill Archer and your colleague, the Honorable Andy Jacobs of
Indiana for theie dedication to the issue of free market health care reform through the
‘enactment of federal medical savings account legislation

‘As 1 am sure you are all aware, Mr Archer and Mr. Jacobs introduced legislation similar
to H.R. 1818 in the 102nd U.S. Congress and in the 103rd U.S. Congress. Those bills,
100, attracted a broad spectrum of Democratic and Republican co-sponsors. However,
H.R. 1818 has become the definitive medical savings account bill in the 104th U.S.
Congress because it accomplishes so much with fitle or no cost to the federal
government.

‘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
laws including Arizona, Colorado, Idaho, Iinois, 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 marketable Medical savings account legislation is also
pending in an additional 16 states While the states have certainly taken the lead in
developing innovative insurance reforms in the past, medical savings accounts have taken
the lead in the states in 1995

As the Executive Director of CAHI. I am also an employer with seven employees, and
cach of us is using a medical savings account system to keep down the cost of our
individual health care, By moving from a low deductible policy to a high deductible
policy, we have saved enough money to fund our $1,000 deductibles. However, we must
pay state and federal taxes on this additional money because under current tax laws, this
$1,000 is a taxable benefit. Why should my employees be penalized by the US. Tax Code
for being prudent purchasers of health care?

HR 1818 begins to address the problem of federal tax inequity for individuals and the
self-employed who must purchase their own health coverage, It does so by allowing these
individuals to deduct their MSA contribution, even though they might not be able to
deduct the cost of the catastrophic insurance plan None the less, the MSA deduction is a
substantial step in the right direction

HR.1818 also provides a source of funds for preventive care, and gives incentives to
begin saving for health care when itis really needed, and really expensive, later in our

lives. Many employees with regular deductibles or copayments do not have sufficient out-
of-pocket fiznds to access preventive care services. MSAS provide a source of funds to pay
for these services, even for low income workers

H.R. 1818 also allows long-terin care insurance premiums to be considered a qualified
medical expense under the U S. Tax Code. and it allows LTC insurance premiums to be
ctly from the MSA. By promoting the purchase of long-term care insurance,
H.R. 1818 will, in the long run, help reduce Medicaid costs



114

HMOs and other comprehensive coverage plans from adverse risk selection by limiting
employees’ abilities to select catastrophic coverage during healthy years and switch to
comprehensive coverage when specific health conditions emerge.

+ Require catastrophic coverage policies to meet the same standards as other health
benefit plans. Catastrophic coverage should be subject to the same standards that apply to
other health plans, to ensure that individuals have the same access to all coverage options.
For example, catastrophic coverage would have to be offered on a guaranteed issue basis
(.e., without regard to health status) if federal of state law includes such a requirement
for other health plans.

GHAA believes strongly that consumers should have a choice among a wide variety of coverage
options in the health care marketplace. However, to build on the advances that health plans have
made in recent years to provide high quality, cost effective care to their enrollees, it is crucial
that reform proposals -- particularly those proposals that establish tax-preferred MSAS -- treat all
plans in an equitable manner. The catastrophic coverage-based MSA provisions described in
H.R. 1818 could reverse advances in the current marketplace, by providing a tax advantage to
old-style, uncoordinated, and inefficient health care coverage. To this end, the federal
government should not provide catastrophic plans more favorable tax treatment than
comprehensive coverage options by linking MSA availability with a catastrophic coverage
requirement.

As this MSA legislation moves forward, we urge you to consider the serious consequences that
could result for the health care marketplace and for consumers if MSA proposals are not designed
in a thoughtful manner.


54

+ 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
{o 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 prove 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 that $1,500.

Finally th rtcsm that MSAs ae incompatible with managed care i leary
untrue, since the NCPA‘s MSA plan has a managed care component. Although MSAs

ly are inconsistent with the traditional philosophy of HMOs, efforts to make
medicine cost-effective are natural allies of Medical Savings Accounts.

Under the NCPA plan, for example, the insurance company has established a
preferred provider network (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.

‘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 direculy, itis taxed as income.

Because of this distortion, seven states have MSA legislation under their
state income tax systems to create a level playing field between self-insurance and third-
party insurance. ‘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 law, which is why America needs
the tax changes proposed in the Archer-Jacobs bill.

Health Care in the Information Age. The traditional philosophy of HMOs
‘was summed up by an HMO manager several years ago: “Patients do what their doctors tell
them to do; therefore, if you can tell doctors how to practice medicine, you can cut costs.”
This approach assumes that patients are compliant because they do not know what services
they are not receiving.

‘A model based on patient ignorance, however, is unlikely to survive in the new
Information Age. Increasingly, patients will use the Internet and other computer services to
tap into various medical libraries and databases, discuss ailments with other network users
and follow diagnosis decision trees. Thus, the best model for the future is one that
assumes that patients will know as much as their doctors — not about how to practice
medicine but about what medical practice offers.

‘One such model is Medical Savings Accounts. Using their accounts, patients will,
seek doctors who are financial advisors as well as health advisors. Physicians will be
aided by sophisticated computer programs. No large bureaucracy will be required. When
all patients have ready access to information, doctors acting as their agents will probably
outperform most bureaucracies.

In order to take full advantage of the information age, however, Congress needs
give patients, health care providers and insurers the freedom fo experiment with the most
efficient and cost effective ways of providing quality health care.


12

announced that, beginning next year, Medicare will spend more than it takes in. By 2002,
it will be completely bankrupt. If this happens, no one in America will have Medicare—No
‘one, Something must be done to protect, preserve and improve this vital program. It must
bbe done in a manner that gives our nation’s seniors more choices in health care; that gives
them better, higher quality health care; and, most importantly, ensures that Medicare will be
there for them and for generations to come.

I'm hopeful that MSAs will play a vital role in achieving these goals. During last
month's bearings on the potential role that MSAs might have in the Medicare program, I
was especially impressed with testimony of Peter Ferrara, a Senior Fellow with the
National Center for Policy Analysis out of Dallas, Texas. Mr. Ferrara highlighted a
proposal that he and Dr. John Goodman, the father of MSAs, drafted. Under that
proposal, seniors would be free to withdraw their share of Medicare spending each year
and use it to purchase private coverage of their choice, including an MSA option. Under
the MSA option, the senior would use part of the funds to purchase a high-deductible
bealth insurance policy. The remaining funds would be placed in an MSA and used to pay
for medical expenses below the deductible. The seaior citizen would be able to withdraw
any remaining MSA funds at the end of the year and use them for any purpose. Like
MSAs in the non-Medicare setting, MSAs for Medicare recipieats would create effective
incentives for recipients to be cost- and quality-conscious in their health care decisions
while at the same time providing seniors with greater choice of bealth care providers and
services.

In closing, I want to again thank you Mr. Chairman and my colleagues on the
‘Subcommittee for the opportunity to testify before you today. When I began my campaign
for the United States Congress nearly two years ago, this nation was facing one greatest
public policy challenges it has ever faced. Health care reform was the hot topic and
everyone was looking for ways to halt skyrocketing costs and address such problems as
portability and pre-existing conditions. The current occupants of the White House were
advocating the goverment takeover of one-seventh of our nation’s economy as the
solution to these problems. I took a different route. I campaigned on a little-known reform
called the Medical Savings Account because it was the free-market altemative to the
government-knows-best type of reform that was being proposed. Health care decisions are
best made by individuals, not governments. It made sense two years ago. It makes sense
today.

Thank you.


people can do what Joi did because of the tax disincentives involved.’ Joi will have
to put after-tax dollars into her savings account. Medisave would level the playing
field and encourage many others to save.

Another associate with a good idea is Cindy Pierce, who is with me today. Cindy is
an hourly Wal-Mart associate and a young mother who we're happy to report is
going to have her second baby soon. Cindy, who lives in Missouri, gave us this in
1994 as an expense savings idea. Let me read it:

Consider a payroll deduction for the health insurance deductible to be
put in a reserve and credited to that associate. Then as each associate
incurs claims that will go to the deductible, the amount can be taken
from the account and reimbursed to the associate, either by separate
check or though their payroll check.

Her supervisor wrote:

Excellent idea! This would help associates to save money for
unexpected bills that would go to deductible.

Please give Wal-Mart families such as Cindy's a medisave option.
Thank you.


19

And I would love to come back and talk about that at some other
time.

I do believe that individuals can make these decisions. They will
make good decisions for their families if we simply level the
playingfield and give the same kind of preference as we do to other
types of care.

‘hank you, Mr. Chairman.
(The prepared statement follows:]


the employer pays in insurance premiums for the cur-
rent health care plan.

There are substantial differences among proposals,
concerning the tax treatment of the investment
income that would accumulate on unspent MSA
funds. Some proposals would tax the interest earn-
ings on MSA account dollars. Others would allow
investment earnings to accumulate tax free.

Proposals also differ in regard to how much
money could accumulate in an MSA. And there are
differences in what is specified as appropriate non-
medical circumstances for making withdrawals from
the MSAs.

Conclusion. If either contributions to or medical
withdrawals from MSAs were taxed, there would be
no particular advantage to having one. Few employ-
ees would want an MSA, and few employers would
establish them. On the other hand, if there are no
limits on pre-tax contributions and the tax-free
buildup of funds, MSAs would lead to greater gov-
‘ernment subsidization of health care and lost tax rev-
enues. MSAs could then become a tax shelter for the
well-to-do and a tax-free vehicle for special-purpose
savings (e.g., down payments on first homes). The
tax treatment of MSAs must be skillfully crafted to
encourage their adoption, while discouraging their
use as mere tax-planning devices.

4, Administrative Expenses

Currently, administrative expenses for all the insured
plans in the United States average 15% of claims pay-
ments. MSAs could reduce some of this expense.
Employees would have direct access to the funds in
their MSA account, so they would not need to file any
claims.

However, the administrative costs of the high-
deductible component must be considered, too. With
a standard (low) deductible plan, there are many low-
cost claims. For these, administrative expenses repre-
sent a high percentage of the claim payments. The low-
cost claims are avoided with a high-deductible plan.
But insurers will absorb considerable expense in man-
aging the complex cases under the high-deductible
plan. For example, a $2,100 claim with a $2,000
deductible in place will be expensive to administer.
The insured amount is only $100, but the entire $2,100
of expenses must be verified as covered expenses.

For the MSAs themselves, however, administrative
costs will probably be much lower than with a stan-
dard low-deductible plan. In fact, if MSAs are not

44

subject to expenses like premium taxes, sales com-
missions, or extensive reporting for tax purposes,
administrative expenses could be as low as 2%.

Conclusion. Administrative expenses, which now
account for approximately 15% of claims payments,
would be about the same for high-deductible
replacement plans. There would be overall adminis-
trative cost savings, however, because there would be
fewer claims to process. The administrative expens-
€s for MSAs would be lower than the expenses for
other types of health insurance. Thus, for a com-
bined MSA/high-deductible plan, administrative
costs will be less than the current 15%.

5.Health Plan Options

Adverse selection is one possible consequence of
employers offering MSAs as one of a range of health
‘coverage options for their employees.

Roughly defined, adverse selection results when
individuals attempt to figure out, and then opt for,
the insurance coverage that provides them with the
greatest financial benefit. Presented with a range of
health plans, the healthier people would tend to pick
the high-deductible, low-cost plan, The less healthy
would usually choose a low-copayment plan. The
effects of this selection process are increased premi-
tums for the low-copayment plans and corresponding
decreases in premiums for the high-deductible plans.

But even more problematic is the case in which
the MSA is offered alongside other plans whose fun-
damental philosophy and design differ dramatically
from that of the MSA—managed care plans.

The current environment is built around a system
of management controls and discounts. The extreme
approach, traditional HMOs, combines both of
these. Integrating the MSA concept into this envi-
ronment presents significant problems. The goal of
the government and employer should be to preserve
the savings achieved by the current environment
while offering the employee more influence in the
purchase of health care.

The simplest solution for employers would be to
offer the managed care plan as a totally separate
option. It would be possible, but difficult, to inte-
{grate managed care into the framework of the MSA
itself. The latter approach would require a major
restructuring of the copayment and reimbursement
structure of the traditional HMO. State and federal
law would have to be modified to permit HMOs to
compete within this changed environment.

RESEARCH BRIEF MAY 1995 3


0)

TESTIMONY OF REP. PAT ROBERTS
FAMILY MEDICAL SAVINGS ACCOUNTS
HEARING BEFORE THE
HOUSE WAYS AND MEANS SUBCOMMITTEE ON HEALTH
JUNE 27, 1995

Mr. Chairman, thank you for the opportunity to discuss health insurance reform with you
today, particularly Medical Savings Accounts (MSAs) and their impact on the health of rural
Americans. 1 am pleased that this committee has introduced legislation which will greatly improve
the health care insurance options for all Americans, rural and urban alike.

One-quarter of the U.S. population--about 65 million persons--reside in rural areas. Rural
communities have unique characteristics and special needs that pose challenges to providing rural
health care services, Rural residents are more likely than urban residents to be uninsured. ‘They
are often out of the mainstream of employment-based health insurance coverage because they are
self-insured farmers and ranchers or seasonally employed workers such as custom harvesters
Many rural residents are employed by small businesses that do not provide health insurance
benefits or are unemployed altogether. As a result, a higher proportion of rural residents must
purchase individual health insurance policies on their own. These policies are generally more
costly than group coverage and make health insurance coverage less affordable in rural areas.

However, compromise is a way of life for rural residents and we in rural America are used
to developing our own solutions to health care problems. Rural consumers are not looking for
‘more federal handouts or regulatory schemes, Rural Americans are looking for the proper tools
to make their own decisions and help themselves. Medical Savings Accounts (MSAs) are one
such tool that will help farmers and ranchers meet their health care needs,

Farmers and small business proprietors prefer an approach to health insurance coverage
that puts them in charge of their own health care dollars. The Family Medical Savings and
Investment Act does just that. This approach will allow individuals to control their spending
through the use of a high deductible catastrophic plan combined with the MSA trust to pay for
smaller medical bills. These plans encourage savings and responsible spending decisions. MSAs
help ensure that individuals and families have adequate health insurance in times of economic
hardship or unemployment. Since MSAs are portable, they also eliminate the fear of losing health
benefits due to a job loss or change. Furthermore, individuals have the option to choose the plan
that works best for them.

‘As we move into a new “managed care world”, MSAs will become an even more
important tool in rural areas. This is partly because there are not many doctors or hospitals to
‘manage in rural areas. I've often asked the question, “How do you manage care that is not
there”? While I support efforts to integrate health services and strongly encourage the
networking of facilities and providers, managed care is simply not readily available in much of
rural America. Many rural health care consumers are a little nervous about the possibility of
someone or some corporation coming into their community and telling them where they will have
to go for care, Ifindividuals are in control of their own health spending through an MSA, they
are also in control of choosing their own doctor and health care facility, Until managed care
becomes more established in underpopulated rural areas, MSAs will protect and preserve the right

of the patient to choose his or her own family doctor.

The House Agriculture Committee held a hearing on rural health care last March where I
heard from a variety of rural health providers and consumers from across the country. The theme
of “freedom of choice” and “individual responsibility” came through loud and clear. Several
witnesses strongly recommended that Congress create MSAs or Medi-Save accounts in order to
encourage this responsiblity and preserve choice. A soybean farmer from Georgia told me that
“farmers can be part of the solution by designing and managing their own coverage”. While
MSAs may not be a panacea for health insurance, I believe they are a part of the solution,

Thanks to the work of your committee, we are making progress in our efforts to improve
health care options for those in rural areas. By restoring the tax deduction for the self-employed
to 25 percent earlier this year, your committee has taken the first step to bring tax fairness to rural
residents, 1 am still hopeful we can increase this deduction to 100 percent in the near future. The
Family Medical Savings and Investment Act is another step to increase insurance options and
improve the health care of rural Americans.

‘Again, thank you for this opportunity to share my thoughts with you this morning. As
always, it has been a pleasure meeting with this committee. J applaud you in your efforts to
establish Medical Savings Accounts and look forward to working with you,



47

tax treatment is a forceful impediment to the widespread use of
this popular free market health care reform.

1 am pleased to be here today to support the same tax treatment
for health care savings as for health care spending, and I will be
happy to take your questions.

‘he prepared statement follows:]


84

Chairman THoMas. I thank the panel very much, and the gen-
tleman from Louisiana wishes to inquire.

Mr. McCrery. Thank you, Mr. Chairman.

Mr. Rateliff, you offer four different kinds of health insurance
packages?

Mr. RATELIFF. Yes, sir.

Mr. McCrery. Approximately how many of your employees are
covered by the high-deductible choice?

Mr. RATELIFF. The highest deductible? We have a—let me briefly
explain—$250, $500, $750, and $1,000. There is about 8 percent in
the thousand dollar coverage.

Mr. McCrerv. And is that what you—is the thousand dollar de-
ductible what you would describe as your MSA account?

Mr. RATELIFF. No, sir. We have not designed an MSA account,
per se. That example was one of our associates that chose that
route. She didn’t know what to call it but she chose that as a way
to save premiums, set the money aside and use it as she needed
it.

Mr. MCCRERY. So, do you see more employees moving to higher
deductible policies; is that a trend in your company?

Mr. RaTELIFF. Yes, sir, we offered these—we just began offering
these about 3 years ago. We had lower deductibles. We began offer-
ing multiple options and this is exactly what we have seen, associ-
ates like Joi that have moved up to higher deductible levels and
reduced their premium costs and saved the difference.

Mr. McCrery. And what has been the experience with your com-
pany in terms of your overall health care costs?

Mr. RaTELIFF. This last year we had—we are a self-insured plan,
which the company pays about two-thirds of the cost, and our plan
was flat. We had no premium rate increase this year.

Mr. McCrery. Is that unusual?

Mr. RATELIFF. Very unusual.

Mr. McCrery. Ms. Samuelson, if MSAs are made tax deductible,
put on the same basis as any other health insurance vehicle, do
you think that insurance companies will go out of business or will
they adapt to the change, and create new insurance products?
What is your opinion on that?

Ms. SAMUELSON. I do not think they will go out of business. I
think they will start marketing more catastrophic health insurance
policies. Cornell is a self-insured employer, so ] am not sure I am
adequately representing the view of insurers, but New York State
insurers have an advantage already.

Mr. McCrery. Well, I happen to agree with you. I think the in-
surance industry will adapt rather readily to the concept of MSAs
and begin to offer a variety of vehicles to employers who are not
self-insured and to the marketplace in general.

Mr. Chairman, those are all the questions I have of this panel.

Chairman Tuomas. I thank the gentleman. The gentleman from
Nevada.

Mr. ENSIGN. Thank you, Mr. Chairman.

Mayor, a couple of questions. First of all, if we apply this to the
Federal employees, do you think that we will have similar numbers
of people signing up? And a lot of people have talked about the risk


106

Cost management will become more critical as the medical revolution gains in
momentum and offers medical advances that promise to abate cancer, fight heart
disease, and prolong life. The unlocking of genetic codes will change medicine forever.
Unless we deal with the realities of today, the medical triumphs of tomorrow will be
available only for the privileged.

We recognized the need to address the future in 1987 when we urged passage of
an Ohio law that enabled Blue Cross & Blue Shield of Ohio to negotiate for the best
hospital rates for its 1.5 million customers.

This action helped Cleveland drop from the fourth most expensive hospital city in
the U.S. to the 33rd in nine years. By projecting the "Cleveland Model” nationwide, an
annual savings of $20 billion could be achieved, enough to cover nearly 12 million
uninsured Americans.

In addition, Blue Cross & Blue Shield of Ohio joined with the Greater Cleveland
Growth Association (Cleveland's chamber of commerce) and the Council of Smaller
Enterprises to create an alliance which led to the nation’s biggest small group purchasing
coalition for health care. This prototype has been the subject of study by other groups
across the country.

Blue Cross & Blue Shield of Ohio has also taken the lead in containing health
care costs by fighting systemic waste and fraud. Experts estimate that 25% of the cost of
the U.S. health care system is lost through waste and fraud. That is nearly $230 billion
annually. Even a partial list of potential savings shows the significance of the problem:

© $4 billion annually if uniform claim forms and electronic claims processing
and billing could be put on line nationally, according to the U.S.
Department of Health and Human Services.

© $20 billion through the reduction of unnecessary patient care and other
administrative savings through computerized patient records, as estimated
by the U.S. General Accounting Office and the Department of Health and
Human Services.

© $80 billion by the elimination of health care fraud, estimated at upward of
10 percent of total medical expenditures by the U.S. General Ac in
Office. In Cleveland alone, a special fraud squad set up by Blue Cross &
Blue Shield of Ohio has saved an average of $2 million a year.

. $42 billion that is attributed by the American Medical Association to the
treatment that results from unhealthy habits such as smoking, drinking,
obesity, and violence.

© $10 billion that is lost to the insurance system by the 12 million Americans
who choose not to take available health insurance and make the rest of us
pay more for coverage.

© $6 billion in excessive drugmaker profits and research and development of
"me too" drugs that represent no therapeutic gain, according to the U.S.
Office of Technology Assessment and the House Energy and Commerce
Committee.

© $19 billion of excess costs from the 11% of physician procedures deemed
unnecessary or inappropriate, as estimated by the Value Health Sciences,
Blue Cross & Blue Shield Association, and U.S. Health Care Financing
Administration.


25

Other critics of MSAs contend that MSAs will be chosen
by the healthy and that this adverse selection would drive up the
cost of other types of insurance. One could make exactly the
same argument about managed care, or for that matter, the
marketing and pricing strategies of "traditional" insurance. In
practice, the potential of adverse selection for MSAs does not
seem to be a problem for those companies already using non-tax

deferred accounts.

It is clear that if this country is going to reduce its health
care inflationary spiral, someone is going to control the
spending. Government bureaucrats have been racheting the
tourniquet for the past decade, and managed care gatekeepers
are increasingly making those decisions in the private sector.
The question is not whether choices are going to be made. The
simple fact is that they will and nothing that this Congress does
can change that. But we can address the question as to who
makes those choices. Congress should enact Medical Savings
Account legislation for individuals and retirees, encouraging
health care consumers to be just as knowledgeable and cost-
conscious as my patients were. . . and to make those choices for
themselves.

Thank you again, Mr. Chairman, for the opportunity to
submit these remarks. I look forward to working with you and
the Members of the Committee to see that the goal of Medical
Savings Accounts becomes a reality.


67

by case management may prefer to go with a medical savings ac-
count and the high-deductible plan, whereas under the current sit-
uation they would stay with the low-deductible plan to preserve
their choice.

Mr. McCRrERY. So, are you saying that there is——

Mr. HENDEE. You are not necessarily just going to get the low
cost people moving to the MSA.

Mr. McCrery. Is it your opinion that the risk selection problems
associated with MSAs is no greater than that associated with

Ss.

Mr. HENDEE. I agree that an MSA option produces selection con-
cerns comparable to those produced by an HMO option. Depending
on the specific situation those concerns may be greater or less.

Mr. McCrery. OK. Thank you.

Mr. CHRISTENSEN. I thank the panel for their testimony.

I would now call up the next panel, Hon. Bret Schundler, Jean
Samuelson, and Charles Rateliff.

Chairman THOMAS [presiding]. I want to welcome the panel and
tell you that if you have a statement we will make it a part of the
record without objection, and you can address the Subcommittee in
any way you see fit in the time available to you. And we will go
first with the mayor of Jersey City, New Jersey, Hon. Bret

undler,

STATEMENT OF HON. BRET SCHUNDLER, MAYOR, JERSEY
CITY, NEW JERSEY

Mr. SCHUNDLER. Thank you for allowing me to join you today. I
want to express my strong support for H.R. 1818, the Family Medi-
cal Savings and Investment Act of 1995, which grants contributions
to medical savings accounts with the same sort of tax deductibility
now permitted only for the payment of health insurance premiums.
I think this is the most constructive and important piece of health
care reform legislation that this Congress will face.

Last year, Jersey City, New Jersey, was one of the first public
entities in the United States to provide MSAs to its employees.
Previously, all of our employees were in the medical—what is
called the State health benefits plan, which provides three options
for our employees. One is a stan , low-deductible indemnity pol-
icy; the second is an HMO; and the third is a preferred provider
option plan.

What we have done is added a fourth option which is a cata-
strophic policy. with a medical savings account. And I might add
the catastrophic policy mirrors the State low-deductible policy. So,
the benefits that are covered are 100 percent the same, but what
you have is a higher deductible with the MSA option.

Right off the bat, 56 percent of our eligible employees chose the
MSA option over their previous coverage. And we expect that per-
centage to rise to over 90 next year. Moreover, for every employee
who has chosen the MSA option, the city has achieved immediate
budgetary savings of $500, and we expect even greater savings to
be realized in the future.

Now, how has the MSA been able to please both our employees
and reduce our health care costs? The answer is relatively simple.
In the past, Jersey City covered its management employees


CoO YN DW BF BW

RN Ne ee Be Be ee Be eB
RBREBBRBSGCRSBAVIABAEBDEAS

Xl
9
ent (as defined in section 152) of such in-

dividual, but only to the extent such
amounts are not compensated for by insur-
ance or otherwise, or

“(ii) for long-term care insurance for
such individual, spouse, or dependent.

“(B) HEALTH PLAN COVERAGE MAY NOT

BE PURCHASED FROM ACCOUNT.—

“(i) IN GENERAL.—Such term shall
not include any amount paid for coverage
under a health plan unless such plan is a
catastrophic health plan.

“(ii) EXCEPTION.—Clause (i) shall
not apply to any amount paid for long-
term care insurance.

“(3) ACCOUNT HOLDER.—The term ‘account
holder’ means the individual on whose behalf the
medical savings account was established.

“(4) CERTAIN RULES TO APPLY.—Rules similar
to the following rules shall apply for purposes of this
section:

“(A) Section 219(d)(2) (relating to no de-
duction for rollovers).
“(B) Section 219(£)(3) (relating to time

when contributions deemed made).


COI AHF WN

iN] OS Se
RPBBPEPBFSCewWIABDEBEAS

v
2

Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.

This Act may be cited as the ‘Family Medical Sav-
ings and Investment Act of 1995”.

SEC. 2. MEDICAL SAVINGS ACCOUNTS.

(a) Ix GENERAL.—Part VII of subchapter B of chap-
ter 1 of the Internal Revenue Code of 1986 (relating to
additional itemized deductions for individuals) is amended
by redesignating section 220 as section 221 and by insert-
ing after section 219 the following new section:

“SEC. 220. MEDICAL SAVINGS ACCOUNTS.

“(a) DEDUCTION ALLOWED.—In the case of an indi-
vidual who is an eligible individual for any month during
the taxable year, there shall be allowed as a deduction for
the taxable year an amount equal to the aggregate amount
paid in cash during such taxable year by such individual
to a medical savings account of such individual.

“(b) LIMITATIONS.—

“(1) IX GENERAL.—Except as otherwise pro-

vided in this subsection, the amount allowable as a

deduction under subsection (a) to an individual for

the taxable vear shall not exceed the lesser of—

“(A) $2,500, or


22

In my medical practice, patients who spent their own dollars on
sometimes very complex procedures were quite knowledgeable
about the quality issues in addition to the cost.

My own sister has a child with Down’s syndrome. She has taken
over the health care of that child. She is very knowledgeable about
Down's syndrome and works very closely with her pediatrician.
Where there is an interest, there will be knowledge.

Health care consumers can, and do, make wise decisions. By set-
ting up MSAs as an option for Americans, this Committee will take
a giant step toward eliminating overutilization of health care serv-
ices. I look forward to working with this Committee on this prob-
lem.

Thank you.

[The prepared statement follows:]


53

is $1,500. {See Figure 1]. The total out-of-pocket exposure is $375 per individual and
‘$500 per family. [See Figure I]

FIGURED
Options for NCPA Employees
Family
Conventional Medical Savings
Policy! Account Policy
Deductible $500 $2,000
Maximum
copayment $1,002 70°
MSA deposit $1,500
exposure $1,500 $500

| The figures inthis columnare per family member up toa maximum of three people
2.20 percent of the first $5,000 of expenses above the deductible.

NCPA employees may use their MSA funds to see any deci, enter any espia. or
pay any medical bill. However, spending counts toward satisfying the deductible on!

the sevice or procedure i covered under the heath plan. for pe, Smployees ca pay
for dental care or eye glasses with their MSAs, but those expenses do not apply toward the
deductible. Furthermore, all spending counts toward the deductible only if employees see
doctors within a network. If they go outside the network, only 75 percent of “usual and
customary” fees are counted.

In the future, the buildup of MSA funds will give the employees important options
with respect to expensive medical procedures. For example, 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 use their MSA funds to go outside the
network and 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.

+ MSAs would restore the ent relationship, making doctors agents of
Patients, rather than agents of a 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.

. rwork and administrative costs would be greatly reduced; since patients would
ro ft ls diel onofce MSA my co yas wel acy
be by insurance

* Those who live healthy lives and avoid risky behavior would benefit financially from
those choices.


62

say, well, you could reduce the premium by $800, some $600, but,
generally, we found our models to be quite consistent.

Of course, if you have any individual cases, as I understand Dr.
Goodman has, and, of course, as he says, it has just started so real-
ly we do not know what the situation will be, but if you just have
20 or 30 people, you could easily have cost savings of $1,500 or
$2,000 if you have cost increases.

Mr. Carvin. I will give Dr. Goodman a chance, if I might. Using
your figures, the $828 savings, that gets eroded if it is a small
amount that the employer puts in, if I understand your testimony,
unless the employee buys in, this is not really my savings for
health care, the savings are not as much. And if there are other
options allowed under the employer's plans, only the healthier peo-
ple will likely opt into the medical savings account. Is that right?

Mr. HusTeaD. It is a caution we make that those type of things
could happen. We think, or at least I think, that a large employer
with a number of options in their plan, can control that situation.
But if you take a group where you do allow current options to con-
tinue and where you do set up the MSAs; if you compare the sav-
ings to what would occur if you moved everybody to a high-deduct-
ible plan, you generate less savings if you allow selection to occur.

Mr. CaRDIN. Dr. Goodman, if I understand your plan, you only
have that one plan so your employees are in the high-deductible

plan.

Mr. GoopMaN. That is correct.

Mr. CaRDIN. So, you do not run that risk.

Also, you are putting a significant amount of money into their
savings accounts so they really do have an interest in trying to
save some money.

Mr. GOODMAN. That is correct.

Mr. CARDIN. Have you experienced this t; of savings, the
$1,500, and is that net of the tax advantages? You are not getting
a tax advantage right now.

Mr. GoopMaN. No, we are not. We have to pay taxes on all the
money deposited, which is a feature the Archer bill, of course,
would change. But we do pay taxes on it, even if the money is
spent on medical care. We have to pay taxes on the deposits to the
medical savings account.

Mr. CaRDIN. You believe that you will be able to realize a $1,500
per employee savings that you are giving back to the employees
through the medical savings accounts.

Mr. GOODMAN. We have already done it.

What we did was we held the employer’s total cost constant and
saved enough to put $1,500 in the medical savings account. Now,
employees will spend part of that money. In fact, we anticipate half
the money will be spent by employees on medical care.

Mr. CaRDIN. Trying to look at this from the employer’s point of
view right now. From the employer's point of view, it came out no
additional cost.

Mr. GoopMaNn. That’s right.

Mr. CarDIN. Thank you, Mr. Chairman.

Mr. CHRISTENSEN. Mr. Ensign.

Mr. ENSIGN. Thank you, Mr. Chairman.


H.R. 1818, THE FAMILY MEDICAL SAVINGS AND
INVESTMENT ACT

HEARING

BEFORE THE

SUBCOMMITTEE ON HEALTH

OF THE

COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
FIRST SESSION

JUNE 27, 1995

Serial 104-80

Printed for the use of the Committee on Ways and Means

ee

U.S. GOVERNMENT PRINTING OFFICE
98-259 CC WASHINGTON : 1997

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

ISBN 0-16-055081-5
a



88

City of Jersey City - MSA Pilot Program

MSA Participant Profile

Average age: 42.2yrs.

72% are male
28% are female

61% are married
36% are single
4% are divorced

37% have coverage 10(Employee Only)
22% have coverage 40(Employee and Spouse)
36% have coverage 50(Employee and Family)
5% have coverage 80(Employee/Child/Children)


Set

STATEMENT OF THE GROUP HEALTH ASSOCIATION OF AMERICA

This testimony is submitted for the hearing record by the Group Health Association of America
(GHAA), the leading national association for health maintenance organizations (HMOs).
GHAA's 385 member HMOs serve 80 percent of the 50 million Americans who receive health
care from HMOs. Our member plans started — and continue to lead ~- the nation's move to high
quality, organized health care delivery.

‘The Group Health Association of America (GHAA) appreciates the opportunity to submit this
statement for the record to discuss the Chairman's "Family Medical Savings and Investment Act
of 1995" as well as other proposals that establish tax-preferred medical savings accounts
(MSAs). GHAA supports the need for expanded choice of coverage options in the health care
marketplace. However, as Congress works towards this goal, it is important that all options be
treated in an equitable manner, both in terms of tax and regulatory treatment.

GHAA applauds Chairman Bill Archer and Representative Andrew Jacobs’ interest in providing
consumers with an additional option for their health care benefits coverage and in encouraging
individuals to become more educated and prudent consumers of health care services. However,
we have concerns with certain features of the H.R. 1818, specifically the mandatory linkage with
catastrophic coverage, the unlimited accumulation of unused tax-preferred MSA funds, and the
ability to use MSA funds for non-health related expenses.

Our concems with elements of H.R. 1818, as well as with other proposals that link MSAs with
catastrophic coverage, are focused on the competitive advantage that these proposals grant to
catastrophic coverage over other forms of comprehensive coverage, including HMOs. By
restricting access to MSAs, individuals who might otherwise select HMO coverage may be
encouraged to purchase catastrophic coverage, losing the benefits of HMO-based care delivery.
In many ways, HMOs' philosophy is fundamentally at odds with catastrophic coverage, and thus,
with proposals that link MSAs with catastrophic coverage.

HMOs believe that the availability of preventive care and early treatment for health problems
promotes better health and is more cost-effective than traditional fee-for-service coverage. In
addition, HMOs treat health problems in a comprehensive, coordinated fashion to ensure that
patients receive the most appropriate care in the most appropriate setting. The indemnity-
based catastrophic coverage that is likely to be available under an MSA/catastrophic coverage
option provides a fragmented, uncoordinated approach. This lack of coordination and continuity
imposes unnecessary costs and exposes patients to unnecessary risks.

H.R. 1818: "The Family Medical Savings and Investment Act of 1995"

H.R. 1818 would allow eligible individuals to establish a tax-preferred "medical savings
account" (MSA) if they have health insurance coverage through a catastrophic plan.
Catastrophic coverage is defined as a health plan that provides coverage for health services after
the enrollee has met a minimum deductible of $1,800 for individuals or $3,600 for families.
Individuals who receive catastrophic coverage from their employer would be able to deduct the
amount that either their employer or they had contributed to their MSA during the plan year, up
to the lesser of the catastrophic plan's deductible or $2,500 ($5,000 for families). Self-employed
individuals and individuals without employer-provided coverage could deduct contributions to
their MSA, but could not use money in their MSA to pay for their catastrophic plan premiums
(such payments would be treated as they are under current tax law, self-employed individuals
could deduct 30 percent of their premiums and individuals could deduct premiums to the extent
that they exceed 7.5 percent of their adjusted gross income).

MSA participants could not use their MSA funds to purchase health benefits coverage (including
catastrophic coverage), except for long-term care coverage. Withdrawals from an MSA would


104TH CONGRESS
LO HER, 1818

To

To

amend the Internal Revenue Code of 1986 to allow a deduction for
contributions to a medical savings account by any individual who is
covered under a catastrophic coverage health plan.

IN THE HOUSE OF REPRESENTATIVES
JUNE 13, 1995

. ARCHER (for himself, Mr. Jacoss, Mr. THOMas, Mr. DeLay, Mr.

CRANE, Mr. SHaw, Mr. Bu: of Kentucky, Mr. HouGHTON, Mr.
HERGER, Mr. MCCRERY, Mr. HANcocK, Mr. Camp, Mr. RAMSTAD, Mr.
ZIMMER, Mr. NUSSLE, Mr. SAM JOHNSON of Texas, Ms. DUNN of Wash-
ington, Mr. CoLLIns of Georgia, Mr. PORTMAN, Mr. ENGLISH of Penn-
sylvania, Mr. ENSIGN, Mr. CHRISTENSEN, Mr. SoLoMon, Mr. Youna of
Alaska, Mr. MYERS of Indiana, Mr. DoRNaN, Mr. SMITH of Texas, Mr.
ROHRABACHER, Mr. Frost, Mr. Haut of Texas, Mr. BURTON of Indi-
ana, Mr. LIPINSKI, Mr. TORRICELLI, Mrs. VUCANOVICH, Mr. SAXTON,
Mr. CALLAHAN, Mr. GALLEGLY, Mr. PICKETT, Mr. Upton, Mr.
PosHaRD, Mr. STEARNS, Mr. BARTLETT of Maryland, Mr. BREWSTER,
Mr. Crapo, Mr. HILLeary, Mr. INGLIS of South Carolina, Mr.
KNOLLENBERG, Mr. MAN2ZULLO, Mr. Royce, Mr. TALENT, Mr:
CHAMBLISS, Mr. CHRYSLER, Mr. GANSKE, Mr. JONES, Mr. LaRGENT,
Mr. THORNBERRY, Mr. WatTS of Oklahoma, Mr. WELLER, Mr. WHITE,
Mr. WicKER, Mr. HOKE, and Mrs. JOHNSON of Connecticut) introduced
the following bill; which was referred to the Committee on Ways and
Means

A BILL

amend the Internal Revenue Code of 1986 to allow a
deduction for contributions to a medical savings account
by any individual who is covered under a catastrophic
coverage health plan.

ay)


City of Jersey city
Bret Schundler, Mayor

MEDICAL SAVINGS ACCOUNT (MSA) PILOT PROGRAM

Employee Census (3/1/97)

MSA
Employee Only. 49
Employee/Spous: 25
Employee/Family: 43
Employee/Children: 7
Total: 124 (56%)
Traditional
Employee Only: 24
Employee/Spouse: 24
Employee/Family: 13

Employee/Children: 2
Total: 63 (29%)

Blue Choice (POS)

Employee Only: 6
Employee/Spouse: 3
Employee/Family: 15
Employee/Children: 3
Total: 27(12%)
HMO Blue
Employee Only: 2
Employee/Spouse: 1
Employee/Family: 3
Employee/Children: 1
Total: 7(3%)
GRAND TOTAL: 221

Note: Page 108:(Lines 2473 - 2476)
Page 113:(Lines 2565 - 2567)


10

MSAS alleviate this problem by giving people control over their own health care
dollars. When they know and understand that it’s their own money they are spending,
individuals are much more careful and selective about the medical services they use. This
increased price sensitivity results in more efficient use of health care resources and, thus,
lower health care costs.

The Rand Corporation has confirmed this. In a study conducted in the early 1980s,
researchers studied the health care decisions of over 2,000 families. What they discovered
was that the lower the health insurance deductible, the greater the utilization with no
discernible difference in health outcomes. When these findings are extrapolated, the Rand
study shows that when people are spending their own money on health care they spend 30
percent less with no adverse effect on health.

Second, MSAs encourage savings by individuals. Our country is facing a savings
crisis; we have the lowest savings rate in the industrialized world, As a matter of public
policy we must do everything we can to encourage people to save money. MSAs provide a
vehicle for employees to save their hard-eamed dollars. Unlike Flexible Spending
Accounts (FSAs), where the funds in the account remain the property of the employer and
any unused funds traditionally revert to the employer, all money in an MSA belongs to the
individual. This money can be saved by the individual to cover future health care
expenses.

Third, MSAs are completely portable. One of the greatest concems tbat I bear from
Nebraskans and others about is “job-lock” -- the situation in which individuals are scared to
leave their current job because they might lose their health insurance. MSAs, unlike
traditional employer-provided health insurance, follow the individual. They allow
individuals to save money that can cover health care expenditures and insurance during
temporary lapses in employment.

Finally, MSAs are a proven tool in cutting health care costs with no adverse affect
on the individual’s health. We've all heard how Forbes magazine, Dominion Resources,


69

health care costs by maintaining choice and incentivizing citizens
to get what is good for them, and what actually makes fiscal sense
for all of us, that is a great power and that is a great positive.

I would like to conclude by simply saying I think Congress
should immediately offer medical savings accounts to federal em-
ployees. It would represent a far greater savings to the American
taxpayer if you make this available as an option. You do not have
to replace anything you offer your employees today. You should
simply give them an additional option.

I might add, if you did the same with Medicare and Medicaid you
would dramatically reduce health care costs in America. If you
have that combined effect with Jersey City and Medicaid/Medicare
and Federal employees all having an MSA option, I think you will
take the wind out of health care inflation.

In short, I would like the Ways and Means Committee to move
quickly to pass the Family Medical Savings and Investment Act of
1995. Thane you very much.

[The prepared statement follows:]


64

tient’s knowledge. But it is more of a legal statement that says just
because you get in does not mean we will pay the whole bill.

Mr. McDERMOTT. So, people should read this card very carefully
if they decide they want to get involved in it.

Mr. HusteEaD. That is correct.

Mr. McDeERMoTT. Let me ask a question about the plan. Dr.
Goodman, could you tell me, the people who are in your plan, what.
is the age range? What is the oldest person and the youngest per-
son in your plan?

Mr. GooDMAN. Oh, my gosh. Probably 65, 64; 65 would be the
oldest and 19 or 20 would be the youngest.

Mr. McDERMoTT. What is the average?

Mr. GoopMan. Approximately 35.

Mr. McDermott. Thirty-five. So basically healthy young people?

Mr. GoopMaNn. Yes. Reasonably healthy.

Mr. McDERMOTT. Reasonably healthy.

Mr. GooDMAN. We have some employees with health problems.

Mr. McDeRmMoTr. And when they pay money for their health
care, they reach into their medical savings account to pay for some-
thing, does that money get counted against their deductible under
the health plan; or is it only on certain procedures that are covered
in the health plan that to be counted toward the deductible?

Mr. GoopMaN. As long as it is a covered expense, it is counted
against the deductible. If they stay within the network, all they
spend counts against the deductible.

Mr. McDERMoTT. But if they have—so if the medical savings
plan is very narrow—for instance, does it include mental health
benefits?

Mr. GOoDMAN. Some mental health benefits, but I cannot tell
you the extent of them.

Mr. McDERMoTT. So, if they go beyond this narrow little mental
health benefit, then anything they spend beyond that would not be
counted against the deductible?

Mr. GooDMAN. I did not say it was narrow or little. There is
some mental health benefit, but I cannot tell you the extent of it.
But once they go outside the plan, which they are free to do and
they have the money that allows them to do that, that does not
count toward the deductible.

Mr. McDERMOTT. I see. So, they could really spend their whole
account outside of the plan on medical benefits, since the definition
of medical benefits for which the medical savings account could be
used is a fairly broad one. But the plan might be narrow, and,
therefore, would never count against the deductible. Then, if they
had a big problem, they would have a big deductible all of a sud-

len.

Is that a fair assessment of a potential problem?

Mr. GoopMAN. That is fair, but that same statement could be
made about the conventional plan that we had last year. In other
words, the movement to the medical savings account did not really
change the range of benefits employees were entitled to. What it
does is it allows them to manage more of their own health care dol-
lars,


COD mM IY DH eB YN

ee
RP BBEBSBSIUIABDEBSAE

XVI
13

which is includible in gross income under para-

graph (1).

“(B) DISABILITY OR DEATH CASES.—Sub-
paragraph (A) shall not apply if the payment or
distribution is made after the account holder
becomes disabled within the meaning of section
72(m)(7) or dies.

- “(3) ROLLOVERS.—Paragraph (1) shall not
apply to any amount paid or distributed out of a
medical savings account to the account holder if the
entire amount received (includmg money and any
other property) is paid into another medical savings
account for the benefit of such holder not later than
the 60th day after the day on which he received the
payment or distribution.

“(4) COORDINATION WITH MEDICAL EXPENSE
DEDUCTION.—For purposes of section 213, any pay-
ment or distribution out of a medical savings ac-
count for qualified medical expenses shall not be
treated as an expense paid for medical care to the
extent of the amount of such payment or distribu-
tion which is exeludable from gross income solely by
reason of paragraph (1)(A).

“(g) COST-OF-LIVING ADJUSTMENT.—


34

thereby inure to the benefit of the Medicare Program and the Med-
icaid Program and the unemployed generally.

Chairman THomas. If you will hang on for just a moment, I be-
lieve the spirit has moved. the gentleman from Washington.

Mr. McDERMOTT. Mr. Chairman, thank you. I just wanted to ask
a question. Many of the people on the panel are advocates of chang-
ing the tax structure to some kind of flat tax or something. Can
you ell me how this would work in relationship to a flat tax sys-
tem?

Chairman ARCHER. With a flat tax, you would still have—you
would still have, I assume, although I do not know what flat tax
proposal you are looking at, it is one thing to talk about a flat tax,
it is another thing to analyze all of the details of it, but it is very
possible that it could still have the same tax deductibility con-
sequences under a flat tax, depending on how it is arranged.

f you go to taxing goods and services, which I would like to do,
then you do not have to worry about tax deductions for anything
because you are not taxing income in any way, shape, or form. So,
there is no need to be concerned about how the income tax law will
apply to these sorts of programs.

Mr. MCDERMOTT. So, you are really saying that you think that
under a flat tax you would still have tax deductibility of health in-
surance.

Chairman ARCHER. Depending on—I am not the advocate of the
flat tax in this Congress, but depending on the actual formulation
of the flat tax, it is very possible that you could.

Mr. McDeRmort. Thank you, Mr. Chairman.

Chairman THOMAS. Thank you. Once again, I want to thank the
panel.

The Chair would request that the next panel consisting of Mr.
Hustead, Mr. Hendee, and Mr. Goodman please come forward. The
Chair would inform each of the members if you have a written
statement it will be made a part of the record without objection
and you may proceed to inform the Subcommittee in any way you
see fit in the time afforded to you.

Mr. Hustead.

STATEMENT OF EDWIN C. HUSTEAD, SENIOR VICE
PRESIDENT, HAY/HUGGINS, ON BEHALF OF AMERICAN
ACADEMY OF ACTUARIES MEDICAL SAVINGS ACCOUNT
WORK GROUP

Mr. HusteaD. Thank you, Mr. Chairman.

My name is Edwin Hustead. I am the chair of the American
Academy of Actuaries’ work group on medical savings accounts and
also a senior vice president with the Hay/Huggins actuarial con-
sulting firm.

We have prepared a general report on medical savings accounts,
which was delivered in May and hopefully has been of some use,
and are now proceeding to a report and a study specifically on H.R.
1818 and other proposals.

I think it is helpful, when you think in terms of a medical sav-
ings account and a high-deductible deductible plan and their effect,
to think of three steps in the process: First, there would be the ena-
bling legislation, such as H.R. 1818; second, employers and insur-


6

Medical Savings Accounts

‘As the leading source of employee opinion on workplace benefits issues, Workplace Pulse examined
employee opinion on Medical Savings Accounts. Initiclly, the survey looked at tax advantage incentives
to encourage workers fo save for health care needs. One question asked: “Do you think the government
provides adequate incentives through tax advantages for the average working person to save for their

current and future health celated needs, yes or no?”

Adequate Tax Incentives Available

85%]
Uncertain +
om 20% 40% om 20% 100%
‘Workplace Pulse National Survey’
Survey Report

Sune 27, 1995, SURVEYS OF AMERICA INC.


55

Mr. CHRISTENSEN. Thank you, Dr. Goodman.

Since the NCPA, National Center for Policy Analysis, has its own
medical savings plan, how difficult was it for you to convert from
the health care plan a year or two ago to its current MSA type of
plan?

Mr. GoopMAN. It was not difficult at all. Now, we are a small
business. We only have 28 employees and, therefore, we cannot af-
ford to give choices to our employees a larger organization could.
We consulted with all of them, and whatever we did, it had to be
the same plan for eve: .

Mr. CHRISTENSEN. Did you find that the MSAs have been defi-
cient in providing health care coverage with respect to any particu-
lar type of health care; for example, spital stays of specific types
of medical procedures? Are there any deficiencies thus far in the
plan; and what has been the overall general reaction of the employ-
ees?

Mr. GOODMAN. We have been in the plan since January 1, so we
have not had a tremendous amount of experience with it. But it is
comparable to other plans that other employers have had for a
longer period of time.

The basic plan covers basic medical care, but there are certain
things that we do not cover, and people can use their medical sav-
ings accounts, for example, to buy eyeglasses and certain other
kinds of care that are not covered by the plan. Our employees have
flexibility, and, of course, what they do not spend at the end of the
year they get to take home and keep.

Mr. CHRISTENSEN. How much do you anticipate the MSAs saving
your company in administrative costs?

Mr. GoopMaN. Our goal in making this transition was that I did
not want the cost to the employer to increase. In the two columns
that you are looking at, from two different insurance companies,
the cost to us remained the same. My instructions were, let us put
as much as we can in the medical savings account with no in-
creased cost to the employer.

Now, what this means is that the savings we get under this plan,
the employees §et to keep it. That is true of most medical savings
account plans. It is wrong to think of them primarily as designed
to save money for the employer. They do not. Primarily, the people
who economize and save money in their account get to keep it.
That is a good feature of this kind of incentive system. It is de-
signed so that those who economize get the benefits of their econo-
mizing.

Mr CHRISTENSEN. Some States have already enacted legislation
that would allow favorable tax treatment for MSAs. I know Michi-
gan was one of them. We heard Congressman Chrysler testify ear-
lier. How significant of an impact do you see H.R. 1818 having on
the States and what specific legislation do you see would have to
be enacted to accomplish that goal?

Mr. GOODMAN. At the State level?

Mr. CHRISTENSEN. Yes.

Mr. GoopMaN. Really, none. There are about 14 States now that
have adopted medical savings accounts under their State income
tax laws. But what most States do is they piggyback on the Federal
Tax Code. So, if medical savings accounts were created under Fed-


16

Chairman THOMAS. I thank the gentleman.
The gentleman from Michigan, Mr. Chrysler, welcome back.

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

Mr. CHRYSLER. Thank you, Mr. Chairman, and Members of the
Committee. Thank you for inviting me here today to relate to you
and the American people the positive experience my company en-
joys with medical savings accounts.

At my company, RCI, we use medical savings accounts as our an-
swer for health insurance and we are proof positive that they work.
Michigan had the wisdom and the vision to enact medical savings
accounts in 1993. After our first year of implementation, we can al-
ready say that the program has been an enormous success. While
our medical savings account plan carries substantially higher bene-
fits than our former insurance plan, our annual health care ex-
penditures per employee was actually reduced by $600 from $4,800
to $4,200. ‘That is a savings of 14.3 percent in just 1 year.

At RCI, an employee with dependents received $3,000 in a medi-
cal savings account. Single employees receive $1,500 in their ac-
counts. With this MSA, the employee can purchase any kind of
health service they want, medical, dental, prescription drugs, any-
thing they need, as long as it is medical. Any money left in the
MSA at the end of the year is the employee’s money to keep. Sev-
enty-five percent of the employees at RCI received money back,
usually over $1,000, at the end of our first year.

I will say that the average American will spend about $1,000 per
year on health care. Coupled with the employee’s medical savings
accounts is a $1,500 insurance policy put into place in the event
the account is exhausted. Any additional medical expenses above
the MSA are paid by this policy. It is similar to car insurance,
where you have a high-deductible.

For the employees, this health care plan is beneficial in two
ways: First, by being in control of their health care dollars they can
receive a return at the end of the year; second, it creates an incen-
tive to take better care of themselves through preventive measures,
to avoid costlier medical procedures later.

When it is the employee’s own money, they will spend it wisely,
asking how much it will cost, and shopping around for the best
price. That is the best way to control cost. Free enterprise, alive
and well.

With an average healthy life, an individual who puts money
away each year from his or her medical savings accounts,
compounding it over a lifetime of work, will have a substantial nest
egg of well in excess of $100,000 at retirement. And that is exactl:
when it is needed, because about 80 percent of our health care dol-
lars are used in the last 6 months of life.

Currently, no tax advantages exist to rollover remaining MSA ac-
counts to the following years, leaving most employees to take the
cash option at the end of the year. If Congress authorizes MSAs
and grants them tax deductible status, these programs will have an
unlimited appeal to both employees and employers, providing a
win-win situation for everyone involved.


BILL ARCHER RANT OTE
TM et as
canna , reece
ways ano MEANS Congress of the United States eel
Bouse of Representatives ‘x Se S29
ows comers ere
‘on tananion napa
June 27, 1995

Statement of the Honorable Bill Archer
Committee on Ways and Means
Subcommittee on Health
Hearing on H.R. 1818

Mr. Chairman and members of the Subcommittee, I appreciate the opportunity
to be here today to discuss an issue that is important to all of us.

Less than a year ago, the American people dismissed a plan to create a new
government run health care system.

The people spoke and we listened.

Today as we begin to undertake health care reform that is carefully targeted
towards identified problems, we recognize that people want more personal choice and
control over their health care spending. The bill before you today (H.R. 1818), the
Family Medical Savings and Investment Act, does just that. I’m pleased that my
colleague and friend — Andy Jacobs ~ joined me in developing this proposal -- one that
we believe will work. It will work for Texans and Hoosiers -- for Californians and
Virginians. It increases personal choice and personal responsibility for their health care
spending.

This bill provides American families with an opportunity not only to determine
‘what health services they need, but also to do their part to help put a lid on health care
costs -- costs that have continued to sky-rocket due to over-utilization and lack of
accountability.

H.R. 1818 allows individuals who are covered by a catastrophic health plan to
maintain a medical savings account to assist in paying for out-of-pocket expenses.

Within limits, contributions would be excludable from gross income if made by
the employer -- and deductible if made by the individual.

In general, the amount of the individual or employer contributions that could be
deducted or excluded for a taxable year would be the lesser of the deductible under the
catastrophic plan or the $2,500 if the MSA covers only the individual. The deduction
would be $5,000 if the MSA covers the individual and the spouse or a dependent of the


oT

STATEMENT
of the
AMERICAN MEDICAL ASSOCIATION
to the
Committee on Ways and Means

Subcommittee on Health
United States House of Representatives

RE: Medical Savings Accounts and the “Family Medical Savings and
Investment Act of 1995, H.R. 1818"

June 27, 1995

Mr. Chairman and Members of the Committee:

‘The American Medical Association (AMA) appreciates the opportunity to submit this statement
for the record regarding the “Family Medical Savings and Investment Act of 1995," and to
express our overwhelming support for the passage of medical savings accounts (MSA) legislation
by this Congress.

We commend Chairman Bill Archer and Representative Andrew Jacobs for their leadership in
introducing this legislation. MSAs, combined with catastrophic insurance coverage, represent
a refreshing and rational reform of our health delivery system. Empowering individuals with
the ability to choose the type of health care they will purchase and from whom has continued
to remain at the center of the health reform debate: Should we favor more government 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 the Archer-Jacobs MSA
legislation will help to provide health care consumers with that freedom.

For almost a decade, the AMA has been on record as supporting the adoption of MSAs as an
option 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 MSAs not only represent a cost effective
approach to providing health care, but also strengthen the market for medical care by assuring
patients more freedom of choice.

We understand that the Archer-Jacobs legislation would allow individuals to establish a medical
savings accounts in conjunction with a catastrophic health policy. Such catastrophic health plan
would be a plan that has a deductible amount of at least $1,800 for an individual or $3,600 if
the plan provides coverage for more than one individual.

Within certain limits as described in the Archer-Jacobs legislation, employer contributions would
be excludable from gross income if made by the employer and deductible if made by the
individual. The amount of individual contributions that could be deducted or employer
contributions that could be excluded for a taxable year would be the lesser of either the

bealth plan's deductible, or $2,500 per individual or $5000 if the MSA covers a
family. Withdrawals from a MSA would be excluded from income if used for qualified medical
expenses for the individual or family.

‘There are many advantages to using MSAs and the AMA would like to touch on several reasons
‘we believe the Archer-Jacobs bill would be beneficial to our health care delivery system.


33

Mrs. JOHNSON OF CONNECTICUT. Chairman Archer, to clarify on
the record, what kinds of expenses would be deductible under a
medical savings account approach?

Chairman ARCHER. The normal medical expenses, which I be-
lieve that we have already clarified under the current law.

Mrs. JOHNSON OF CONNECTICUT. It is impressive that the medi-
cal savings account allows deductions for a lot more medical ex-
penses than most insurance policies allow. You can deduct the cost
of glasses, for example. The definition is in the Code. It defines the
medical expenses that you can deduct over and above 7.5 percent
of income.

But it will allow families to deduct prescription medications. It
will not depend on whether you have a policy that covers prescrip-
tions. It will allow you to deduct prescription medications, and I
think dental visits, and vision care. So, it allows a far more com-
prehensive approach in support of health care benefits than any in-
dividual insurance plan, and I want to make that really clear on
the record, because it provides an option that nothing else in the
market provides.

I do want to commend my colleague, Mr. Roberts, because there
are areas of the country in which managed care is not going to be
the right answer. There are areas of the country where fee-for-serv-
ice medicine is going to be the right answer. And as Mr. Ganske
pointed out, fee-for-service medicine is perfectly capable of control-
ling costs if the incentives are right. This is the only legislative pro-
posal out there that is going to assure that America will have the
kind of high quality health care system that is appropriate in each
area.

I do think this will mean that modernization of fee-for-service
medicine will take place and it will survive in those areas where
it ought to, and a family will have far more choices under this op-
tion than they have under any offer in the market now.

That is why it is such an important proposal, and I appreciate
your work on it. I appreciate the depth of experience of this panel.
We have never had a panel before us on this issue where there has
been such depth of experience. This is a mature proposal in a wa:
that it was not a few years ago, and I look forward to working with
you to pass it and provide for the American people the same kind
of choice that this week we are going to provide for seniors in
America through Medicare Select.

Chairman THOMAS. I thank the gentlelady. If there are no other
questions, I will thank the panel very mu:

Mr. JAcoss. Mr. Chairman, could I make one observation for the
record, take 30 seconds?

Chairman THomaS. The gentleman from Indiana.

Mr. JACOBS. The old saying is that a rising tide lifts all boats.
And the question has been raised about how in the world would
this proposal help people who do not have insurance, people who
are on Medicare, people who are not employed, self or otherwise?

And the answer is that a falling tide lowers all prices, if you
think about it. If you have millions of people in this country em-
ployed, exercising discretion and prudence in shopping, the prices
do not simply fall for them, they fall for the entire economy and


29

individual. Withdrawal from an MSA would be excludable from income if used for
medical expenses for the individual and his or her spouse or dependents.

The bill allows families to have the freedom to go to any doctor, hospital or
drugstore they would like. Families have control of how their health care dollars are
spent. If they find themselves facing health care costs when they are unemployed or
during retirement, the reserves accumulated in their medical savings account balances
can be used to mect those needs.

It is truly portable. You can take your medical savings account with you if you
change jobs or retire. Paperwork is reduced — expenses are simply paid out of the
MSA. Premium increases on the catastrophic plan are lower because the premium base
with a high deductible policy is lower.

Americans with conventional health insurance have few incentives to buy medical
services carefully.

I believe that this bill puts consumers in the loop and provides the American
family with a valuable tool to use to help make the family paycheck stretch further.

Thank you again for this opportunity to appear before your Subcommittee. I’ll be
glad to respond to any questions the Members may have.


58

«THE MEDICAL SAVINGS ACCOUNT PLAN een
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WE SUGGEST THAT YOU NOT CANCEL YOUR EXISTING COVERAGE UNTIL YOU RECEIVE THE CERTIFICATES OF COVERAGE FROM GOLDEN RULE.

(‘Section 3 EMPLOYEE AND DEPENDENT INFORMATION _
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‘A. Total Number of Employees (Partie and ful imo)
8, Total Number of FulTime Employees (A ful-time employee is one who works atleast 30 Rous par week and 48 weeks
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°C") and at least 60% of al fulltime employees (response “B"). Groups with 3-50 qualfed employees: the number ia
response D must be at least 90% of al qualified employees.

Is amy employeeldependent currenty on a continuation of beneits under COBRA or State Coninuation Law?
= Has any employeetdgpendent qualified fora continuation of benefits under COBRA or Stale Continuation Law and not yet elected

to continue coverage?
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tyes, please ist the 3s name(s).

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68

through the New Jersey State health benefits plan, as I mentioned.
Most chose the fee-for-service option where employees had to pay
a $200 front end deductible and a 20 percent copayment on the
first $2,000 of expenses for each covered family member.

That means if you had a family of four you could have potential
out of pocket expenses of up to $1,800 in medical expenses. That
would be 20 percent of $2,000 times four people, plus another $200
up front deductible. So, that comes to $1,800.

Under the MSA plan, the city purchases that catastrophic insur-
ance policy that covers 100 percent of the family’s medical costs
above $2,000. Then we put $1,800 into the medical savings ac-
count. This gives the family the opportunity to draw on that medi-
cal savings account to cover the Fest $1,800. They cover out-of-
pocket the next $200. And above that $2,000 limit, the insurance
covers 100 percent of their expenses.

If at the end of the year there is money left in the medical sav-
ings account, they will get a check for the unused portion of the
account. It is 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 than under the previous low-deductible
policy most of our employees chose.

To be precise, for a family of four, the out-of-pocket exposure goes
down from $1,800 to $200. Now, if the health care costs are low,
the family will actually have money rebated to it, representing
whatever is remaining in the MSA. Obviously, the prior low-de-
ductible policy never rebated money to you if you had low health
care costs.

The reason we expect to see over 90 percent next year is when
those rebate checks go out I suspect those who chose not to look
at the MSA plans just may reevaluate their medical health plan
needs.

Now, the cost to the city again is down by $500. Last year, it was
$6,800 for everybody who chose the standard plan. Now it is $6,300
and costs us $4,500 for the catastrophic insurance policy and
$1,800 for the cash contribution. So, that is a savings of $500 per
family.

We also expect to save even more money in the future as, again,
employees begin to look for value in the way they spend their
money. Forbes, Inc. has been able to reduce its health care pre-
miums by approximately 25 percent in the 3 years they have had
their plan in effect.

I know that the critics of MSA argue that many families, lured
by the prospect of a check at the end of the year, may not get nec-
essary care. I have to say from personal experience that is not the
way MSAs work. I recently went in for foot surgery to treat a re-
curring ailment and at the end the doctor offered to give me a pad-
ded shoe, for instance. I simply said, I do not need that, I already
have one at home. I might not have even brought up the subject.
had there not been a financial incentive to actually reduce my med-
ical cost.

The bottom line is that the American people are not afraid to
make informed judgments about their own health care needs. What
they are afraid of, however, is losing the opportunity to make their
own judgments because of third party rationing. If we can control


23

STATEMENT OF HON. GREG GANSKE,
A REPRESENTATIVE IN CONGRESS FROM THE STATE OF IOWA

Mr. Chairman, thank you for holding this important
hearing and for allowing me to testify.

I first want to applaud the Chairman of the Full Committee,
Mr. Archer, for his leadership in this area. I have had the
opportunity to discuss Medical Savings Accounts with him on
several occasions. His insights have proven valuable to me and
Iam sure will help guide this Congress.

As a plastic surgeon prior to becoming a Congressman last
November, I know from personal experience that when
consumers pay the bill, medical costs are controlled. While
most of my practice was reconstructive and paid for by third
party payers, I also did some cosmetic surgery. I can assure you
that when patients spend their own money, the free market can
work to hold down medical costs. Before most patients ever
walked into my office, they had probably called every other
plastic surgeon within fifty miles of Des Moines. They shopped
for the best package price which included all their expenses and
also considered the quality of each doctor they called.

All of my patients had many questions about options,
outcomes, and risks. But unlike my reconstructive patients,
those who came to me for cosmetic procedures were also very
concerned about price. Because no one else (the government or
an insurance company) was paying for their treatment, financial
aspects of one treatment option versus another were of much
greater concern to them.

And that is the basic reason that health care costs have
risen far faster than inflation. There is a fundamental disconnect
between the payor and the patient. When somebody else is
perceived as the payor, the goods and services are perceived as
being free and demand explodes and the patient doesn't care
what it costs.


109

Medical savings accounts, as designed under H.R. 1818, will also make a major
contribution to reducing the numbers of uninsured in this country, and lessening the
problem of “job-lock.” It will do this by providing employees with a source of funds to
pay for COBRA continuation coverage when they are between jobs. As you know, most
of the uninsured are without coverage only for a short period of time, usually when they
have lost their job. This is the very time when they are least able to afford to pay for health
insurance because they are without an income, MSAs directly address this very real
problem.

Many have referred to medical savings accounts as a cousin of the Section 125 flexible
spending account (FSA), H.R. 1818 brings these two closer together by allowing an
‘employee to make an annual contribution from an FSA into an MSA. By addressing FSAs
in their legislation, Chairman Archer and Rep. Jacobs have responded to the concerns
raised by employers about the uncertainty that has existed about Section 125. Section 125
remains a popular element of health care reform that many rely on not only for health care,
but for other cafeteria-type plans and services. CAHI believes that Section 125 will be
enhanced by H.R. 1818, and will not and should not, be jeopardized by Medical Savings
Accounts.

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,
my organization 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 I'm afraid there are still some misconceptions out there

The biggest concern we hear 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 HMOs and other managed care settings. This concern must be clearly
addressed and understood because it is so misleading, and possibly self-serving.

‘There are a few things we know about selection, One of them is that high users of health
care services avoid managed care whenever they can. Why? Because their one great
priority is to preserve their personal network of providers. Many observers attribute all of
‘managed care savings to this very process -- the young and healthy don’t mind going into
an HMO, because they don’t have ties to any particular physician. Therefore the average
cost of an HMO is lower. Foster Higgins surveyed nearly 1,000 mid-sized firms and
discovered that in dual choice situations, the indemnity plan was $1,000 more expensive
per employee than the HMO alternative because, “healthier employees choose the HMO,
and the indemnity plan is left with the poorer risks.” (Highlights, September, 1994) To
the extent MSAs help preserve their choice of provider, MSAs will be extremely attractive
to high risk individuals.

But that is just half the reason they would opt for an MSA. Under most traditional
indemnity plans, including fee-for-service PPOs, the insured is responsible for paying a
regular deductible and a substantial copayment, totaling thousands of dollars. In most
MSA arrangements we have seen, the high user of services will actually have to pay less
out of pocket than they do today, provided of course, that the tax advantages of the
Archer/Jacobs bill are available.

Because many state mandated benefits require first dollar coverage of certain services, the
catastrophic policy as defined in H.R,1818 would be illegal in those states. There are two
ways to address this problem, either of which would be acceptable to my organization:

1, Include a federal preemption of state benefit requirements for these
catastrophic insurance plans;

2, Include these state benefit requirements in the definition of “permitted
coverage,” thereby allowing the catastrophic policy to provide coverage
for those state mandates.


93

STATEMENT OF THE AMERICAN DENTAL ASSOCIATION
FOR THE RECORD
ON MEDICAL SAVINGS ACCOUNTS AND THE
“FAMILY MEDICAL SAVINGS AND INVESTMENT ACT OF 1995, H.R. 1818”

The American Dental Association (ADA) is very pleased to have an
opportunity to submit this statement for the record on the issue
of Medical Savings Accounts (MSAs). The Association is the
largest dental organization in the United states, representing
more than 140,000 dentists.

The ADA enthusiastically supports H.R. 1818, the "Family Medical
Savings and Investment Act of 1995", introduced by Chairman
Archer (R-TX) and Representative Jacobs (D-IN), which offers
consumers the option of managing their own insurance program
through medical savings accounts.

MSAs are a market-friendly means of controlling medical health
care costs by reducing demand for unnecessary medical services.
The advantages of MSAs are clear: they empower and motivate
individuals to seek only necessary, cost-effective care because
consumers will be using their own money. At the same time,
freedom of choice of providers is guaranteed; and the insurance
is portable because it belongs to the individual, thus addressing
the “job lock" issue that has been one of the major concerns of
health care reformers. MSAs can even increase coverage because
they can be used to cover services which may be important to the
individual, but which are not usually covered under more
traditional insurance.

Further, like millions of Americans, many dentists are self-
employed and may take only a 25 percent (30 percent beginning in
1996) deduction for premium payments for their health coverage.
This is a long-standing inequity ameliorated with MSAs.

The ADA commends the Chairman for his leadership in developing an
alternative insurance proposal as part of health system reform
that emphasizes equity, efficiency and individual responsibility.

H.R. 1818 permits an "eligible" individual to deduct annual
contributions to a Medical Savings Account (MSA) totaling the
lesser of $2,500 or the deductible under a catastrophic health
plan. The contribution ceiling is raised to $5,000 if the
catastrophic plan also covers a spouse or dependent. To become
"eligible" for an MSA, an individual is limited to catastrophic
health plan coverage, except for certain "permitted coverage"
including dental care only plans.

The bill defines catastrophic health plans as any health plan
that provides no compensation for expenses covered by the plan
until the expenses exceed $1,800 for an individual or $3,600 if
the plan covers more than one person. However, exceptions to
this deductible provision are allowed for "permitted coverage,"
including plans furnishing coverage only for dental care.
Withdrawals from an MSA are excluded from income if they are used
for "qualified medical expenses" for medical care as defined in


102

If healthy people are given an incentive to take their dollars out of the insurance
pool, the results could be disastrous for the older and sicker people who would be forced
to pay ever-higher premiums in a futile attempt to insure one another.

‘That's why the National Association of Insurance Commissioners opposes medical
savings accounts, saying "[A]sa result, the health insurance pool would contain a higher
proportion of "high-risk’ individuals and insurance costs would be higher for those left in
the health insurance pool."

The American Academy of Actuaries reached the same conclusion, stating, "Less
healthy individuals who need and select low-deductible insurance plans will likely pay
more for their coverage, since the most healthy and highest income persons in the group
are likely to select MSA programs." Thus, the Academy of Actuaries observed, "The
greatest losses will be for the employees with substantial health care expenditures.
Those with higher expenditures are primarily older employees and pregnant women.”

Even the Heritage Foundation, a principal supporter of MSAs, has conceded that
their appeal is limited largely to the so-called "young immortals" and those in higher
income brackets.

Medical savings accounts are presented as an incentive for the health care
consumer to shop independently for the best care and the best price. The outdated
premise for this argument evolved from a single 1979 Rand Institute Health Insurance
Study that implied that if people had to pay more out of pocket for medical care, they
would consume less. Significantly, the Rand study predated the introduction of managed
care, and could not take into account the gathering momentum of the medical
revolution.

Blue Cross & Blue Shield of Ohio concluded a major study two years ago to see if
MSAs made sense in a much more evolved medical marketplace. Our study of 38,729
families, a huge sample, demonstrated that MSAs would bankrupt our current system of
financing health care and significantly add to the cost of medical care.

The families in the study were insured through Blue Cross & Blue Shield of
Ohio's small-business insurance coverage. The total health care charges of the families
in the study for one year were a shade more than $159 million, a sum which reflected
typical utilization patterns. If MSAs such as those now being considered by the Ways
and Means Committee had been in effect, there would have been a shortfall of more
than $50 million, ‘That's because the sum of all catastrophic premiums plus all the
amounts actually withdrawn from MSAs to pay medical expenses, a much smaller
amount than that deposited, would have totalled less than $110 million.

The reason for that shortfall is self-evident. As numerous experts have observed,
MSAs would violate the basic tenet of underwriting: that the resources of many are
pooled to meet the extraordinary needs of a few. In short, the money that normally
would be pooled through the payment of premiums would instead be locked up in MSAs.
As a consequence, those funds would be retained in the accounts of the relatively
healthy, and would be unavailable for payment of the medical expenses of the relatively
sick. The bottom line would be that there would be insufficient funds within the system
to cover those who most need medical attention.

This would leave an insurer with one of two options. First, an insurer could
increase dramatically the cost of its policies, thus boosting the costs which MSAs are
‘meant to contain. Second, health insurers could exclude the 10% or so of families who
incurred the majority of health care costs. If insurers chose that option, MSAs effectively
would deprive the most frail, infirm, and chronically ill any health care coverage at all.


107

When you consider that these sums far exceed the estimated cost of covering the
nations’s uninsured, you get some idea of what could be done with these wasted dollars.
My point is that there is much we can do to streamline the health care system without
adding more money to it.

Conclusion

MSAs proponents ask the right question—how can staggering health care costs be
contained? But MSAs are the wrong answer.

In essence, MSAs would require taxpayers to provide a first-dollar subsidy for
costs that individuals can bear themselves. Moreover, that subsidy--by design—would be
higher for the affluent than for persons of limited means.

In return for that subsidy, taxpayers would get nothing but the bill. Health care
costs would not be reduced. To the extent costs would be affected at all, they would be
shifted rather than contained. Moreover, MSAs would have no impact on the great
majority of health care costs which are incurred beyond catastrophic deductibles.

The worst aspect of MSAs, however, would not be their expense or their failure to
contain costs. The greatest flaw of MSAs would be their devastating impact on
insurance markets.

By inducing healthier persons to gravitate towards high deductible plans, MSAs
would undermine the very purpose of insurance—spreading the financial burden of the
few who incur high medical expenses among the many who do not. The CBO got it
Tight-MSAs "could threaten the existence of standard health insurance.”

Health care reform is an extremely complex undertaking for which there are no
simple answers, If something sounds too good to be true, it usually isn’t. And nothing
sounds better than the premise of MSAs~that we can contain health care costs by
creating a vast new tax break. Unfortunately, it just isn’t so.

Health care costs can be contained, but not through the gimmickry of medical
savings accounts. I look forward to working with Congress and the Ways and Means
Committee to identify and implement the steps necessary to secure a sound financial
basis for our nation’s health care system.


CONTENTS

Text of H.R. 1818 ...
Advisory of June 15, 1995, announcing the hearing

WITNESSES

American Academy of Actuaries Medical Savings Account Work Group, Edwin
. Hustear
Archer, Hon, Bill, a Representative in Congress from the State of Texas
Christensen, Hon. Jon, a Representative in Congress from the State of

lebraska ...
Chrysler, Hon. ‘Dick, “a” Representative’ in’ Congress from ‘the "State of

ichigan

Ganske, Hon. Greg, a Representative in Congress from the State of lowa
Goodman, John C., National Center for Policy Analysis
Hay/Huggins, Edwin C; Hustead
Hendee, Peter G., Odell & Associates, In:
Hustead, Edwin C., Hay/Huggins, on behaii

ies Medical Savings Account Group
Jacobs, Hon. Andrew, a Representative in Congress from
National Center for Policy Analysis John C. Goodman .
Odell & Associates, Inc., Peter G. Hendee .
Rateliff, Charles R., Wal-Mart Stores, Inc -

, Hon. Pat, a Representative in Congre: :

Salmon, Hon. Matt, a Representative in Congress from the State of Arizona
Samuelson, Jean A., Cornell University
Schundler, Hon. Bret, Mayor, Jersey City,
Wal-Mart Stores, Inc., Charles R. Rateli

SUBMISSIONS FOR THE RECORD

American Dental Association, statement
American Medical Association, statement
Blue Cross & Blue Shield of Ohio, John Burry, Jr., statement
Council for Affordable Health Insurance, Alexandria, VA, Greg Scandlen,
statement ......
Group Health Association of America, statement
Virginia Bankers Association, Richmond, VA, John B. Vellines, letter ..

ath

wag

Bk

QBSSSSSak SESRS a


86

Mr. RATELIFF. We have no experience with it yet. We are just
studying it. And yes, we do believe long term that they will make
that conversion. We are getting too many cards and letters and
phone calls from associates that are asking to have those sorts of
options. They may not know—they do not call it Medisave or medi-
cal savings accounts.

Mr. ENSIGN. What do you think long-term it will do to your ad-
ministrative costs?

Mr. RATELIFF. That is a good question, too. Our costs currently
run about 3 percent. We felt like if we could cut those in half, I
think that is hard to estimate at this time, it would save us about
$7 to $8 million corporately. Since we are self-assured, we would
pass that back to lower premiums in the plan.

If I might address the previous question to Ms. Samuelson, we
believe a higher deductible option later on, having seen the pat-
terns we have seen so far of folks wanting higher deductibles,
would be something they would want. They would like to accumu-
late the money and move into a high-deductible, be able to continue
to reduce their premiums long term. We would like to see that.

Mr. ENsIGN. Very good. Thank you, panel, and thank you, Mr.
Chairman.

Chairman THOMAS. The gentleman from Maryland.

Mr. CaARDIN. Thank you, Mr. Chairman. Let me thank all our
witnesses for their testimony. It is very helpful to us.

Mayor Schundler, I am impressed by the results you have been
able to accomplish in Jersey City. It is very impressive the type of
savings you have been able to achieve for your taxpayers as well
as providing additional incentives for your employees.

When was that plan put into effect?

Mr. SCHUNDLER. This January.

Mr. CARDIN. So, you have just 6 months of experience?

Mr. SCHUNDLER. Right.

Mr. CarRDIN. At the present time. If I understand it, you offer
your employees a choice. They can get the identical benefit struc-
ture, the only difference being the deductible and copay.

Mr. SCHUNDLER. That’s right.

Mr. CarDIN. And they can choose to go into the medical savings
account plan or go into the traditional plan.

Mr. SCHUNDLER. Lower deductible plan.

Mr. CaRDIN. Right. What has been the experience? What is the
percentage difference?

Mr. SCHUNDLER. Fifty-six percent have chosen the MSA in the
first year. Again, I am convinced after the checks go out in Decem-
ber, we will see more switch into it.

Mr. CarRDIN. Have you noticed any trend as far as the age of the
employee or the health history of the employee as to which ones
are choosing which plans?

Mr. SCHUNDLER. No, I honestly have not studied that, so I can-
not answer it.

I think, again, one of the things we were able to do for our em-
ployees that was charted out for them, what the impact would be
on them if they had high costs or low costs. They benefit under ei-
ther scenario with the MSA.


46

Mr. CHRISTENSEN [presiding]. Mr. Hendee.

STATEMENT OF PETER G. HENDEE, CONSULTING ACTUARY,
ODELL & ASSOCIATES, INC., WINSTON-SALEM, NORTH
CAROLINA

Mr. HENDEE. Mr. Chairman, thank you for this opportunity to
testify regarding the Family Medical Savings and Investment Act
0 .

My name is Peter Hendee. I am a member of the American Acad-
emy of Actuaries and a Fellow of the Society of Actuaries. I am
here as a consulting actuary who practices in the health care fi-
nancing market.

This bill will encourage the use of a promising health care fi-
nancing mechanism. It will eliminate the handicap imposed in the
current tax law on health care savings by giving savings the same
tax treatment now reserved for health care spending. This will
make it practical for employers to provide medical savings accounts
for their employees.

Not only will medical savings accounts be put on a level
layingfield with other mechanisms for employee health care, the
ill also counters the current tax law’s bias against the self-em-

ployed and individuals who purchase their own health insurance.

ese people will continue to be at a tax disadvantage for the cata-
strophic portion of their health care financing, but their medical
savings accounts will be treated on a consistent basis with em-
ployer-provided health care.

I would like to address a couple of provisions of the bill. The dis-
tribution rules are reasonable and ey are not too onerous. The
taxes on distributions that are not used for health care are signifi-
cant enough to encourage responsible behavior. But very impor-
tantly, they are not excessive; the accountholder will feel that
money is available for a nonhealth care need if it arises, and this
is necessary for the accountholder to have an incentive to be a care-
ful purchaser of health care.

e bill also includes an automatic inflation adjustment for the
minimum catastrophic deductible, and that will make sure that
this critical plan feature receives the periodic attention it needs. It
needs attention because over time the rising cost of medical care
can make current deductibles less significant and that will weaken
the individual’s incentive to control health care spending.

One concern I have with the bill is that mandated insurance ben-
efits, such as first dollar coverage for certain preventive services,
are required by some States. As a result, in those States it may not
be legal to issue health insurance coverage that meets the proposed
definition of a catastrophic health plan. So, under this bill, citizens
of those States could not buy a catastrophic policy and set up a
medical savings account.

I do have two possible solutions for your consideration. The first
is to preempt the mandated benefit requirements, at least for cata-
strophic products to be used with medical savings accounts. And an
alternative is to e d the definition of “permitted coverage” in
this bill to include those mandated benefits.

Many States have enacted medical savings account legislation,
many others are considering it, but the unfavorable Federal income


32

raised and, hopefully, develop an MSA bill that will be the best for
all parties involved. I look forward to working with my colleagues
in that regard, and I thank you for your testimony.

Chairman THOMAS. Thank the gentleman from Maryland. The
gentleman from Texas.

Mr. JOHNSON. Thank you, Mr. Chairman.

Chairman Archer, I wonder if you could explain, maybe for the
record, why we want a penalty tax included on withdrawals one
and two. Is there any ultimate limit on what a savings plan can
accrue?

Chairman ARCHER. We felt that if this savings account was going
to be Protected to be used for medical needs, that simply being able
to withdraw at will was not a desirable thing to have.

We believe that it is very important that people should be en-
couraged to save and be able to accept personal responsibility to
the greatest degree possible, and, therefore, we feel that it is appro-
priate to have a penalty for withdrawal for unauthorized purposes.

There is no limit to how much can be accumulated in the medical
savings account.

Mr. JOHNSON. So over a 10-year period, it could go as high as
$20,000 to $30,000 if they wanted to?

Chairman ARCHER. If Fie were fortunate to do a lot of good pre-
ventive maintenance and keep yourself in good shape, eat right and
take care of yourself.

Mr. JOHNSON. Or found a good doctor like Ganske. Thank you,
sir. I appreciate it. Thank you, Mr. Chairman.

Chairman THOMAS. Thank you very much.

The gentleman from California, Mr. Stark.

Mr. STARK. Well, as I say, I want to thank the panel. I think that
there is evidence for a great deal of belief in free enterprise and
thrift and shopping for medical care, and I only wish that that
were sufficient to deal with the problem of the uninsured and the
rising cost of medical care.

Unfortunately, the Joint Committee, in analyzing this, says it is
assumed that this proposal would have a limited effect on the self-
employed who currently do not have insurance; for individuals
without insurance it would have a limited effect; for the low-income
insured it would increase the tax benefits available to those indi-
viduals, but they are assumed to be insufficient to induce low-in-
come individuals to purchase health care coverage. It does say,
however, the bill for high-income uninsureds could provide an in-
centive to some high-income individuals who were perhaps volun-
tarily uninsured.

So, it does sound like it is a good bill for the rich who can use
the tax deduction but will not do much, if anything, for 40 odd mil-
lion Americans without health care coverage or for those who are
attempting to have insurance in their own business. For the small
business person who cannot get insurance, and for the low-income
individuals in our country, it does not do much. For the high-in-
come folks, it does let them buildup a tax exempt savings account
with which they may have happier retirement years.

I look forward to the rest of the witnesses and appreciate our col-
leagues’ contributions today. Thank you, Mr. Chairman.

Chairman THoMas. Gentlewoman from Connecticut.


81

by either employer contributions, voluntary employee contributions,
or a combination of both.

Medisave is an idea that working men and women of America
want and will understand. We have received a number of calls and
letters from Wal-Mart associates around the country asking for the
kind of help that Medisave could provide. For example, one of our
hourly associates, Joi Easterling, had a good idea. Wal-Mart offers
four health plans currently with deductibles ranging from $250 to
$1,000. Joi switched from the $250 plan to the $1,000 plan and put
her biweekly payroll deduction savings in a special savings ac-
count. She estimated that her family would soon have enough sav-
ings to cover the higher deductible and then some. However, not
all people can do what Joi did because of the tax disincentives in-
volved. Joi will have to put aftertax dollars into her savings ac-
count. Medisave would level the playingfield and encourage many
others to save.

As I introduced Cindy earlier, Cindy has worked in several areas
of our company. Cindy is an hourly associate and a young mother
who we are happy to report is going to have her second baby soon.
Cindy lives in Missouri and gave us this idea in 1994 as an ex-
pense savings idea through a program we have, and if I could, I
would read it briefly.

She asked us to consider a payroll deduction for the health insur-
ance deductible to be put in a reserve and credited to that associ-
ate. Then as each associate incurs claims that will go to the deduct-
ible, the amount can be taken from the account and reimbursed to
the associate, either by separate check or through their payroll
¢

And it is her supervisor, Rose Cooksey, who wrote on here, excel-
lent idea; this would help associates to save money for unexpected
bills that would go to the deductible.

Please give Wal-Mart families such as Cindy’s the Medisave op-
tion. Thank you.

[The prepared statement follows:]


6

Putting off a tetanus shot or a flu shot may save a buck today,
but it may very well end up costing a whole lot more tomorrow. For
the healthy, there may be a reduction in the premium for their
health care coverage, but for those remaining in the standard poli-
cies, they will see a premium jump. Again, overall, there is no proof
that health care expenditures will be reduced as a result of the
availability of MSAs.

Thank you, Mr. Chairman.

Chairman Tuomas. And for the rest of the story, the gentleman
from Indiana, Mr. Jacobs.

STATEMENT OF HON. ANDREW JACOBS, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF INDIANA

Mr. Jacoss. Thank you, Mr. Chairman.

Obviously, Mr. Stark’s and my view of this is slightly different.
I am not in the habit of perpetrating scams, but it is in the eyes
of the beholder, I suppose.

The explosion in medical inflation occurred in the United States,
I believe the record will show, around 1965-1966, in the late
sixties. Coincident with that explosion was the advent of Medicare,
a very deep pocket. It was begun on an unfortunate model; namely,
that of the Pentagon—the infamous “cost plus contract,” which
meant that whatever your costs are would determine your profit;
the higher the cost, the higher the profit. It was an invitation to
excess and to waste.

By 1983, the Reagan administration—I had the honor of being
one of your predecessors, Mr. Chairman—the Reagan administra-
tion proposed the diagnostically related groups and the prospective
payment to cease that kind of nonsense and inject a little bit of
market incentive into the Medicare systems. If we had not passed
that law in 1983, God knows what would be left of Medicare now
more than a decade later.

The literature is rife with articles about third party payers. My
colleague, Mr. Christensen, has a very bad cold now. If he goes to
see a doctor, he will get over it—with all due respect to my friend
from Nevada, if he goes to see a doctor—we are not talking about
broken legislation now—he will get over it in 6 days. And if he does
not go to see a doctor, he will get over it in 6 days.

Now, if you are paying his bill and the doctor tells great jokes,
then maybe John would be tempted to go on over anyway. Or if I
have a hangnail and my doctor tells good jokes I might go anyway.
The point being that there is a difference between using money
that does not seem like yours and money that is yours. That is
what the medical savings account is all about.

My friend Pete says, well, there is no proof that that will save
money. To me, that is like saying there is no proof that if you do
push-ups you will be in better shape. It has been proved at the
Forbes organization, for example.

I listened to a woman in a meeting explain that with her medical
savings account she went to see a doctor who said she needed an
operation that cost $8,000. Well, she had the medical savings. That
is her money. So, she goes to a second one and says, you are crazy,
that guy is ripping you off, I can do it for $4,000. But she even
went to a third doctor and he said, you’re really crazy, you do not


ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HEALTH

FOR IMMEDIATE RELEASE CONTACT: (202) 225-3943
June 15, 1995
No. HL-12
Thomas Announces Hearing On. F , .
And Investment Act Of 1995"

Congressman Bill Thomas (R-CA), Chairman of the Subcommittee on Health of the
‘Committee on Ways and Means, today announced that the Subcommittee will hold a hearing
on H.R. 1818, the Family Medical Savings and Investment Act. The hearing will take place
on Tuesday, June 27, 1995, in the main Committee hearing room, 1100 Longworth
‘House Office Building, beginning at 11:00 a.m.

Oral testimony at this hearing will be heard from invited witnesses. Any individual or
organization not scheduled for an oral appearance may submit a written statement for
consideration by the Committee and for inclusion in the printed record of the hearing.

BACKGROUND:

‘The fact that Americans with conventional health insurance have few incentives to buy
medical services carefully or benefit from staying well are major factors affecting health care
cost growth. One approach to providing incentives for Americans to be more cost conscious
purchasers of medical services is to make available alternatives to conventional insurance such
‘as medical savings accounts (MSAs). Medical savings accounts are used to pay for out-of-
pocket medical expenses up to a catastrophic limit after which costs would be covered by
insurance. MSAs would give people more control over their health care dollars and the
‘opportunity to save the MSA funds not spent that year for future health care needs.

H.R. 1818, the Family Medical Savings and Investment Act of 1995, allows
individuals who are covered by a catastrophic health plan to maintain a medical savings
account to assist in saving for expenses not covered by the health plan. Within limits,
contributions would be excludable from gross income if made by the employer and deductible
if made by the individual. In general, the amount of the individual or employer contributions
that could be deducted or excluded for a taxable year would be the lesser of (1) the deductible
‘under the catastrophic health plan, or (2) $2,500 if the MSA covers only the individual or
$5,000 if the MSA covers the individual and the spouse or a dependent of the individual.
Withdrawals from an MSA would be excludable from income if used for medical expenses
for the individual and his or her spouse or dependents.

In announcing the hearing, Chairman Thomas stated: "The American people know
that health care spending must be reduced — it takes an ever increasing bite out of the average
family paycheck, What we are trying to do with this bill is provide people with a tool to help
them take control of their own health care

FOCUS OF THE HEARING:

‘The hearing will examine the issues involved in expanding health care coverage
options available to individuals and families under H.R. 1818. The Subcommittee is
Particularly interested in technical issues involved in implementation of the MSAs established
in HR. 1818.


85

selection. With the large amount that we get to potentially sign up,
do you think we would have problems with risk?

Mr. SCHUNDLER. I think you would get large amounts to sign up.
I think your experiences would be similar to my own. You would
achieve immediate savings. You would find some people, just by
virtue of not paying attention, would keep whatever they are choos-
ing now. And those who are paying attention would probably
switch immediately. The next year, after you sent the checks out,
you would see most of your people switch.

I do not think you would see adverse selection. As was testified
by someone earlier, I think, if anything, those who are concerned
because they know they have health problems and they know they
are going to be seeing a doctor, they may well have already been—
Because if they have seen a lot of doctors, they may already know
who they trust and those who they do not, so they are the most
averse toward going into an HMO. They want to go to a doctor be-
cause they know they have a real problem.

So, if anything, you will see a lot of people going into it who, in
fact, are more unhealthy, but that still gives them an incentive to
try to get the best deal. Again, it reduces their out-of-pocket ex-
pense when they go into the MSA versus staying in the current
policy. It also gives them the ability to stay with the doctor they
want. But, if per chance it should be a good year, they are going
to be directly getting money back, and that is a good thing. They
are going to want to get their health care costs under control.

Mr. ENSIGN. Could you address any potential conflicts? Are there
any with 1818 and the current State law that you know of?

Mr. SCHUNDLER. No, not at all, not at least in New Jersey.

I want to point out the provider we have offering the MSA to us
is actually Blue Cross/Blue Shield of New Jersey, who manages the
State plan. So, we directly went to the provider who is already pro-
viding the three options we had. We asked them to create a fourth
for us. The State gave us explicit permission to go and to pilot it
for the State’s benefit, to offer a fourth option, and most employees
are extremely happy and the insurance company was able to adapt
very quickly.

Mr. ENSIGN. Thank you.

Ms. Samuelson, right now 1818 single taxpayer can deduct up to
$2,500 annually. Do you think the bill would be more effective if
the individual was allowed to deduct, say, $2,000 initially and then
increase to $3,000, say over like a 7-year period? Do you think that
would make the bill any better?

Ms. SAMUELSON. I do not know. I do not see what effect that
would have on it. At least this way it is consistent with the depend-
ent care accounts.

Mr. EnsIGn. OK. Mr. Rateliff?

Mr. RATELIFF. Rateliff.

Mr. ENSIGN. OK. Mr. Rateliff, based on Wal-Mart’s experience
with MSAs and your employees, long-term do you see this being an
effective alternative? Do you think over the long term—we get
some of these switches, like maybe up to 90 percent in the first
couple of years. Do you think long-term employees will stay with
it?


14

tool in rural areas. This is partly because there are not many doc-
tors or hospitals to manage in a rural area.

have often asked the question, how do you manage care that
is not there? While I support efforts to really try to integrate the
health services and strongly encourage the networking of facilities
and providers, managed care is simply not readily available in
much of our rural areas. Many rural health care consumers are a
little nervous about the possibility of someone or some corporation
simply coming into their community and telling them where they
will have to go for care. If individuals are in control of their own
health spending through a medical savings account, they are also
in control of choosing their own doctor and their health care facil-
ity. Until the managed care becomes, and I would say if and when
it becomes, more established in the underpopulated rural areas,
the MSAs will protect and preserve the right of the patients to
choose his or her own family doctor.

Mr. Chairman, we had hearings in the sometimes powerful
House Agriculture Committee with the former Chairman Kika de
la Garza, and we heard from all sorts of rural health care provid-
ers, and the support was across the board, the Farm Bureau, the
Wheat Growers, other commodity groups; all farm organizations
endorsed the MSA.

I want to thank you for your leadership in this regard. I want
to thank you for restoring the tax deduction for the self-employed
up to 25 percent; it will be 30 next year. That is of the answer.

MSA is part of the answer. I urge swift and favorable passage
of this act and I thank you, sir, for the opportunity.

(The prepared statement follows:]


95

dental expenditures are out-of-pocket, while only about 20
percent of medical costs are directly borne by the patient.

The CATO Institute, long a proponent of medical savings accounts,
in its March 14 policy analysis, implicitly supports the
Association’s proposition that dental benefit plans already
strike a proper balance between patient and third-party
responsibility. According to the analysis, cost increases have
risen less rapidly for services characterized by lower third-
party payments. For example, from 1965 to 1990 inflation-
adjusted increases for hospitalization costs rose 350 percent and
physician costs increased by 250 percent, but dental costs rose
only 200 percent. In addition, "From 1960 to 1990 out-of-pocket
health spending relative to personal income did not increase at
all, Yet total health care spending relative to income tripled
during that period."

Further, linkage of dental coverage to a catastrophic plan is
also inappropriate. Medical benefit plans are inherently
different from dental plans. All medical benefit plans are,
first and foremost, intended to provide insurance against
catastrophic events that could bankrupt the average family.
Consequently, even high-deductible medical coverage serves the
primary purpose of medical coverage and, when linked with an MSA,
provides many individuals with appropriate incentives to cut
costs.

On the other hand, dental expenses are not catastrophic in
nature. In fact, the standard dental benefit plan is really not
an insurance plan at all, but a prepayment plan. First dollar
coverage in dental plans is invariably limited to preventive and
diagnostic services. Patients who require more extensive and
costly care must bear an increasingly greater share of the cost.
At the same time, most dental plans reimburse preventive services
at 100 percent of costs because prevention is such a integral,
cost-effective component to good oral health.

A high-deductible dental benefit plan, which would not reimburse
until a threshold amount is reached, would preclude payment of
preventive services for most people. Even on the surface, this
appears "penny wise and pound foolish" as a cost-control
mechanism in dentistry because it merely defers treatment, and,
therefore, will increase the eventual cost of dental care.
Individuals who choose to avail themselves of the MSA program
must not be required to settle for a dental coverage plan that
fails to cover preventive services at 100 percent. To require
otherwise would be a clear step backward for the approximately
110 million Americans with dental coverage and would support the
contention of MSA opponents that medical savings accounts
undermine preventive care efforts.


116

Your staff will have to determine the budgetary ramifications of this change, but
we suspect that the short term effect would be minimal. Society's long term
benefit should offset any short term budgetary impact.

Much of the debate centers over the inability of MSA's to take advantage of the
gains that Managed Care have brought to the table over the last few years. We
believe that it may be possible to merge the two concepts. Initially, we would
recommend a Preferred Provider Organization (PPO) network overlay. This
would at least allow MSA participants to take advantage of existing physician and
hospital contracts and discounts. Further extensions into gatekeepers, etc, will
evolve over time.

While it would appear that HR 1818's silence on this issue would allow MSA
administrators to proceed with Managed Care initiatives on their own, you may
wish to insert language encouraging these efforts.

In summary, let me repeat our strong support for this bill. We believe that this first step
will go a long way in solving one of the core problems in America’s health care system.

IJBV/bhe

Sincerely,

£04 Ve be .

& B. Vellines
Chief Administrative Officer

ISBN 0-16-055081-5

9°780160"550812

oO
——O
=——o
———O
——o.


38

Table 1
Cost of Different Copayment Designs- Individual Pian
JDeducholer Maximum Reduction
JOurotPocker Premio hom Basetine Premium
Baseine
$200/$,000 32.699 a
$1,0007S2,000 2178 523
'$1,500182.500 : 103
$$2,000/83,000 1.871 628
$9,000rS4,000 1.668 1.033
'$4.000/85,000 1.501 1.198
'$5.000/86,000 1.369 1.330

JSource: American Academy of Actuaries, Medical Savings Accounts: Cost Implications
{and Design Issues. Public Policy Monograph No.1, May 1985.

Note: Relative cost of plans after consideration of induction, belore consideration of the MSA.

What causes this reduction in premium? Raising the deductibles and out-of-pocket limits reduces
the portion of the bill paid for by insurance, inducing employees—now responsible for paying a
larger share of their health care costs—to use less health care services. This effect, termed
“induction” by the work group, may work so as to bring the consumer into the health care arena as
an active payer.

The work group assumes that employers will probably try to hold their health expenditures constant
with the introduction of the MSA and high-deductible plan. ‘The employer could keep the total
health care expense at $2,699 per person by putting the $828 in premium savings into an MSA
(Table 1). The total employer cost, $1,871 for the high-deductible plan and the $828 to the MSA,
would equal the cost of the low-deductible plan costing $2,699.

Factors Affecting Premium Savings

There are at least two aspects of MSAs that could reduce the premium savings employers would
otherwise enjoy by purchasing a less expensive high-deductible plan, and therefore, the amount that
an employer would be willing to contribute to an MSA. First, if employees consider their MSA
balance as little more than another form of insurance, then much of the savings from induction would
be lost. Consider, for example, a $500 health care expense. The current low-deductible plan would
pay $240 of the current cost, with the individual responsible for the remaining $260 of the $500
expense (Figure 1). The MSA/high-deductible, in contrast, would pay none of the cost (Figure 1).


92

Chairman THoMaS. The two examples you gave us of folks who
were prescient enough to ask for this without knowing the name
of it were in fact both hourly associates?

Mr. RATELIFF. Yes, sir.

Chairman THOMAS. If you do initiate any program like this, once
again we would appreciate having any data that you have in mate-
rials of age or income groups or other discernible categories who
see this perhaps as an option more than other categories. We think
it will be a definite plus as an additive. Some folks see it as a pana-
cea. I believe a number of folks testified today that as an additive
it certainly is an attractive option.

Mr. RaTELIFF. That is correct.

Chairman Tuomas. I have been urged by several of my col-
leagues to go ahead and move the bill today. This is a hearing, not
a markup, but I can assure you that sentiment expressed on both
sides of the aisle is largely in support of this concept. I just hope
we can quit talking and move the product.

I want to thank you very much for your testimony, once again,
indicating to Congress that things are going on in the private sec-
tor, Mrs. Samuelson, among State institutions, among cities, and
among the private sector, and it is time that Congress caught up
to the ideas that are out there. Thank you very much.

This hearing is adjourned.

(Whereupon, at 1:25 p.m., the hearing was adjourned.]

[Submissions for the record follow:]


56

eral tax law, it would automatically be created under most State
income tax systems.

Mr. CHRISTENSEN. My final question would be how could we im-
prove H.R. 1818? Any suggestions for improvement?

Mr. GOODMAN. Well, I would allow the money to grow tax free.
I cannot tell you now what the revenue loss as a result of that deci-
sion would be. But, I think it ought to function like a normal IRA.
That money should grow tax free. Certainly if when you pull it out
you are going to pay taxes plus a penalty, you should get the bene-
fits of tax free growth. But I support the act as now written.

Mr. CHRISTENSEN. Thank you very much.

Mr. Crane, any questions?

Mr. CRANE. Thank you, Mr. Chairman.

Mr. Hustead, if I read your testimony correctly, on balance, your
group thinks that medical savings accounts will be able to deliver
quality health care at a reduced rate; is that a correct reading?

Mr. Husteap. I think we say that if we are looking at a tradi-
tional fee-for-service plan and raising the deductible, that should be
able to deliver the same health care as now at a reduced rate, yes.

Mr. CRaNE. Have you ever designed an MSA plan for a client?

Mr. HusreaD. No, I have not.

Mr. CRANE. Have any of you had any experience in that realm?

Mr. HENDEE. I have designed one medical savings account pro-
gram and am currently designing another. Designing a program
generally involves raising the deductible and determining how
much money would be saved as a result of raising the deductible,
and then the employer makes a decision as to the appropriate level
of contribution to the account.

Mr. CRANE. I have heard that with a $200 deductible in contrast
to a $1,500 deductible policy, the differential in premium cost is al-
most four to one. Does that sound reasonable? In other words, you
would be paying four times as much for a $200 deductible than for
a $1,500 deductible.

Mr. HENDEE. It would depend a lot on the program of benefits
that you provided. The report of the Committee that Mr. Hustead
chairs indicates that for a change comparable to the one you de-
scribed, the savings would be on the order of $600 to $800. That
is my recollection, for that change in deductible. And depending on
what the total program of benefits was, that amount of money
could be a different percentage of the original premium.

Mr. CRANE. Thank you very much. Dr. Goodman.

Mr. GOODMAN. Well, if you look at market prices for insurance
around the country, you will see that the amount you save in pre-
miums by choosing a high deductible over a low deductible varies.
The most significant variable is how high are the health care costs
in the region generally. So, if you are in a high cost city, like New
York or Los Angeles, you will save much more by going to a higher
deductible than you will if you are in a low cost area or even an
average cost city like Dallas.

Mr. CRANE. I see. Thank you very much.

Mr. CHRISTENSEN. Mr. Stark.

Mr. Stark. Thank you, Mr. Chairman.

Mr. Hustead, you have produced, I suppose, the most comprehen-
sive report of this MSA concept. Did the insurance companies that


8

their own money they are spending, individuals are much more
careful and selective about the medical services they use. The in-
creased price sensitivity results in more efficient use of health care
resources, and, thus, lower health care costs.

The Rand Corp. has confirmed this. In a study conducted in the
early eighties, researchers studied the health care decisions of over
2,000 families. What they discovered was that the lower the health
insurance deductible, the greater the utilization with no discernible
difference in health outcomes. When these findings are extrapo-
lated, the Rand study shows when people are spending their own
money on health care, they spend 30 percent less with no adverse
effect on health.

Second, MSAs encourage savings by individuals. Our country is
facing a savings crisis. We have the lowest savings rate in the
industrialized world. As a matter of public policy, we must do ev-
erything we can to encourage people to save money. MSAs provide
a vehicle for employees to save their hard-earned dollars. Unlike
flexible spending accounts where the funds in the account remain
the property of the employer and any unused funds traditionally
revert to the employer, all money in an MSA belongs to the individ-
ual. This money can be saved by the individual to cover future
health care expenses.

Third, MSAs are completely portable. One of the greatest con-
cerns that I hear from Nebraskans and others about is “job lock,”
the situation which individuals are scared to leave their current job
because they might lose their health insurance. MSAs, unlike tra-
ditional employer-provided health insurance, follow the individual.
They allow individuals to save money that can cover health care
expenditures and insurance during temporary loss of employment.

And, finally, MSAs are a proven tool in cutting health care costs
with no adverse effect on the individual’s health. We have heard
numerous examples from Dominion Resources to Quaker Oats to
Golden Rule to even my colleague on my right and his company
where they testified last month before our Committee.

In conclusion, I want to touch just briefly on the issue that we
have been working on, that we will be working on later this year,
and that is the Medicare problem. I believe that MSAs also hold
a solution facing us with that problem.

Last month, we heard an individual from the National Center for
Policy Analysis, Peter Ferrara, testify and highlight a proposal
from Dr. John Goodman about how MSAs can help in reducing the
consumption with Medicare. I truly believe that using the MSAs
with the Medicare dilemma we are faced with to help create an
advantageous system for seniors, allow more opportunity, more cost
consciousness and place for emphasis on the individual.

I truly believe that MSAs are part of the answer to every phase
whether it is private, Medicare, or the entire health care system.
It is truly a revolutionary idea that has come.

I thank the Chairman for holding these hearings and thank you.
I will be glad to answer any questions and would ask that my full
testimony be entered into the record.

Chairman Tuomas. Without objection, all the written testimony
of the Members will be made a part of the record.

[The prepared statement follows:]


m4

Statement of Jean A. Samuelson
Director of Benefit Services
Comell University
Before the
Committee on Ways and Means
House of Representatives
June 27, 1995

Mr. Chairman and members of the Committee, I would like to
thank you for providing me the opportunity to testify on the Family
Medical Savings and Investment Act of 1995, HR 1818. My name is Jean
Samuelson, Director of Benefit Services, Comell University, Ithaca, New
York. At Comell and through various employee benefits organizations in
which I take an active role, we are always looking for the most innovative
ways to provide benefits choices fo our employers ‘We have investigated

of medical savings accounts for our employees and
Avil Condon our aalyi esau we want wo provide what ins for ot
workforce.

‘Therefore, we were especially pleased at the approach taken in this

‘We are aware that some believe that HR 1818 will diminish the
effectiveness of cafeteria plans. We are also aware that insurers and
others who design and administer benefit plans feel threatened by certain
Provisions of this bill, but we are encouraged that members and staff have
exhibited a willingness to work to resolve reasonable issues.

[t. Chairman, we applaud your statement that this bill is a
tamevor align Already, in meetings with staff, we
found willingness to work to resolve problems that arise for
particular constituencies. In the end, as these diverse interests bring their
‘creativity to the task, you and the Committee will fashion an even stronger

ine

Several of the organizations that I work with are also investigating
ical spending accounts and their appropriateness. I am active in the
County Health Care Coalition in westem New York state.
Several of us, employers of various sizes, will be receptive to this

i


XI
10
“(C) Except as provided in section 106(b),
section 219(f)(5) (relating to employer pay-
ments).
“(D) Section 408(h) (relating to custodial

accounts).

“(e) TAX TREATMENT OF ACCOUNTS.—

“(1) ACCOUNT TAXED AS GRANTOR TRUST.—

“(A) IN GENERAL.—Except as provided in
subparagraph (B), the account holder of a med-
ical savings account shall be treated for pur-
poses of this title as the owner of such account
and shall be subject to tax thereon in accord-
ance with subpart E of part I of subchapter J
of this chapter (relating to grantors and others
treated as substantial owners).

“(B) TREATMENT OF CAPITAL LOSSES.—
With respect to assets held in a medical savings
account, any capital loss for a taxable year
from the sale or exchange of such an asset shall
be allowed only to the extent of capital gains
from such assets for such taxable year. Any
capital loss which is disallowed under the pre-
ceding sentence shall be treated as a capital
loss from the sale or exchange of such an asset

in the next taxable year. For purposes of this


57

do a lot of high-deductible assist or enter your review? Or were
they contacted at all?

Mr. HusTeaD. We did get information from a lot of insurance
companies who sell individual products and the report does rec-
oncile our numbers with those individual products. We did go to
those employers who have said that they have MSA accounts that
are saving substantial money and in several cases we got informa-
tion, but it was fairly scarce. In other cases, we were not provided
any information. We did provide in the report the information that
was provided by several of these organizations.

Mr. Stark. Is that usual, that they will not give you policy infor-
mation?

Mr. HusTEAD. Well, the insurance policy information we got, be-
cause that is public information. The information on how employers
are managing their own plans, now, that often is not available be-
cause so many confusing things are happening within the organiza-
tion. They would have had to do a fairly good analysis process.

But I think we threw out our net and with our members were
able to get all the information that does exist on these plans.

Mr. Stark. Mr. Goodman, you are referred to as the father of
MSAs. Who is the mother? It seems to me that the chief contribu-
tors to the National Center for Policy Analysis are Golden Rule In-
surance. And Pat Rooney, he is the director; isn’t he?

Mr. GOODMAN. The premise is not correct. The chief contributors
to the NCPA—or should I say the chief contributor is not Golden
Rule Insurance Co. Golden Rule makes an annual contribution of
about $60,000 to our organization.

Mr. Stark. And Mr. Rooney is the director?

Mr. GoopMaN. No. He is the chairman of the Golden Rule. Our
annual budget is $3 million, and so that is a small part of our——

Mr. StarK. How much of the $3 million comes from insurance
companies?

Mr. GOODMAN. Pardon me?

Mr. Stark. How much of the $3 million comes from insurance
companies?

Mr. GoopMaN. Probably less than $100,000.

Mr. StTarK. Golden Rule is the big one, then.

Mr. GoopMaNn. Yes.

Mr. Stark. OK. We asked if you would send us more detail on
your plan. I presume you are going to send that on to us.

Mr. GoopMAN. Yes, I am. I received your note and I looked at
my plan and learned something I didn’t realize, and might not
have realized had you not requested it. Our plan does not include
a reference to medical savings accounts.

In other words, our contract with the insurance company is just
a high-deductible policy and the plan pays for all expenses over
$2,000. We have a separate arrangement with a third party admin-
istrator to manage our medical savings accounts. But, I will be
happy to send you the contract.

Mr. Stark. Yes. As I say, I would be interested because just as
Mr. Hustead said, some of these are a little hard to focus on just
what the terms are, and if one was writing legislation to enact
them, it would be helpful to know what the state of the art is.

[The following was subsequently received:]


63

Dr. Goodman, in your testimony you noted that the NCPA and
an insurance company established a preferred provider network.
Can you tell the Subcommittee a bit about how this PPO agree-
ment was achieved?

Mr. GoopMAN. No, I really can’t, except it appears on the surface
to me to be a very normal preferred provider arrangement in Dal-
las. It includes a large number of doctors and our employees do not
feel constrained by operating within the PPO network, although
some may choose to go outside it.

Mr. ENSIGN. Since the NCPA was able to establish a PPO, don’t
you think this factor is a very strong indication that MSAs can be
integrated into the existing health care system?

Mr. GoopMaN. Oh, yes. In fact, we have done it. And in fact most
private plans that have medical savings accounts are integrated
with some sort of managed care.

Mr. ENSIGN. Thank you. And thank you, Mr. Chairman.

Mr. CHRISTENSEN. Mr. McDermott.

Mr. McDermott. Thank you, Mr. Chairman. I recall Premier
Gorbachev being here and he gave us a warning once talking about
how you get along with Americans. He said you can always agree
sort of on the general principles but the devil is usually found in
the details. And I sort of have the feeling that we are talking a lit-
tle bit about the details here today.

Mr. Christensen was kind enough to pass out a card for one of
these medical savings accounts and I just absentmindedly started
reading the back side of it and since you guys are actuaries, and
you have these plans out there, I wonder if your card said some-
thing like this on the back. It says: “Medical precertification is re-
quired at least 7 days prior to admission, surgery, or home health
care. For emergencies call in 24 hours. If not certified, benefits may
be reduced.” Then it says this sentence, which I wondered if you
would have on your card, “Certification is not a guarantee of pay-
ment.”

Now, if the doctor tells me I need to go in and have my gall-
bladder taken care of, and I call up 7 days in advance and say I
am going to the hospital, my doctor has ordered me in to have my
gallbladder removed, and they say, well, yeah, we will certify that,
what does that line mean, “Certification is not a guarantee of pay-
ment”? Does that mean after I’m out of the hospital I will have to
argue with them?

Mr. Husteap. It could well be. I do not think this is language
that is limited to MSA. This is typical language for health plans.

I think the warning they are getting at is that—while the insurer
will precertify your need to be in the hospital, if you, say, go on
for 4 or 5 days, when the health plan says you should only be lim-
ited to 3 or 4 days, the plan will not pay the extra days.

Mr. McDERMOTT. What they are certifying is 3 days in the hos-
pital to have your gallbladder out. They do not tell the patient that,
they just say, yes, you can go have it done, but hidden in the draw-
er is the chart that says, after 3 days out, you go, ready or not,
or you will pay it yourself. Is that what you are suggesting?

Mr. HusTEAD. I think what happens is, that the doctor and the
insurer and the hospital work together on the issue with the pa-


CoO YN DH HW Ph YN =

YN RN YF eB eB Be ee ew ee
Sonvet FSF OCwM IAA A RHNH HS

IX
6
“(B) who is not, while covered under a cat-
astrophic health plan, covered under any health
plan—
“(i) which is not a catastrophic health
plan, and
“(ii) which provides coverage (other
than permitted coverage) for any services
which are covered under the catastrophic
health plan.

“(2) CATASTROPHIC HEALTH PLAN.—The term
‘catastrophic health plan’ means any health plan
which provides no compensation for an individual’s
expenses covered by the plan (other than for per-
mitted coverage) for any calendar year to the extent
such expenses for such calendar year do not exceed
$1,800 ($3,600 if the catastrophic health plan cover-
ing the taxpayer provides coverage for more than 1
individual) or such higher amounts as may be speci-
fied by the plan.

“(3) PERMITTED COVERAGE.—The term ‘per-
mitted coverage’ means—

“(A) coverage only for accidents, dental
care, vision care, disability income, or long-term

care insurance,


91

Mr. Carpin. If I could ask one more question, mayor, if I might.
The premiums for those individuals who are not in the MSA option,
has that premium changed at all?

Mr. SCHUNDLER. No. Well, no, it has not changed with the excep-
tion of it went up with the regular State plan. There has been no
adverse effect, in short.

Mr. CarDIN. You were paying $6,300.

Mr. SCHUNDLER. $6,800 on that plan.

Mr. Carpin. And that is still at $6,800. You have not achieved
savings in the plan like you have in the MSA option?

Mr. SCHUNDLER. That is correct.

Chairman THomas. But it has not gone up, either.

Let me underscore the gentleman from Maryland’s request about
information, mayor. You have only been in the program, I under-
stand, 6 months, so, obviously, we would be very interested.

As you may have heard from other panelists, some of the criti-
cism is there is an adverse selection process. And it just seems to
me that if you have any data on the initial selection—I assume you
did some advertising and across the board in materials of the city
employees.

ir. SCHUNDLER. Right.

Chairman Tuomas. Have you done any analysis at all as to who
jumped at the opportunity to utilize the MSA?

Mr. SCHUNDLER. Again, I apologize I cannot give you good infor-
mation. Anything I would bring to you today would be conjecture.
My employees——

Chairman THOMAS. We would be very anxious if you would ana-
lyze the profile. It is of great concern to us and we would appre-
ciate having some empirical data.

(The information was not available at time of printing:]

Chairman THOMas. What about the other cities in New Jersey?
As you move around to various city organization, have you gotten
some inquiries? How large is Jersey City?

Mr. SCHUNDLER. Two hundred thirty thousand people. We have
about 2,500 employees.

Now, we were the first—we were the first to do this. There have
been a lot of cities leaving the State plan because of the dramati-
cally rising premium costs to being in the State plan. As you might
imagine, there has been a lot of union opposition, because typically
what the cities have done as they leave the State plan they may
actually try to get copayments or what have you from their employ-
ees. So, it creates a lot of fractiousness.

Instead of leaving the State plan, we went to the State and said,
give us permission to add an alternative that will allow us to
achieve the savings we are interested in and it will make our em-
ployees very happy and feel secure.

hairman THOMAS. Thank you.

And, obviously, Mr. Rateliff, Wal-Mart has a significant number
of employees. What percentage of the employees of Wal-Mart are
hourly associates?

Mr. RaTELIFF. About 85 percent.

Chairman THomasS. About 85 percent. That would translate into
how many numbers, roughly? Ballpark.

Mr. RATELIFF. Well, we have 600,000 on the payroll totally.


61

Mr. HENDEE. I would agree that the increase would tend to be
similar under both programs.

Mr. McCrery. You do not see a danger if a great segment of the
market were to go toward high-deductible policies? You do not see
a danger that that kind of instrument would—the premiums for
that kind of instrument would grow more than we have experi-
enced under the current system?

Mr. HusTeaD. No. There would be the initial reaction in the sim-
ple case of just having the low- and high-deductible plan that the
cost of the low-deductible plan would go up as the healthier people
move to the high-deductible plan. But then the premiums, once
that initial change happened, would rise at about the same rate.

Mr. HENDEE. I believe that actually the rate of increase of all
policies would decrease. This is in the academy’s report, HCFA re-
search has shown that as the percentage of health care costs that
are paid by third parties increases, so does health care inflation.
So, moving to catastrophic policies will decrease the percentage
paid by third parties and, hopefully, would decrease the health care
inflation.

Mr. McCrery. OK. Thank you very much.

Mr. CHRISTENSEN. Mr. Cardin.

Mr. CaRDIN. Thank you, Mr. Chairman. I am having a difficult
time reconciling the testimony from Mr. Hustead and Dr. Good-
man. Let me see if I can try to set this up and get a response from
both of you.

Mr. Hustead, you indicated that if you move from a $200 deduct-
ible to a $2,000 deductible, that an employer would start $828 in
premium savings, on average, if I am reading your chart correctly.

Mr. HusTeEaD. That is correct.

Mr. CarDIN. Yet, Dr. Goodman has indicated that his firm moved
from a $500 deductible to a $2,000 deductible, and the $500 deduct-
ible policy had copayments up to $1,000 and that the savings to his
company were $1,500, that he was able to put into the medical sav-
ings accounts. If I understand, it was at no additional cost to the
employer to put the $1,500 in the medical savings account.

r. Goodman also indicates that he comes from an average cost
community. So, it did not seem like it was high cost. How do we
reconcile what appear to be significant differences in the potential
savings from what Mr. Hustead has come up with and what Dr.
Goodman is experiencing? Any explanation?

Mr. HusTEAD. Well, the very reason for the organization of our
work group last year, is that as actuaries would testify before Con-
gress and give their evidence, there seemed to be this great dif-
ference in the actuarial community. We got together people from
we think, all ranges of view on this topic and sat down and said,
when we put our models together and look at experience based on
millions and millions of lives over many years, what are the actual
facts, what is really happening here.

We also, as indicated earlier, went out to the insurance compa-
nies and to people who had MSAs and said, what are your find-
ings? Let us make sure we get this all stated together. And the
range of opinion among the actuaries, based on this body of data
was fairly narrow. Some of us, depending on the situation, might


87

There is only one place where you actually are a little worse off,
and that is if you have costs which are right about the deductible
jevel. If your costs are, for instance, $2,000, because your MSA con-
tribution is taxable income to you, it actually is marginally less at-
tractive. But that is a very narrow band, between about $1,800 and
$2,200 of expenses where you lose out. And you lose out only slight-

ar you pass this, that will even—that band will be eliminated,
and it will be more attractive for the employee. And it is much
more attractive when your costs are much higher or much lower.

Mr. CaRDIN. You are estimating a $500 per family savings for
the taxpayers.

Mr. SCHUNDLER. That is in pocket now.

Mr. CaRDIN. Pardon?

Mr. SCHUNDLER. That is in pocket now. Because our premiums
immediately went from $6,800-——

Mr. CaRDIN. That is the question I wanted to ask. You have
achieved that through your——

Mr. SCHUNDLER. That is already achieved. We think the—the
premium already went from $6,800 to $4,500 because the deduct-
ible went up. But as the claims experience goes down, then we
think you will see further premium reductions in the next couple
of years. And, ultimately, when it begins to go up farther into the
future because of inflation and so forth, it will go up more slowly.
And the experience we have had, actually the premiums for the
standard plan doubled in just the last 5 years.

Mr. Carvin. If the Federal legislation prohibited the annual
withdrawal of the funds for the employee but required that they be
accumulated for health reasons or to reach the age of retirement
or the age of when it is permitted under IRAs to withdraw funds,
would that have, in your view, a negative impact on your plan?

Mr. SCHUNDLER. i think so. I think it would have—monies to-
morrow are less attractive than moneys today. So, I think that
takes away some of the incentive that we want to create for people
to shop around for quality and cost.

Mr. CarDIN. Well, thank you very much, and I would appreciate
it if you would keep us informed if you find out some of the demo-
graphics as to who chooses which plans. They may be useful to us.

I know the underlining insurer is doing that and if we could get
that information it would be certainly useful to us in our analysis.

[The following was subsequently received:]


72

Chairman THOMAS. Thank you, mayor.
Miss Samuelson.

STATEMENT OF JEAN A. SAMUELSON, DIRECTOR OF BENEFIT
SERVICES, CORNELL UNIVERSITY, ITHACA, NY

Ms. SAMUELSON. Mr. Chairman and Members of the Committee,
I would like to thank you for providing me the opportunity to tes-
tify on the Family Medical Savings and Investment Act of 1995.

Chairman THOMAS. Ms. Samuelson, I want to tell you these
microphones are very unidirectional so you will have to get it down
close to you so we can hear you. Thank you.

Ms. SAMUELSON. At Cornell and through various employee bene-
fits organizations in which I take an active role, we are always
looking for the most innovative ways to provide benefit choices to
our employees and their families. I began investigating the medical
savings accounts for Cornell’s employees and will certainly con-
tinue to follow this legislation because we want to provide a re-
sponsible level of protection in a manner flexible enough to accom-
modate the needs in today’s increasingly diverse work force.

Therefore, we were especially pleased at the approach taken in
this legislation. By resisting the temptation to define exactly the
benefits available in a medical savings account, you provide the
broad freedom of choice that will be most responsive to the largest
numbers of employers and their employees.

As the representative of an employer who sponsors a section 125
cafeteria plan, and as a participant in that plan, I believe that this
legislation helps employers and employees obtain many of the same
goals as flexible health care benefits; Greater individual control
and choice in designing plans that meet each individual employee’s
needs.

Mr. Chairman, we applaud your statement that this bill is a
framework awaiting improvement. Already in meetings with staff
we have found a willingness to work to resolve problems that arise
for particular constituencies. In the end, as these diverse interests
bring their creativities to the task, you and the Committee will
fashion an even stronger bill. Thus, we support the Family Medical
and Savings and Investment Act and also the process you have
started to further perfect the bill.

We believe the legislation should go forward and that it will
allow cafeteria plans and flexible spending accounts to coexist and
augment medical savings accounts. There need be no inherent con-
flict between medical savings accounts and plans covered under
section 125 of the Internal Revenue Code.

Iam a board member of the Employers Council on Flexible Com-
pensation, which, coincidentally, has just conducted research into
working Americans’ attitudes on medical savings accounts. Since
1992, the council has cosponsored Workplace Pulse, the only peri-
odic survey of full-time employed workers.

This most recent Workplace Pulse, which was conducted in early
June and released today, found that 85 percent of American work-
ers believe the government does not provide adequate incentives
through tax advantages for the average working person to save for
future and current health care needs.


40

enrollment in an MSA/high-deductible plan, However, employees with a large medical expense,
such as $25,000, who are enrolled in an MSA/ high-deductible plan would pay $2,000 more out-of
pocket for covered health expenses than the individuals covered under a low-deductible plan. The
net loss to these employees, after application of the $828 MSA contribution, would be $1,172
(Figure 2). The work group's analysis showed that approximately 8% of the insured population
would face the full $1.172 increase in out-of-pocket expenses.

Figure 2
‘$25,000 Health Care Bill
ow-Desuctbie Plan -MSAVHigh-Deductble Pian Dilference Between Plans
Envollee pays $1,000 _-Enrolee pays $2.172, 1.172
Catculatons
'$1,000 maximum-out- $3,000 maximum-out-f pocket iit sate
‘of-pocket mit 2 $1.000
282,172 281.472

Its important to determine which health care expenses will be covered by the high-deductible plan
and those that can be paid from the MSA. Employees could be permitted to spend their MSA funds
on items not generally covered under the health plan. For example, an employee might spend $2,000
for permitted MSA expenses that include $500 of services not allowable under the MSA/high-
deductible plan. Having spent $2,000, an employee who had to be admitted to a hospital might
presume that he was only responsible for 20% of remaining charges up to the $3,000 maximum out-
of-pocket limit. However, the insurer would review the $2,000 in expenditures and determine that
the employee would, in fact, have to pay the first $500 of the hospital bill before the insurance
protection begins.

Effect of Health Care Costs

‘The work group’s analysis found that the replacement of a low-deductible fee-for-service plan with
an MSA/high-deductible plan would result in lower health care expenditures for a typical group of
employees. In addition, administrative expenses would decrease by approximately 20%. Health
care costs for this typical group of employees would decrease by up to 10%, depending on the extent
to which the employees considered the funds in the MSA to be personal savings, rather than
insurance


36

from this new system. There will be 25 Percent of employees and
individuals who do not meet the current deductible. If an employer
gave them $700 or $800, that would be a net gain. There would be,
as has been pointed out so far already, the employees and individ-
uals with very high medical expenses with a net loss. In the exam-
ple we give, the loss could be $1,200 per person per year with high
medical expenses. We figure that about 8 percent of the employees
would be in that category.

As far as overall savings, if you take an average group and move
them from a current fee-for-service nonmanaged plan to a high-
deductible plan, administrative savings would be substantial. We
figure about 20 percent of the administrative costs would be saved,
claims costs would be saved. There would be savings up to 10 per-
cent of the total cost, again depending on how the individual
viewed their MSA.

Thank you very much.

[The prepared statement and attachment follow.]

[Medical Savings Accounts Cost Implications and Design Issues
attachment is being held in the Subcommittee’s files.]


Vo

ns

12

XXII

19
any payment made to or for the benefit of an em-
ployee if at the time of such payment it is reason-
able to believe that the employee will be able to ex-
clude such payment from income under section
106(b).”

(C) UNEMPLOYMENT TAX.—Subsection (b)
of section 3306 of such Code is amended by
striking “‘or’” at the end of paragraph (15), by
striking the period at the end of paragraph (16)
and inserting ‘; or’, and by inserting after
paragraph (16) the following new paragraph:
“(17) any payment made to or for the benefit

of an employee if at the time of such payment it is
reasonable to believe that the employee will be able
to exclude such payment from income under section
106(b).”

(D) WirHHoLDING Tax.—Subsection (a)
of section 3401 of such Code is amended by
striking ‘‘or’” at the end of paragraph (19), by
striking the period at the end of paragraph (20)

and inserting ‘; or’, and by inserting after
paragraph (20) the following new paragraph:
“(21) any payment made to or for the benefit

of an employee if at the time of such payment it is

reasonable to believe that the employee will be able


27

And I thank you for these hearings, Mr. Chairman. I look for-
ward to working with you in developing what I believe will be a
very constructive approach to health policy.

[The prepared statement follows:]


31

could give. That would then give a consumer a reasonable way of
shopping in an informed way.

Mr. ENSIGN. Thank you, Dr. Ganske.

Mr. Salmon, what was your experience after this bill was passed
in Arizona? Obviously, there is not as much incentive on the State
level as there is from the Federal level, but, still, what was the ex-
perience from some of the companies?

Mr. SALMON. Their experience was a lot of the insurance provid-
ers, the traditional insurance providers of days of yore, actually
went to medical savings accounts coupled with catastrophic care
policies and it opened up a whole new market.

far as companies that have offered medical savings accounts—
I have heard it said there is no proof that they are going to work—
virtually every case study of every company that has offered medi-
cal savings accounts has shown that health care inflation has been
far less, with those companies than it has with traditional compa-
nies offering PPO and MO coverage.

Mr. ENSIGN. Thank you.

And I would like to thank the Chairman also for holding these
Committee hearings. I think that medical savings accounts are not
going to be a panacea for our health care concerns, but they are
certainly one of the answers to reforming our health care system.
Thank you.

Chairman Tuomas. I thank the gentleman for his questions. The
gentleman from Maryland.

Mr. CarDIN. Thank you, Mr. Chairman.

Let me thank all of our colleagues for their contributions to our
work here in this Committee. I very much appreciate your testi-
mony and your interest in health care issues.

I come to this issue from a similar perspective to you. The cur-
rent Tax Code discriminates against medical savings accounts. An
employer under our current Tax Code can set up a self-insured
plan which may be the most inefficient plan imaginable yet the

‘ax Code gives full tax preference to that type of plan. But, that
employer cannot set up a medical savings account and get the same
type of tax advantage. So I think we must, at least initially, re-
move that discriminatery practice which is currently in our Tax

‘ode.

I worked with my friend Mr. Jacobs last year and Mr. Thomas
to include the MSA provisions in the bill that we moved through
this Committee last year, in the context of comprehensive health
care reform. While we are not going to get comprehensive health
care reform, that is clear, I think we need to work on a bill that
will remove the discriminatory provisions and allow employers to
have this option available to their employees with the same tax in-
centives as traditional insurance, and I look forward to working
with my collea; 5.

I do think, though, that we should look at the issue of risk selec-
tion; we should look at the administrative savings that we would
like to be able to achieve; we should look at providing proper infor-
mation to the consumer to make an intelligent choice and encour-
age preventive health care. These are issues that have been
brought up that I hope that in our deliberations, as we move for-
ward on legislation, that we listen to the concerns that have been


60

Mr. Stark. Thank you, Mr. Chairman.

Mr. CHRISTENSEN. Thank you, Mr. Stark.

Mr. McCrery.

Mr. McCrery. Thank you, Mr. Chairman.

Gentlemen, thank you for coming today. I am sorry I missed part
of your testimony but I am familiar with the concept, having been
a promotor—not the father—but a promotor of this concept for
some time. I appreciate the work Dr. Goodman has done on this.

Dr. Goodman, just to clear up one thing, you said that the sav-
ings under this type of plan go to the individuals involved and not
to the employer. But isn’t it true that as an employer you antici-
pate savings in the future in terms of future increases in your pre-
mium costs to cover your employees?

Mr. GoopMAN. Well, that’s correct. What we did in moving from
1994 to 1995 was we held our plan costs constant, and for the fu-
ture we anticipate that as employees save money for themselves
they will also save money for the organization.

Mr. McCrervy. I just wanted to clear that up.

At the end of your testimony, Dr. Goodman, you state that Con-
gress should give patients and health care providers the freedom
to experiment with ways to provide quality health care more effi-
ciently and effectively.

Can you give us some examples of that?

Mr. GOODMAN. Well, what we have now is an income tax struc-
ture which encourages third party payers to pay every medical bill
because the payment of third party premiums is excluded from the
taxable income of the employees.

What we recommend and what this bill does is make self-insur-
ance through medical savings accounts just as attractive under the
Income Tax Code as todays third party premiums are. And if you
create a level playingfield, what you will do is allow insurers, em-
ployers and employees to be more flexible and come up with op-
tions that none of us have considered here this morning. We should
not have people making these decisions based on tax advantages.
We should allow them to make these decisions based upon health
care needs and the economics of the health care marketplace.

Mr. McCrery. Well, for example, someone might use some of his
MSA money for a physical exam that might not have been covered
under a traditional insurance policy; is that correct?

Mr. GoopMaN. That is correct.

Mr. McCrery. OK.

Mr. Hustead and Mr. Hendee, you know, we have a very limited
experience so far with MSAs though hope to get more in the future.
Can you comment on what you think the stability of the premium
for a high-deductible policy might be over time?

Mr. HusTEaD. Well, while there may be little experience with
MSAs, there is a good deal of experience on ranges of options like
in the Federal employees health benefits program. And generally
you find that once the employees sort them out into the various
plans, low-deductible, high-deductible, HMOs, and so forth, that
the cost of each of the plans tend to rise at about the same rate.
So, they are fairly stable once you go over the initial sorting out

le.

of peop!
Mr. McCrery. Mr. Hendee, do you have any comment on that?


115

Tirginia
ankers

sociation

BENEFITS CORPORATION 1804) 643-8060
0 faa «Fanon bn AE?

July 5, 1995

‘Mr. Phillip D. Mosley
Chief of Staff

House Ways and Means Committee
1102 Longworth House Office Building
Washington, DC 20515

Re: Statement for the Record for the June 27, 1995 hearing on HR 1818 Family Medical
Savings and Investment Act

Dear Mr. Mosley:

1am John Vellines, Chief Administrative Officer of the Virginia Bankers Association
Benefits Corporation. I am submitting this testimony not as a banker, but as an administrator
of a trade association sponsored multiple employer health insurance trust. ‘The Virginia Bankers
Association has been offering health insurance to its members for 49 years, and 78% of the
banks participate in our plan.

‘The Virginia Bankers Association Benefits Corporation wholeheartedly supports the
concept of Medical Savings Accounts, and specifically endorses HR 1818. We believe that one
of the reasons that medical care costs have consistently risen faster than inflation in general is
that the receiver of the medical service is not the direct payer of that service. While not a total
solution to that problem, MSA's will assist in bringing the patient into the loop as a better
consumer.

‘We would like to respectively suggest that the committee consider several changes to the
bill that we believe will counter some of the objections of the MSA concept and make the bill
more effective,

1. Toassure that MSA participants do not ignore preventative care, we suggest thal
the redesignated Section 220 (c)(3) Permitted Coverage be extended to allow a
panel of adult preventative care treatments, as well as well baby care and
immunizations for infants. ‘The Preventative panel can provide for a schedule of
treatments, such as mammograms, pap smears, and PSA tests based un age and
sek,

‘One efficient way to provide this coverage is to allow the catastrophic policy to
Pay first dollar coverage for preventative and well baby care subject to a modest
co-pay, such as $15. This would encourage adults to get the preventative care
they need, and assure that parents will not be disincented to provide for the
important medical care needs of their infants.

‘This method of covering preventative care would only add about 2% to the price
of the $1,800 catastrophic insurance policy.

2, We suggest that retirement be added to the list of permitted tax free withdrawals,
subject to existing IRA withdrawal rules. While this recommendation seems to
vary from the “pure” intent of MSA's, we believe tat encouragement of
Tetirement savings is a very high societal priority, and we should take advantage
Of this perfect opportunity to blend the two goals. Adding this feature will make
MSA's more altractive to a broader segment of the population, and ultimately
relieve some of the long term pressure on the Social Security Retirement system.


Co oe YN DAN H PR YN

XVII
14

“(1) IN GENERAL.—In the case of any taxable
year beginning in a calendar year after 1996, each
dollar amount in subsection (b)(1) or in subsection
(e)(2) shall be increased by an amount equal to—

“(A) such dollar amount, multiplied by

“(B) the medical care cost adjustment for
such calendar year.

If any increase under the preceding sentence is not
a multiple of $50, such increase shall be rounded to
the nearest multiple of $50.

“(2) MEDICAL CARE COST ADJUSTMENT.—For
purposes of paragraph (1), the medical care cost ad-
justment for any calendar year is the percentage (if
any) by which—

“(A) the medical care component of the
Consumer Price Index (as defined in section
1(£)(5)) for August of the preceding calendar
year, exceeds

“(B) such component for August of 1995.

“(h) REPORTS.—The trustee of a medical savings ac-

21 count shall make such reports regarding such account to

22 the Secretary and to the account holder with respect to

23 contributions, distributions, and such other matters as the

24 Secretary may require under regulations. The reports re-

25 quired by this subsection shall be filed at such time and


35

ers would then redesign their programs and their benefits packages
to take advantage of the option that would be offered by a high-
deductible plan and an MSA; and, third, this offering would then
be provided to the employees and the employees would choose the
plan they want.

To just talk briefly on those three steps, and our written testi-
mony is there for the record, the legislation, to the extent that I
have had a chance to look at it, seems pelsesigned to deal with
the setting up and enabling legislation for a high-deductible MSA
option for employers and insurers. It deals successfully with the
problems we have pointed out, such as the interaction of two poli-
cies for two family members.

One technical issue that I would raise, at least in my reading of
the bill, suggests that a family would have to meet a $3,600 de-
ductible in order to be able to set up an MSA, whereas an individ-
ual would only have to meet an $1,800 deductible. If I am reading
that correctly, that means an individual in a family would have to
meet more of an increase in deductible than an individual in their
own policy. You may want to look at that provision.

Most of what would go on in a high-deductible/MSA introduction
would deal with the employer response. Now, the assumption of the
work group is that the employers would want to keep their health
care costs constant, so the employers will then want to redesign
their health plan to accommodate high-deductible MSA options,
and in our report we show what would happen if an employer were
to introduce a high-deductible plan.

For example, if an employer were to go from a $200 deductible

lan to a $2,000 deductible plan, they could save an average of
Ss08 per person. That would be the amount they could put in a
medical savings account and keep their costs constant.

But there are two cautions, in reference to the employer design.
First, if an employer were to keep other options in ir program,
then it is likely that the healthiest individuals would go to a high-
deductible plan and the savings would be less than the figures we
show in our report. Second, if the employee who had a medical sav-
ings account were to consider that MSA as just another form of in-
surance, then the cost savings could be lower than had been pre-
dicted in our report. So, we would suggest to employers they view
those two aspects.

Another thing that employers will have to consider as they rede-
sign their plans will be how to deal with current management ap-

roaches, the health maintenance organizations, the point-of-serv-
ice plans, and so forth. Employers have been very successful and
done quite a bit with managed care organizations to control cost in
recent years. Presumably, they will want to add to those savings
that they have already achieved through introduction of a high-de-
ductible plan.

And finally, an employer or insurer is going to have quite a com-
munication process, as they relate these plans to the individuals.
Employers are used to having successful communication programs
and we think that they can achieve that to tell employees what
they really have and how these new plans work.

As far as the result on the individuals, we show in the report,
and I show in the testimony that, on average, individuals will gain


Cm rd AH eR WH

RPBBESBsSCSSvURFAARBESAS

VI
3
“(B) the deductible under the catastrophic
health plan covering such individual.
If the catastrophic health plan covering such individ-
ual provides coverage for any other eligible individ-
ual who is the spouse or any dependent (as defined
in section 152) of the taxpayer, subparagraph (A)
shall be applied by substituting ‘$5,000’ for
“$2,500.

“(2) PRORATION OF LIMITATION.—

“(A) IN GENERAL.—The limitation under
paragraph (1) shall be the sum of the monthly
limitations for months during the taxable year
that the individual is an eligible individual if—

“(i) such individual is not an eligible
individual for all months of the taxable
year,

“(ii) the deductible under the cata-
strophie health plan covering such individ-
ual is not the same throughout such tax-
able year, or

“(iii) such limitation is determined
using the last sentence of paragraph (1)
for some but not all months during such

taxable year.


52

Medical Savings Accounts
and the Future of Health Care

John C. Goodman, Ph.D.
President, National Center for Policy Analysis

‘The traditional, fee-for-service health insurance policy — that lets people choose
their own 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. As a result, most people
will have to settle for one of two options: (1) either they will enroll in a health maintenance
‘organization (HMO) that restricts their choice of physicians and limits their access to
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 (MSAs).

Currently, the Internal Revenue Service taxes MSA deposits, although employer
payments for third-party insurance are tax free. The Archer-Jacobs “Family Medical
Savings and Investment Act” (HR 1818) would end this discriminatory treatment.

1_ How Medical Savings Accounts Work, Medical Savings Accounls give

ty to move from a conventional, low-deductible health insurance plan
ene wan’ igh deductible (ay $2,000 to 83,000) and to pt the premium savings fn
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, and their families pay all medical bills up to the deductible
from the MSAs and out-of pocket funds, Catastrophic insurance pays all expenses above
from te

FIGURE

Employers and their employees are turning to MSAs for the same reason others are
turning to managed care: to control rising bealth 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
Cente for Policy Analysis had a conventional fe fr service health plan with a $500

ible anda 20 pereent copayment, this anet was at risk for
to $1,500 out of three members ofthe wake faaily sl became Seriously il, the
farily was at sk tox $4,500 in diel bas,

‘This year the NCPA adopted an MSA plan that limits the exposure of the employees
and at the same time gives them more control over their health care dollars. At no extra cost
to the employer, the plan creates a $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


7

need an operation at all. Now, Pete, there is $8,000. Chalk that up.
And that can be multiplied by millions of people.

I hear it said that it will shrink the pool of insurance money to
pay medical bills. Of course it will. That is exactly what we are try-
ing to do. If you shrink the prices, the proportion of the U.S.
economy that puts money into medical care will shrink. You will
not need as much insurance at that point.

And finally, Mr. Chairman—by the way, when I chaired this
Committee I always allowed each witness two “finallies” and one
“in conclusion.” I will see if I can make it on the finally.

In the old days, if you had a fender-bender you went to the insur-
ance company and the first question the guy with the clipboard
would ask is, is this an insurance job, and you knew what the price
was going to be if it was, and you knew what the price was going
to be if it was not.

Cha-cha and off.

Chairman THOMAS. And, in conclusion, I thank the gentleman
from Indiana.

The gentleman from Nebraska, Member of the Subcommittee,
Mr. Christensen.

STATEMENT OF HON. JON CHRISTENSEN, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF NEBRASKA

Mr. CHRISTENSEN. Thank you, Mr. Chairman, and as Mr. Jacobs
has already stated, I am experiencing a summer cold, so if I start
to hack and cough I will apologize profusely to the Committee.

Thank you for your leadership in this area and for having these
hearings today. Medical savings accounts, or MSAs, are a revolu-
tionary idea whose time has come. Although there are countless
variations, MSAs generally allow individuals to save money in a
tax exempt account, much like an IRA. Instead of purchasing an
expensive first-dollar type of insurance policy, the individual would
purchase a less costly, high-deductible catastrophic health insur-
ance policy to cover major medical expenditures. individual can
use the money. in the MSA to cover routine inedical expenses with

e catastrophic policy covering major medical expenses.

MSAs have many Denefits, First, MSAs create strong incentives
for cost and quality conscious health care Gecisionmaking. Most
health care experts will tell you that the main reason health care
costs have skyrocketed in recent years is because there is little or
no price sensitivity in health care purchases. Under the third party
payer payment model that currently dominates our health care sys-
tem, transactions between health care providers and individuals
are paid by a third party such as an insurance company or the gov-
ernment.

Current estimates reveal that 95 percent of hospital bills and
over 80 percent of physician fees are paid by some third party. This
system perpetuates the misconception that someone else is picking
up the health care tab and, thus, the individual does not have to
worry about the cost or the need for care. This has created
increased health care consumption, which in turn has caused infla-
tionary pressure on health care costs.

MSAs alleviate this problem by giving people control over their
own health care dollars. When they know and understand it is


50

Mr. CHRISTENSEN. Thank you, Mr. Hendee.
Dr. Goodman, the Committee would be pleased to hear your tes-
timony.

STATEMENT OF JOHN C. GOODMAN, PH.D., PRESIDENT,
NATIONAL CENTER FOR POLICY ANALYSIS

Mr. GoopMaAN. Thank you, Mr. Chairman.

My name is John Goodman. I am president of the National Cen-
ter for Policy Analysis.

Mr. Chairman, I would like to begin by saying that I believe the
traditional fee-for-service health insurance policies that we have,
most of us have grown up with, cannot survive in the marketplace.
A policy that allows you to see any doctor you want to see, select
any test you want to have, while sending the bill to someone else,
I think simply cannot, will not, be affordable for most Americans.
Therefore, what is happening in the marketplace right now is that
people are exercising one of two options. Either they are going into
managed care programs where their choice of physician is re-
stricted and where there are limits on the kinds of tests they can
have access to, or, if they want to make many of those decisions
for themselves, then they have to agree to manage some of their
own health care dollars.

Of course, one of the ways to allow them to manage their own
health care dollars is through medical savings accounts. We pre-
sented this option to our own employees and the answer was unan-
imous, they opted for the medical savings account. This chart to my
right shows how we designed it for the employees with families
who work for the NCPA.

We have a deductible for the families of $2,000, and we make a
deposit to the medical savings account of $1,500. So, when our em-
ployee is going to the medical marketplace, the first $1,500 they
spend from their medical savings account. The next $500 they
spend out-of-pocket, and when they reach the $2,000 deductible the
plan covers all expenses above that.

Now, if we can look at the next chart I think I can answer Mr.
Stark’s question, at least for employees who work for us. In the
left-hand column you see our previous year’s policy.

Mr. CarDIN. Excuse me, is this in our written material because
I personally cannot see those numbers. Maybe I need new prescrip-
tions. Can that be moved forward?

Mr. GoopMAN. It is in the material. It is in my testimony, yes.

Mr. CarDIN. Thank you.

Mr. GOODMAN. Last year, suppose we have an employee with a
child who had cancer, and that family knows they will hit the max-
imum on their deductible and copayment.

Well, the deductible last year was $500 and we had a 20-percent
copayment for another $1,000. With this sick child, that family
would have spent $1,500 in out-of-pocket expenses. This year, for
no extra cost to us, by the way, we moved to the medical savings
account plan, and now as you can see, the most this family will pay
out-of-pocket is $500. So, for the family with the sick child, it is as
though the switch of plans resulted in a $1,000 raise for that fam-
ily. fe have reduced by $1,000 the cost to them of medical care for
that child.


affect the U.S. health care system. Employers,
‘employees, health care providers, and the IRS all
would be affected. Determining their preferences is
critical to predicting how MSAs would affect US.
health care.

2, Effect of the High Deductible

‘The high-deductible component of the MSA/high-
deductible coverage will have one very important
feature, It will include copayments from the patient
(such as deductibles or co-insurance) substantially
higher than'those typical in today’s health insurance
market. This could exert a potent effect on how
MSA owners decide to spend their MSA funds.

Available research indicates that the demand for
traditional health care depends to a considerable
extent on how much of a providers bill must be paid
‘out of one’s own pocket. In 1978, when Newhouse
et al. investigated the two extremes, total coverage
and no coverage, individuals with full coverage of
medical expenses made twice as many physician vis-
its as those without coverage.

Copayments exert two significant effects. Higher
copayments cause a decrease in insured health care
expenses because less of each medical bill is paid by
the insurer. Also, having to pay more out of one's
own pocket discourages people from using health
care services.

How will employees think about their MSAS? If
they think of them as litte more than another type of,
insurance, then utilization might be much the same as
with a typical low-deductible plan. In some cases, uti-
lization might actually be greater. By contrast, if
employees consider their MSAs to be personal savings
accounts, utilization might be depressed to almost the
same level as a high-deductible policy without an
MSA.

if workers look upon their MSA as savings, poten-
tially countervailing motivations would arise.
Having control of how health care dollars are spent,
through an MSA, could make individuals smarter
shoppers for medical care.

On the other hand, insurers generally place limits
‘on what they will reimburse. Without these limits,
MSA funds will be available for more services than
plans currently cover. In many proposals, all the ser-
vices recognized by the IRS as legal for income-tax-
deduction purposes are considered appropriate for
MSA expenditures. Services for routine physicals,
eyeglasses, psychological consultations, and cosmet-
ic services are often excluded or limited.

2 RESEARCH BRIEF MAY 1995

Other plan design elements can also modify the
cost-deterring impact of a high deductible. These
include limitations on cost-sharing like out-of-pocket
maximums. Also, provisions stipulating whether
deductibles include or exclude certain kinds of services,
can alter the effect of the deductible.

Further, the amount of new savings possible from
adding a high deductible depends greatly on how
much cost savings has already been achieved by the
plan that preceded the new high-deductible plan,
Perhaps the old plan, through tightly managed con-
trol, such as in an HMO, has already eliminated most
of the excess utilization. Then, the high deductible
will likely not yield very much in further savings.
Hospital costs, in particular, may not be susceptible
to further savings. Data show that utilization has
already dropped by 25% in the last 10 years. There
will, however, be more room for savings in other
areas such as drugs, outpatient care, and profession-
al services.

Conclusion, The extent to which MSAs will gener-
ate savings is far from certain. When consumers are
offered only catastrophic coverage through high
deductible plans, health care spending falls. However,
when MSAs which work so as to offset the high
deductible are introduced, health care spending may
or may not fall, depending on a number of factors.
Spending could decrease if the law governing MSAS is
well-conceived, if employers design their MSA options
carefully, and if workers eventually view their MSAs as,
their own personal savings.

3. Tax Treatment of MSAs

It will be critical, in promoting the widespread intro-
duction of MSAs and ensuring that they are finan-
<ially sound, to establish a well-thought-out roster of
tax regulations to foster these objectives.

Under most MSA proposals, both contributions
to MSAs and payments for health expenses from
MSAs would come from before-tax monies.
However, employees would have to pay taxes if they
used their MSA funds for nonmedical purchases, in
addition to a penalty if the money was taken out
before some specified age.

Right now, health care expenses paid by employers
are fully tax deductible. Current proposals stipulate
that all contributions to MSAs would be tax
deductible as well. However, some specify that an
employer’s total tax deduction for the new
‘MSA/high-deductible plan would be limited to what,


a eS

Se oe ewe ee
kw NK | Oo

15
16
17
18
19

XXIV
21

(1) by inserting “OR ON MEDICAL SAVINGS
ACCOUNTS” after “ANNUITIES” in the heading of
such section, and

(2) by adding at the end of subsection (a) the
following: ‘‘The person required by section 220(h) to
file a report regarding a medical savings account at
the time and in the manner required by such section
shall pay a penalty of $50 for each failure to so file
unless it is shown that such failure is due to reason-
able cause.”
(f) CLERICAL AMENDMENTS.—

(1) The table of sections for part VII of sub-
chapter B of chapter 1 of such Code is amended by

striking the last item and inserting the following:

“See. 220. Medical savings accounts.
“See. 221. Cross reference.”

(2) The table of sections for subchapter B of
chapter 68 of such Code is amended by inserting ‘“‘or
on medical savings accounts” after “annuities” in
the item relating to section 6693.

(g) EFFECTIVE DaTE.—The amendments made by

20 this section shall apply to taxable years beginning after
21 December 31, 1995.

BR 1818 I


Ww

I truly believe we would see a dramatic reduction in health care
costs nationwide with the expanded use of MSAs. In addition, if a
person is unemployed for a period of time, he or she could use his
or her medical savings account to continue their health insurance
until they find a new job. In addition, a huge pool of money would
be created by MSAs which would be a great resource capital for en-
trepreneurs.

Medical savings accounts could also help very costly government
programs, such as Medicare and Medicaid, work better. For Medic-
aid, the government would give an individual on welfare an MSA
voucher which could be taken to an insurance company of the indi-
vidual’s choice to get an MSA insurance policy. If that individual
has money coming back to them at the end of the year, it should
be held until they find a job, giving them another financial incen-
tive to find work.

With MSAs in place over a period of years, the need for Medicare
would be diminished greatly. Yea person had accumulated approxi-
mately $100,000 in their medical savings account by age 65, that
individual could purchase a super MSA from an insurance company
with $100,000 deductible for the remainder of his or her life.

We need to create these types of programs to solve our long-

range crisis in Medicare and Medicaid. Based upon my firsthand
experience with medical savings accounts at RCI, I can honestly
tell you the theory behind them works in real world application.
In my opinion, medical savings accounts provide the best health
care program when it comes to the high level—when it comes to
high-level benefits, employee satisfaction, freedom of choice, effi-
ciency, and cost effectiveness. The Archer-Jacobs bill is a tremen-
dous step toward expanding the use of this innovative approach to
health care in our country and has my full support. The only scam
is that the MSAs were never allowed to be reported out of a Com-
mittee in the past to be voted on by the full floor of the House.

Medical savings accounts can play a positive role in reducing
health care costs and improving the health care delivery system
nationally. Congress should take action now to expand MSAs as
the preeminent choice in providing a free market solution for
health care for all of our citizens.

Thank you.

Chairman Tuomas. I thank the gentleman.

Arriving with us on the panel is the Chairman of the Full Com-
mittee, but I would request of the Chairman—I would prefer he bat
cleanup, if he does not mind, because he is going to be speaki
directly to H.R. 1818 and some Members are speaking in gener:
on the MSA. And we do want to focus as the subject of this hearing
on AR 1818. Therefore, I will turn to the gentleman from Arizona,

ir. Salmon.

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

Mr. SALMON. Thank you very much, Mr. Chairman. I appreciate
the opportunity to testify before your Subcommittee.

I would like to congratulate Chairman Bill Archer and Rep-
resentative Andy Jacobs for introducing their bill, H.R. 1818. I be-
lieve it is a fantastic step in the right direction.


37

STATEMENT OF EDWIN C. json
HAY/HUGGINS, ON BEHALF
AMERICAN ACADEMY OF ACTUARIES MEDICAL SAVINGS ACCOUNT WORK GROUP

INTRODUCTION

Thank you for the opportunity to address the subcommittee today on the subject of medical savings
accounts (MSAs) and, specifically, on H.R. 1818, the “Family Medical Savings and Investment Act
of 1995.” 1am Edwin Hustead, the chairperson of the American Academy of Actuaries’ Medical
Savings Accounts Work Group and a Senior Vice President with the Hay/Huggins division of the
Hay Group. [ am a Member of the American Academy of Actuaries and a Fellow of the Society of
Actuaries.

Briefly, H.R. 1818 would enable employers and their individual employees to establish MSAs. The
bill stipulates that the only insurance coverage required would be a catastrophic health insurance
plan with a deductible of at least $1,800 a year. The employer or individual could contribute a given
‘amount, on a tax-deferred basis, to the MSA. This amount could be no greater than the lesser of the
deductible or $2,500 a year.

MEDICAL SAVINGS ACCOUNTS

An MSA is an individual medical account that employees can draw from to pay for their ongoing
medical expenses. It is set up by an employer for an employee who is eligible for health insurance
coverage, and funded by employer and/or employee contributions. The concept of MSAs has
generated tremendous interest this year, largely because some believe that, if MSAs were to become
popular, they would provide sufficiently powerful incentives to covered individuals to motivate them
to play a more active role in making responsible decisions on how their medical care dollars are
spent. However, others are concemed that MSAs might neutralize the utilization controls already
in place in managed care plans, and place an increased financial burden on the very individuals who
are most in need of health care services.

The Academy Medical Savings Accounts Work Group's May 1995 report, “Medical Savings
‘Accounts: Cost implications and Design Issues,” presents actuarial analysis and commentary on the
MSA concept.

Employer Contributions for Health Care

‘Table 1 shows the work group's estimates of the approximate cost of insurance plans with various
deductible and maximum out-of-pocket limits. If, for example, an employer were to replace a $200
deductible plan with a $2,000 deductible plan, the premium for the average employee would
decrease by $828. This illustration assumes that the $200 deductible plan would have a $1,000
maximum limit on out-of-pocket expenses and that the $2,000 plan would have a $3,000 limit. It
also assumes that the plan would cover a typical work force and that all employees would participate
in the plan.


WAYS AND MEANS SUBCOMMITTEE ON HEALTH
PAGE TWO

‘Any person or organization wishing to submit a written statement for the printed
record of the hearing should submit at least six (6) copies of their statement, with their
address and date of hearing noted, by the close of business, Tuesday, July 18, 1995, to Phillip
D. Moseley, Chief of Staff, Committee on Ways and Means, U.S. House of Representatives,
1102 Longworth House Office Building, Washington, D.C. 20515. If those filing written
statements wish to have their statements distributed to the press and interested public at the
hearing, they may deliver 200 additional copies for this purpose to the Subcommittee on
Health office, room 1136 Longworth House Office Building, at least one hour before the
hearing begins.

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‘m campianes wh Chae guiainen wl wet be pent, bat wl be smfatnned inthe Comoe es fr reviow ad moe Wy the Common.

1, Al aoments und any socompanying exist far pti met be typed a singie pecs on legatctme paper sad may wet
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2 Capen ot wee dormant suhted echt mata wl net seompnd for printing. Mnctoad chit mata! shad bo
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<A vepytemental sheet mest sscumpeny each Nedag th came, fl trons, somber where the ttn
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toms.

Note: All Committee advisories and news releases are now available over the Internet at
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seeee


10

-ATEMENT OF HON. BRET SCHUNDLER, MAYOR,
a JERSEY CITY, NEW JERSEY

Chairman Thomas and Members of the Subcommittee on Health:

1 would like to express my sircng support for HR 1818, "The Family Medical
Savings and Investment Act of 1995,” which grants contributions to Medical Savings
Accounts (MSAs) with the same sort of tax deductibility now permitted only for the
payment of health insurance premiums. This is the most constructive and important
piece of healih care reform legislation that Congress will entertain this year.

Last year Jersey City, New Jersey was one of the first public entities to provide
MSAs to its employees. The results have been extremely positive. Right off the bat, 56%
of our eligible employees chose the MSA option over their previous coverage -- and we
expect that percentage to rise to over 90% next year. Moreover, for every employee who
thas chosen the MSA option, the City has achieved immediate budgetary savings, and we
expect even greater savings to be realized in the future.

How has it been possible for us to both please our employees and reduce our health
care costs? The answer is relatively simple.

In the past, Jersey City covered its management employees through the New Jersey
State Health Benefits Plan. Most chose a fee-for- service option, where employees had to
pay a $200 front-end deductible and 2 20% co-payment on the first $2,000 in expenses
for each covered family member. That means a family of four bad potential out-of-pocket
expenses of up to $1,800 in medical expenses annually.

Under the MSA plan, the city purchases » 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 down upon
for payment of most of thet deductible. Putting these elements together means that a
family of four would, at most, have to pay $200 in out-of-pocket deductible expenses.
Moreover, if family’s total health care costs fall below $1,800 in a given year, 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 than under the
standard policy most employees had previously chosen. If family health care costs are
tow, the family will actually get the money left over in the MSA rebated back to them,
which doesn’t happen under most insurance plans.

‘The cost to the City for family coverage under the State Health Benefits Plan was
$6,800 per year and rising (premiums had doubled in just the last five years). The cost
to the City to offer the MSA option is only $6,300 ~- $4,500 for the catastrophic insurance
policy, and $1,800 for the cash contribution to the Medical Savings Account.

What a deal! We've been able to obtain better coverage for our employees, which
lowers their out-of-pocket expenses and maintains their ability to choose their own doctor
while lowering total bealth care costs for the City!

Because of the MSA’s rebate potential, we expect even larger savings in the future,
as our employees are incentivized to avoid gratuitous expenses, and the reduced claims
‘experience that results translates into lower premiums. For example, Forbes, Inc. bas
been able to reduce its health insurance premiums by approximately 25% by offering
MSAs to its employees, while most other employers with traditional fee-for-service
insurance plans have seen their health insurance premiums increase.

‘The critics of MSAs argue that many families, lured by the prospect of a check at
the end of the year, will be tempted to forgo the medical care they need. But that's not
how MSAs work. [can share a personal experience about how MSAs eliminate wasteful
medical spending. Last week, I had minor foot surgery to treat a recurring ailment.
After the procedure, my doctor offered me a padded shoe, but I refused because I already


zy

Recognition of the "it's free syndrome" is why even
managed care is moving to higher deductible policies. The
problem with high deductible policies is that preventive care
may be avoided leading to more serious, and expensive, health
care needs later on. Therefore, a mechanism is needed that
provides an individual with the ability to pay the deductible for
preventative or necessary care and at the same time provides
him with a carrot not to over-utilize services.

Accordingly, Congress must enact legislation to allow for
funding of Medical Savings Accounts (MSAs) with pre-tax
dollars by employers or employees, or both. People should be
able to select an insurance policy with a high deductible and
lower premiums, placing the savings in an MSA for routine
medical expenses. Individuals holding down their health care
costs are rewarded by keeping unspent balances in the MSA.
Those funds can continue to grow, eventually funding long-term
care insurance or a Medicare MSA for retirees.

Critics of MSAs will claim that health care has become so
complex that consumers aren't capable of making quality and
cost-conscious decisions about their treatment. It is the current
system of third-party payment, and not the complexity of
medicine, which has created disincentives for consumers to
become knowledgeable. In my medical practice, patients
spending their own dollars were very responsible in learning
about the costs and benefits of each procedure. My sister has
taken charge of the care of my nephew with Down's Syndrome,
developing a keen understanding of the treatments which are
worth the cost, and those that are not. These anecdotal findings
are confirmed in scientific studies such as the one performed by
the RAND Corporation. They found that individuals with
higher deductibles were as healthy as those with lower
deductibles, but were smarter consumers and avoided
unnecessary services.

Health care consumers can, and do, make wise decisions
when they have a financial incentive to do so. By setting up
MSAs as an option for more Americans, this Committee will
take a giant step in the effort to eliminate over-utilization of
health care services.


65

Mr. McDeERMoTT. So, you are saying that the Continental and
the medical savings account up there on that chart, the benefit
packages are exactly the same?

Mr. GoopMaN. Roughly the same.

Mr. McDeERmorT. Roughly the same.

Mr. GOODMAN. Yes.

Mr. McDERMoTT. What is the difference?

Mr. GoopMAN. Well, I cannot tell you that every comma and pe-
riod is the same, but, roughly, they are the same benefit structure.

Mr. MCDERMOTT. But there is a $500 deductible on one and
$2,000 on the other. That is where I am having my trouble figuring
out——

Mr. GoopMAN. That has to do with the part to be paid by the
patient. But the services covered by the two plans are virtually the
same. How much mental health is covered by the two plans is the
same in both cases.

Mr. McDErRwort. Is there alcohol rehabilitation in the plan?

Mr. GOODMAN. I’m sorry?

Mt McDermott. Is there an alcohol rehabilitation benefit in the

jan?

P Mr. Goopman. I cannot tell you. I do not know.

Mr. McDeERMoTT. I see.

Thank you, Mr. Chairman. I would like to have—I also would
like to see a copy of your actual plan that people have, so we can
actually look at what this card guarantees them to or does not
guarantee them to.

Mr. GoopMaw. That is not our card.

Mr. McDermott. I understand that. We will get the plan from
this one, too, but I would like to see yours, because I think people
will get caught in the details. What sounds like a good idea, you
can manage your own health care money, presumes you know what
is going to happen to you. None of us know and people are going
to get squeezed by this thing.

Mr. GoopMaN. Mr. Chairman, may I respond to that?

Mr. CHRISTENSEN. Yes.

Mr. GoopMaAN. The restrictions that are there on that card have
nothing whatever to do with medical savi: accounts. Those are
the kinds restrictions that are being imposed on people by managed
care plans all over the country. And what medical savings accounts
do is, it gives people a little bit of freedom, and a little bit of control
over their own health care dollars so that every decision is not
made by the managed care bureaucracy.

Mr. McDeErRwotTt. I would just, in answer, it is on a medical sav-
ings account. It is the RCI medical savings account, so it is the
same as HMOs. Whatever you think you are getting away from in
an HMO, you will meet it coming around the corner in this.

Mr. CHRISTENSEN. The gentleman’s time has expired. The card
the gentleman is holding up is the MPO, Michigan Provider Orga-
nization. It is a managed care network and it is an example of RCI.
So, it is part of managed care.

I will recognize the gentleman from Louisiana, Mr. McCrery.

Mr. McCrery. Thank you, Mr. Chairman, and, Mr. McDermott,
you might want to check your insurance policy. I have checked
mine. I get it through the Federal employees health benefits pro-


42

he

Volt
Nod
May 1995

IssuE BRIEF

Medical Savings Accounts

The efficacy of medical savings accounts will be determined, in large part, by their plan design.
However, young and healthy employees could be big winners with an MSA. Depending upon plan
design, approximately two-thirds of current workers would gain financially if employers combined

MSAs with high-deductible plans.

Jn an American Academy of Actuaries study, the 17 percent of employees who have no medical
expenses reimbursed by their current health plan would have the highest gain—~possibly more than
{$600 under an illustrative plan examined by the Academy. The 8 percent of emplayees who have high
medical expenses would have the greatest loss-—as much as $900 under the same plan. Administrative
costs, which now account for approximately 15 percent of claims payments, also would be considerably

lower under MSAs.

This brief 1s based on the full report, “Medical Savings Accounts: Cost Implications and Design
Issues,” which is available from the American Academy of Actuaries.

1. Introduction: What Is an MSA?

A medical savings account (MSA), as envisioned in
most current proposals, is an individual medical
account that employees can draw from to pay medical
‘expenses. It is set up by an employer for an employee
who is eligible for health insurance coverage and is
funded by employer and/or employee contributions,

Funds in the MSA would be designated as the
employee's own money. Any portion of the fund
that is not used to pay for current medical expenses
can simply accumulate in the MSA. There it is

The American Acodemy of Actuaries isthe public policy voice ofthe
‘actuarial profession, providing te actuarial professions expertise to
‘olcy makes. Tistsue res token oma monograph on medical
‘savings accounts produced by the Acodemys Medical Savings
‘coset Werk Group, Edwin Husteod chairperson, Other membersof
the group are Peter Hendee, Roland E.(Guy King Mark Lito Gerald
A Shea, Hory Sutton Jr,ond George B. Wage

Whison W.Wyat Jr Executive Director
Gary Hendricks Director of Public Policy
Michael Anzick Heath Policy Analyst
Ken Krehbiel, Associate Director of Communications
1100 Seventeenth Street NW_7th Floor Washington,DC 20036
Tel 202223 8196 Fax 202872 1988

allowed to earn interest and will be available for any
future medical expenses.

Funds in an MSA usually would not be sufficient
to cover the cost of major illness. So MSAs will
almost always be combined with a health insurance
plan that covers medical expenses above a fairly high
deductible.

Deductibles that have been discussed range from
$1,000 to as high as $3,000. Above the deductible,
the catastrophic insurance plan might also have
some co-insurance, say 20% of all medical expenses
up to $5,000. Amounts in the MSA could be used to
pay expenses up to the deductible and copayments
above the deductible, provided the MSA had suffi-
cient funds.

‘As a general rule, MSA funds would come from
annual tax-free contributions made by the employer
to each employee's account. Initially, the employer
would probably contribute an amount equal to the
difference between the per-employee cost of the
high-deductible insurance and the per-employee
cost of the employer's lower-deductible plan. If the
combined MSA/high-deductible plan generated fur-
ther future savings, the employer might or might not
choose to pass the savings on to workers through
higher MSA contributions.

Because MSAs cannot be established under current
law, there are many theories about how MSAs might


66

1m, and on the back it says “Precertification is required for all
\ospital admissions and is ultimately your responsibility.” I think
you will find that it is the same——

Mr. McDermott. I have the same card. My point was this is not
giving people any-——

Mr. McCrery. If the gentleman would like me to yield.

Mr. McDERMoTT. Yes. You brought it up. This medical savings
account does not give you anything, because you are in the same
box. The insurance companies have got you in the vice.

Mr. McCRERY. Well, except for the first $2,000, you have pretty
much total freedom. You are not dependent upon the insurance
company, you are dependent on yourself. So, there is a great dif-
ference between the two.

Reclaiming my time. I just want to say to the gentleman that ev-
erybody needs to read the back of their card, in fact, their whole
policy.

If I can shift the focus for just a second to HMOs, HMO t:
managed care plans, I want to address this to Mr. Hustead and Mr.
Hendee. Are there risk selection problems associated with HMOs
in the marketplace?

Mr. HusTEaD. Any option has risk considerations with it.

Mr. McCrery. But are there risk selection problems, particularly
associated with HMOs in today’s climate?

Mr. HusTeaD. I am not——

Mr. McCrery. In other words, is there a fear or do we know that
healthier people tend to gravitate toward HMOs? Is there a risk se-
lection problem in today’s marketplace with HMOs?

Mr. HusTEAD. I think, in general, the studies have shown
healthier people, younger people have selected HMOs over the
years, yes.

Mr. McCrervy. Mr. Hendee?

Mr. HENDEE. Yes, the common expectation is healthier people do
move toward HMOs.

Mr. McCrery. And what about MSAs, are there risk selection
problems associated with MSAs; and, if so, are they roughly com-
Parable to those associated with HMOs, or are they greater? Less

in?
Mr. Husteab. It depends on the group. I think the same general
forces are there, in that the people—I guess if we are saying who
will stay with the traditional fee-for-service, low-deductible plan
and not go to an HMO or a high-deductible plan, people that need
the most health care tend to stay there because it provides the
greatest benefit. With a large employer, who will now look at the

SA and high-deductible option,these are the types of selection
questions they have dealt with for years, and I think they can suc-
cessfully monitor and deal with selection to make the effects what
they want them to be.

So, I do not think the introduction of high-deductible plans intro-
duces any large new selection problems compared to what has gone
on in the past.

Mr. McCrery. Mr. Hendee.

Mr. HENDEE. The selection may actually go in the other direc-
tion, to some degree, because people who do have some medical
problems and want to preserve their choice and not be restricted


101

Testimony to the House Ways & Means Committee
Health Subcommittee Hearing on Medical Savings Accounts
June 27, 1995

By John Burry, Jr.
Chairman and Chief Rxecutive Officer of Blue Cross & Blue Shield of Ohio
Chairman of Mountain State Blue Crost & Blue Shield

The 104th Congress has committed itself to reforming the way bealth care is
financed in America, The Ways and Means Committee, in particular, is to be
commended for taking om the two most fundamental issues relating to health care
financing: the continuing struggle to contain health care costs and the inequitable tax
‘treatment of health care expenditures.

If we learned anything in the health care debate which consumed the last
Congress, it is that it is a mistake to act too quickly without fully assessing the practical
implications of a legislative proposal. The American health care system is extraordinarily
complex. Health care is one-seventh of oar economy, a $1 trillion industry which
employs millions and, most importantly, provides vital services to every one of us and our
families. Any piece of legislation which relates to an industry so large and complex is
certain to have dramatic ramifications. Congress saw last year just how disruptive even a
well-intentioned proposal could be if not fully considered.

Much of what Congress is secking to do brings welcome common sense to the
subject of health care financing. For example, the permanent extension of the deduction
for health insurance expenses of self-employed persons which this Congress passed
earlier this year is an excellent first step in making needed health insurance coverage
affordable for all our citizens.

With respect to certain other proposals, however, [ urge you to heed the lessons
of 1994 and take a harder look. In particular, I urge you to consider more fully the
practical effects of medical savings accounts, particularly as proposed in H.R. 1818, “The
Family Medical Savings and Investment Act of 1995",upon our system of insurance and
health care financing.

In general, medical savings accounts, including that proposed in H.R. 1818, would
permit persons to make tax-preferred contributions to accounts which could be drawn
upon to fund the high deductibles associated with catastrophic health insurance policies.
At first glance, the medical savings account has a seductive and emotional appeal.
concept is simple, and there is an aura of self reliance to it that wings of denocry.

Notwithstanding that initial appeal, however, the impartial experts who have
thought through the real world consequences of MSAs, including the Congressional
Budget Office, the Congressional Research Service, the National Association of
Insurance Commissioners, and the American Academy of Actuaries, have separately
concluded that the practical effects of MSAs could be devastating.

It is difficult to overstate the harm MSAs would cause to our current system of
health care financing. As the CBO bluntly stated, MSAs “could threaten the existence of
standard health insurance.”

‘The CBO concluded that medical savings accounts would “exacerbate the problem
of adverse selection” in the health insurance marketplace. By inducing healthier persons
to gravitate towards high deductible plans, MSAs would undermine the very purpose of
insurance: spreading the financial burden of the few who incur high medical expenses
among the many who do not.


104

Discounts would only be realized by those who effectively sought them out.
Moreover, experience proves that providers will offset the cost of discounts by either
increasing volume or raising prices to others. Effective cost containment comes from
both insurance reform and increased productivity in health care delivery systems, which
MSAs would do nothing to promote. While MSAs give individuals incentives to seek
discounts, isolated discounts are not synonymous with cost containment and increased
productivity.

In fact, MSAs such as that proposed in H.R. 1818 would serve to preserve much
of the fee-for-service system which has limited productivity gains, for there is no other
practical arrangement for individuals to purchase specific medical services. For that
reason, CBO has concluded, “[Ijhe catastrophic-plus-MSA option might attract people
out of group- and staff-model health maintenance organizations. Those people would no
longer benefit from the efficiencies of HMOs.” Because H.R. 1818 expressly limits
MSAS to persons covered by catastrophic policies, it would drive consumers away from
the low- or no-deductible managed care plans which have proven in the medical
marketplace as among the most effective means of containing health care costs.

In addition, MSAs would blunt the financial incentives which would otherwise
encourage consumers and providers to restrict themselves to medically necessary and
appropriate services. Advocates of MSAs regularly have taken out ads which claim that
the accounts are a means of funding health care without government involvement. The
opposite is true. H.R. 1818, like all MSA proposals, provides that consumers would not
bear full cost of medical expenses funded by MSAs--those expenses would be subsidized
through the tax system. Under present law, consumers bear the full cost of deductibles
up to 7.5% of adjusted gross income, Thus, MSAs would eliminate certain disincentives
to over-utilize health care.

Finally, MSAs such as that proposed by H.R. 1818 would impede effective cost
containment because they generally may be drawn upon to be spent tax free on any
“medical expenses," a term which includes a great many health care costs which cannot
be applied to a catastrophic deductible. Thus, MSAs would provide a tax subsidy to
many expenses presently bome fully by the consumer, thus encouraging additional
consumption.

MSAs Would Discourage the Use of Primary and Preventive Care_

HLR. 1818, like other MSA proposals, would discourage the use of primary and
preventive care. Specifically, MSAs seek to reduce demand for care without reducing
the need for care through health prevention and promotion efforts.

MSAs would discourage the use of cost-effective primary and preventive care
because those expenses likely would not be covered by insurance. On the other hand,
the consequences of the failure to obtain such care would be fully covered once the
catastrophic threshold was crossed.

MSAs impose a financial penalty upon persons who seek primary and preventive
care. Because, as MSA advocates stress, the accounts are personal property, withdrawals
from the accounts take money out of the pockets of the patients. The
disincentive to seek primary and preventive care would be avoided through the use of a
standard low-deductible policy.

This problem may be mitigated in part if a portion of the amounts deposited in
MSAs were forfeited unless spent on preventive care, but H.R. 1818 has no such
provision.


i

Quaker Oats, Golden Rule Insurance Company and others have successfully implemented
MSA-type accounts to the benefit of both employer and employee.

For example, last month Tom Erhart, Vice-President for Human Resources for
RCI, a Michigan-based automotive specialty company, testified before this Subcommittce
on MSAs. Mr. Erhart told the Subcommittee that since implementing its MSA program,
the company was able to: (1) increase the level of benefits to its employees while reducing
its health insurance costs by nearly 15 percent; (2) return, on the average, over $1,000 to
nearly 75 percent of its employees; and (3) significantly reduce employer and employee
paperwork. As Mr. Erhart put it, it’s a “win-win situation for employer and employee.”

Itis for these reasons that I am a proud original cosponsor of H.R. 1818,
Chairman Archer's Family Medical Savings and Investment Act of 1995. This historic
piece of legislation provides that individuals covered by a catastrophic health plan, i.e., a
plan that has a deductible amount of at least $1,800 per individual or $3,600 for more than
‘one person ~ will be eligible for tax relief for maintaining and using an MSA for medical
expenses not covered by the health plan. Where contributions are made by an employer,
contributions would be excluded from the employee’s gross income. Where contributions
are made by an individual, contributions would be tax deductible. In both instances
withdrawals from an MSA would be excluded from income if used for medical expenses
for an individual and their family. I’m confident that this important measure will be passed
in the 104th Congress as yet another plank in the incremental bealth care reform platform
Republicans have proposed in order to “zero-in” on specific problems with our health care
system.

Before I close, 1 want to briefly touch on the tremendous potential MSAs hold in
helping us save Medicare from financial ruin while at the same time giving our nation's
seniors improved health care benefits and quality.

By now hopefully we all understand that Medicare is going broke. The Trustees of
the Medicare Trust Fund, including four of President's Clinton’s own appointees, recently


Coord AW PF WN =

SEES

14

XI
8

“(A) Except in the case of a rollover con-
tribution described in subsection (f)(3), no con-
tribution will be accepted unless it is in cash.

“(B) The trustee is a bank (as defined in
section 408(n)), an insurance (as defined in
section 816), or another person who dem-
onstrates to the satisfaction of the Secretary
that the manner in which such person will ad-
minister the trust will be consistent with the re-
quirements of this section.

“(C) No part of the trust assets will be in-
vested in life insurance contracts.

“(D) The assets of the trust will not be
commingled with other property except in a
common trust fund or common investment
fund.

“(E) The interest of an individual in the
balance in his account is nonforfeitable.

“(2) QUALIFIED MEDICAL EXPENSES.—

“(A) IN GENERAL.—The term ‘qualified
medical expenses’ means, with respect to an ac-
count holder, amounts paid by such holder—

“(i) for medical care (as defined in
section 213(d)) for such individual, the

spouse of such individual, and any depend-


26

Chairman THOMAS. And now it is our privilege to hear from the
Chairman of the Ways and Means Committee, the gentleman from
Texas, the sponsor of H.R. 1818, Chairman Archer.

STATEMENT OF HON. BILL ARCHER, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF TEXAS

Chairman ARCHER. Thank you, Mr. Chairman. It is rare that the
Chairman of the Full Committee testifies before a Subcommittee,
but this is, in my opinion, a very rare proposal, an extremely im-
portant proposal.

As we move into the Byzantine halls of health policy and seek
reform to strike at the flaws in the system, we should recognize the
great strengths of the system, too. And I applaud the Members and
the Chairman of the Subcommittee for their work in trying to im-
prove on a very good system by world standards.

We know that people want more personal choice and control over
their health care spending, and the bill before you today, H.R.
1818, the Family Medical Savings and Investment Act, does just
that. And I am pleased that my colleague and my longtime friend,
Andy Jacobs, has joined me in developing this proposal. We have
been working on this for at least 3 years now, Paving introduced
it some time back, and I believe we have continued to improve it
as we have gone along.

It will work for Texans and Hoosiers, for Californians, and Vir-
ginians because it increases personal choice and personal respon-
sibility for their health care spending. It provides American fami-
lies with an opportunity not only to determine what health services
they need, but also to do their part to put a lid on health care
costs, costs that have continued to skyrocket due to overutilization
and lack of accountability.

H.R. 1818 allows individuals who are covered by catastrophic
health plans to maintain a personal medical savings account to as-
sist in paying out-of-pocket expenses. And within limits, the con-
tributions are excludable from gross income if made by the em-
ployer and deductible if made by the individual.

It allows families to have freedom to go to any doctor, hospital,
or drug store they prefer. Families have control of how their health
care dollars are spent. If they find themselves facing health care
costs when they are unemployed or during retirement, the reserves
accumulated in their medical savings account balances can be used
to meet those needs.

And it is truly portable. You can take your medical savings ac-
count with you if you change jobs or retire. Paperwork is reduced.
Expenses are simply paid out of the MSA. Premium increases in
the catastrophic plan are lower because the premium base, with
the high-deductible policy, is lower.

Americans with conventional health insurance have few incen-
tives to buy services carefully. I believe this bill puts consumers in
the loop and provides the American family with a valuable tool to
use to help make the family paycheck stretch further; Freedom,
choice, personal responsibility, and savings. Those are the hall-
marks of the Family Medical Savings and Investment Act, H.R.

18.


x
7

1 “(B) Medicare supplemental health insur-
2 ance,

3 “(C) coverage issued as a supplement to li-
4 ability insurance,

5 “(D) liability insurance, including general
6 liability insurance and automobile liability in-
7 surance,

8 “(E) worker’s compensation or similar in-
9 surance,

10 “(F) automobile medical-payment insur-
11 ance,

12 “(G) coverage for a specified disease or ill-
13 ness, and

14 “(H) a hospital or fixed indemnity policy.
15 “(d) MEDICAL SavINGS ACCOUNT.—For purposes of
16 this section—

17 “(1) MEDICAL SAVINGS ACCOUNT.—The term
18 ‘medical savings account’ means a trust created or
19 organized in the United States exclusively for the
20 purpose of paying the qualified medical expenses of
21 the account holder, but only if the written governing
22 instrument creating the trust meets the following re-
23 quirements:


20

Written Statement of Rep. Matt Salmon before the Health
Subcommittee of the Ways and Means Committee

June 27, 1995

‘Asa proud cosponsor of Chairman Archer’s Family Medical Savings and Investment Act
of 1995, H.R. 1818, I appreciate the opportunity to testify before this subcommittee. The Ways
and Means Committee, and this Health Subcommittee, should be commended for investigating
Medical Savings Accounts (MSA’s), and Chairman Archer and his staff deserve our thanks for
their persistence in advocating Medical Savings Accounts.

Last year I stood beside Arizona Governor Fife Symington as he signed our state's
Medical Savings Account Act into law. I had introduced the bill in the State Senate because my
‘examination of MSA’s led me to conclude that they could improve considerably our health care
delivery and insurance systems for millions of people in Arizona and across America. But I also
recognized at that time that no state or states, and no employer or employers, could unleash the
full promise of MSA’s without changes in federal law. Thus, I promised { would take my fight
for MSA's to Congress; and, needless to say, I have been extremely encouraged to find that
many others have been fighting, and continue to fight, for the same goals.

What we are fighting for is to put MSA’s on a level playing field with other forms of
insurance, be they HMO’s or fee-for-service plans. We are not attempting to mandate MSA's on
anyone, but rather to offer Americans an additional option.

‘As you will hear throughout today’s hearing, a high-deductible catastrophic insurance
plan, combined with a Medical Savings Account, can empower patients to reddce their own
health care expenditures, Health care costs will fall as the persons receiving medical care are put
in charge of shopping for fairer rates and negotiating their own expenses. This will particularly
be true in the case of MSA's because participants who are successful will be able to keep their
savings.

‘The federal tax deduction envisioned in the Archer bill will make MSA’s attractive.
Currently, some employers provide MSA’s for their employees, even though MSA’s do not
enjoy the federal tax deduction that traditional employer-provided health insurance receives.
Once the playing field is leveled, as with the Archer bill, the cost-cutting potential of MSA’s will
fully flourish, and the empowerment it provides to employees will quickly make MSA's a
popular choice for many Americans.

By giving MSA's the tax incentives that other types of health insurance currently receive,
‘we will reverse the upward spirals in health care costs. In fact, I believe MSA’s are part of the
answer to how we can preserve and protect our Medicare system; and I would love to see MSA's
made available to federal workers, as a first step towards providing this option to all Americans.
intend to push these ideas through legislation currently being drafted, and I hope you would
invite me back to talk about them at a later date.

‘Thank you again for holding this hearing, and 1 urge you to support Chairman Archer's
fine MSA bill. Our constituents will benefit from its prompt passage. Thank you very much.


100

“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 bealth 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, at least eleven states have enacted MSA laws including
Arizona, Colorado, Idaho, Illinois, Michigan, Mississippi, Missouri, New Mexico, Utah,
Virginia and West Virginia

On the Federal level, the 103rd Congress produced a number of proposals incorporating MSAs,
with over 200 bipartisan House and Senate supporters. Legislation introduced so far this year
demonstrates the continued enthusiasm on both sides of the aisle for MSA legislation.

‘As the dog days of summer wear on, the AMA believes itis time for the United States Congress.
to step up fo the plate and hit a home run for patients, physicians and, in short, our health care
system by passing sound and sensible MSA legistation such as the Family Medical Savings and
Investment Act of 1995.

Mr. Chairman, we are grateful for the opportunity to share our thoughts with you. The AMA
looks forward to working with you, Chairman Archer, Representative Jacobs and the Congress
as this important legislation moves forward.


XXII

20
1 to exelude such payment from income under section
2 106(b).”
3 (d) TAX ON PROHIBITED TRANSACTIONS.—Seetion
4 4975 of such Code (relating to tax on prohibited trans-
5 actions) is amended—
6 (1) by adding at the end of subsection (¢) the
7 following new paragraph: |
8 “(4) SPECIAL RULE FOR MEDICAL SAVINGS AC-
9 COUNTS.—An individual for whose benefit a medical
10 savings account (within the meaning of section
il 220(d)) is established shall be exempt from the tax
12 imposed by this section with respect to any trans-
13 action concerning such account (which would other-
14 wise be taxable under this section) if, with respect
15 to such transaction, the account ceases to be a medi-
16 eal savings account by reason of the application of
17 section 220(e)(2) to such aceount.”, and
18 (2) by inserting “or a medical savings account

19 described in section 220(d)” in subsection (e)(1)
20 after “deseribed in section 408(a)”.

21 (e) FAILURE TO PROVIDE REPORTS ON MEDICAL
22 SAVINGS ACCOUNTS.—Seetion 6693 of such Code (relat-
23. ing to failure to provide reports on individual retirement

24 accounts or annuities) is amended—


XVIII
15
1 in such manner and furnished to such individuals at such
time and in such manner as may be required by those reg-
ulations.””
(b) DEDUCTION ALLOWED WHETHER OR NOT INDI-

VIDUAL ITEMIZES OTHER DEDUCTIONS—Subsection (a)

2
3
4
5
6 of section 62 of such Code is amended by inserting after
7 paragraph (15) the following new paragraph:

8 “(16) MEDICAL SAVINGS ACCOUNTS.—The de-
9 duction allowed by section 220.”

10 (c) EXCLUSIONS FOR EMPLOYER CONTRIBUTIONS TO

11 MEDICAL SaviNcs ACcOUNTS.—

12 (1) EXCLUSION FROM INCOME TAX.—The text
13 of section 106 of such Code (relating to contribu-
14 tions by employer to accident and health plans) is
15 amended to read as follows:

16 “(a) GENERAL RULE.—Gross income of an employee

17 does not include employer-provided coverage under an ac-

18 cident or health plan.

19 “(b) CONTRIBUTIONS TO MEDICAL SavINGS AC-
20 couNtTs.—

21 “(1) IX GENERAL.—In the case of an employee
22 who is an eligible individual, gross income does not
23 include amounts contributed by such employee’s em-
24 ployer to any medical savings account of such em-

25 ployee. For purposes of the preceding sentence, the


Co mem nd Aw Pk WN

yb RN Roe ee Be Be ee ee
RBRPEBRBEBSEerIABEBHRAS

Vi
4

“(B) MONTHLY LIMITATION.—The month-
ly limitation for any month shall be an amount.
equal to Yiz of the limitation which would (but
for this paragraph and paragraph (3)) be deter-
mined under paragraph (1) if the facts and cir-
cumstances as of the first day of such month
that such individual is covered under a cata-
strophic health plan were true for the entire
taxable year.

“(3) COORDINATION WITH EXCLUSION FOR EM-
PLOYER CONTRIBUTIONS, INCLUDING TRANSFERS
FROM FLEXIBLE SPENDING ARRANGEMENTS.—No
deduction shall be allowed under this section for any
amount paid for any taxable year to a medical sav-
ings account of an individual if—

“(A) any amount is paid to any medical
savings account of such individual which is ex-
eludable from gross income under section
106(b) for such year, or ;

“(B) in a case described in paragraph
(4)(B), any amount is paid to any medical sav-
ings account of either spouse which is so ex-
cludable for such year.

“(4) SPECIAL RULE FOR MARRIED INDIVID-

UALS.—


112

be excluded from income if used for qualified medical expenses (as defined under IRC §213°).
Withdrawals for non-health related expenses would be permitted, but would be treated as taxable
income and assessed a 10 percent penalty

Concerns with MSA/Catastrophic Coverage Proposals

As stated above, GHAA is concemed with the structure of H.R. 1818's MSA proposal because it
links MSA availability to an indemnity-type catastrophic plan and thus, provides more favorable
tax treatment to a specific form of coverage than other health care coverage options. We believe
that this catastrophic-based structure is likely to have a negative impact on the current health care
marketplace as well as on consumers -- those who remain enrolled in a comprehensive coverage
arrangement, such as an HMO, who likely will face increasing premiums, and those with
MSA/catastrophic coverage option who likely will find themselves "at-risk" for a significant
portion of their health care costs.

GHAA believes that MSA/catastrophic coverage designs are problematic for the following
reasons:

+ Interferes with market dynamics. Under current tax law, all employer-based health
benefits coverages (excluding coverage provided to the self-employed) receive the same
tax treatment -- whether an employee selects HMO, PPO, FFS or catastrophic
coverage. Under H.R. 1818, individuals with employer-provided catastrophic
coverage would receive the additional benefit of being able to (or having their
employer) set aside tax-preferred dollars an MSA to cover unreimbursed health care
expenses. GHAA believes that the favorable tax treatment of employees’ out-of-pocket
payments for health-related services under MSA/catastrophic coverage gives a financial
incentive to select MSA/catastrophic coverage in preference to comprehensive
coverage, such as HMOs. Providing a tax advantage to catastrophic coverage could
undermine the positive trends that HMOs are creating in the marketplace by serving to
lower the growth of health care costs and improve quality of care. By assigning
MSA/catastrophic coverage options tax advantages over other coverage options, the
federal government is essentially picking "market winners” and encouraging employers
and employees to choose MSAs for their tax benefits instead of evaluating their overall
quality and cost-effectiveness.

+ Creates adverse selection against comprehensive coverages. Experience with flexible
spending arrangements and catastrophic products has shown that catastrophic coverage
~- which has lower premiums because of the significant deductible ~ tends to be most
attractive to young, healthy individuals who have no or limited expectations for
requiring health services. Conversely, older and less healthy individuals will be
unlikely to find catastrophic coverage attractive, given their anticipated need for health
care services. As a result, tax-preferred catastrophic coverage likely would result in
adverse selection against HMO and more comprehensive coverage options, thereby
increasing premium costs for those remaining in the comprehensive coverage
arrangements.

‘The likelihood for adverse selection was highlighted by the National Association of
Insurance Commissioners (NAIC) in the context of last year's reform debate. in a letter
to the Senate Leadership, NAIC's Special Committee on Health Care Reform expressed
their concer that individuals at low risk for expensive health care treatment would opt
for catastrophic coverage, leaving the non-catastrophic health insurance pools with a
high proportion of "high risk” individuals and causing insurance costs to be higher for
those left in the health insurance pool.

“Limited for expenses for care," including paid forthe
“diagnosis, cure. mitigation, treatment, or prevention of disease.” for transportation "primarily for and essential to
such medical car:” and for “insurance covering such cure." Deductions are not allowed for cosmetic surgery unless
itis deemed necessary.


90

Chairman THOMAS. The gentleman from Nebraska.

Mr. CHRISTENSEN. Thank you, Mr. Chairman. I just wanted to
ask Mrs. Pierce, as an associate of Wal-Mart, what have you felt
to be the general feeling of the associates? Have they been very sat-
isfied thus far? What has been your general experience personally
as well as your representation of the other associates at Wal-Mart?

Ms. PIERCE. On this plan?

Mr. CHRISTENSEN. Yes.

Ms. PIERCE. We have not really even——

Mr. RATELIFF. Again, we have not instituted an MSA. We have
no experience.

Mr. CHRISTENSEN. Do you feel that there will be a general ac-
ceptance by a lot of the associates for that?

Ms. PIERCE. Oh, definitely. Yes, I do.

Mr. CHRISTENSEN. I wanted to ask Mayor Schundler, why do you
favor an MSA over managed care? And maybe you could delineate
a little more specifically why you think an MSA may be a better
alternative to go than a managed care system?

Mr. SCHUNDLER. I think what managed care does ultimately is
third party rationing. It is not as good to say that if you do some-
thing bad to yourself, we will make it all well again, than if you
can say to someone, we will give you an incentive not to do some-
thing bad to yourself.

So, you naturally have inflation when people are in managed
care systems because people are still going out and not doing pre-
ventive care. They have no incentive necessarily financially. So,
what ends up happening is, the way you begin to control costs in
a managed care system is by reducing benefits or by increasing em-
ployee copay. That is the only way you will really begin to reduce
costs in the long term.

I think it is far better to focus on preventive care, responsible ac-
tion, and on consumer shopping around. And that is the way to
really control health care costs without having to take away bene-
its.

Mr. CHRISTENSEN. I Really appreciate your leadership in these
areas as well as all the other areas you have been leading in. I
think we look forward to maybe taking it one step farther and add-
ing a little bit of a Federal slice to this MSA with an amendment.
So, thank you so much for your leadership;

Mr. SCHUNDLER. Congressman, if I could add one point?

Mr. CHRISTENSEN. Yes.

Mr. SCHUNDLER. I think you would also see the Treasury benefit
immediately. Because, again, since health care costs are an exclu-
sion and our total exclusion now goes from $6,800 to—again, we
are not taxable to begin with. But gay we were a corporation, our
costs would go from $6,800 to $6,300. That is $500 more per family
member you would be able to tax.

I might add that the rebate under the Archer plan is taxable in-
come also. So, you would be able to tax that also. You would have
an immediate positive impact not only if you extended it to your
employees, but for everybody else who uses it. There would be more
money for government to tax unless there is an exclusion.

Mr. CARDIN. If whoever has the time would yield?

Chairman THOMAS. The gentleman would be happy to yield.


49

needs.

As the cost of medical care rises, deductible levels that are
catastrophic today will, over time, be reached by an increasing
portion of individuals and families. Periodic updating of the
deductible is necessary for the long term success of these plans.
The catastrophic deductible must not be allowed to become
irrelevant, suchas a $50 deductible is today. If it becomes
immaterial, then the individual's incentive to control health care
spending is weakened.

Administrative Expenses

Filing and processing claims has a cost for patients, for health
care providers, and for insurance companies. Small expenses,
particularly for routine services, are better handled by the
patient paying for them directly.

The majority of people will not exceed their catastrophic
deductible amount in a year. These people can pay for all of their
health care directly. This eliminates the need to process detailed
information on their health care spending.

State Laws

Mandated insurance benefits, such as first dollar coverage for
certain preventive services, are required by some states. For
example, Florida Insurance Law Section 627.6579 specifies a
schedule of physician services for children that must be covered,
exempt from any deductible, under all group insurance policies that
provide expense-incurred family coverage. As a result of these
laws, in some states it may not be legal to issue health insurance
coverage that meets the proposed definition of a "catastrophic
health plan." :

One possible solution is to preempt state mandated benefits, at
least for catastrophic products to be used in conjunction with
nedical savings accounts. Another possible solution is to expand
the definition of "permitted coverage” in H.R. 1818 to include
mandated benefits.

Conclusion

Many states have enacted medical savings account legislation and
many other states are considering such action. Unfavorable federal
tax treatment, however, is a forceful impediment to widespread use
of this increasingly popular free market health care reform.

I am pleased to be here today to support the same tax treatment for
health care saving and health care spending. I will be happy to
take your questions.


4

Chairman THOMAS. The Health Subcommittee will come to order,
please.

Today, the Health Subcommittee will receive testimony on H.R.
1818, the Family Medical Savings and Investment Act of 1995. I
am pleased to be an original cosponsor of what I believe to be an
important health reform and tax legislation bill. It has been devel-
oped by the Chairman of the Ways and Means Committee,
Congressman Bill Archer, and our distinguished colleague from the
Committee, Congressman Andy Jacobs.

H.R. 1818 amends the Tax Code to allow Americans who are cov-
ered by a catastrophic health insurance plan to maintain a medical
savings account, which we normally call MSAs, to assist in paying
for medical expenses not covered by their health plan.

Providing Americans with MSAs combined with catastrophic
health coverage is an alternative to congressional health insurance.
The MSA concept has, frankly, caught the imagination of the gen-
eral public as well as many of the Representatives here in
Congress.

It is an attractive alternative to conventional health insurance,
I believe, because it would contribute to two of the most important.
goals of health reform. First, it would assist in expanding afford-
able health coverage for Americans, and second, MSAs would pro-
mote personal responsibility in cost conscience purchasing of
medical services.

The old-fashioned fee-for-service form of health insurance leaves
physicians and their patients with little knowledge and, therefore,
little concern about the costs of particular treatments or proce-
dures. Historically, health insurance has been there to pay, so often
neither the physician nor their patients have spent medical care
dollars carefully.

In addition, as the old style indemnity insurance has grown in
cost, it has fueled medical inflation. The old style insurance has it-
self become a factor in the decline in coverage as employers and in-
dividuals have found it more difficult to bear the burden of such
costly health insurance.

Coverage by coordinated care arrangements, such as health
maintenance organizations, have proved defective in curbing health
care costs. But in our pluralistic society, many employers and indi-
viduals see choice of additional strategies to health care coverage
as a plus in working the affordability game. MSAs are one such
alternative.

This approach will enhance coverage by keeping it affordable.
And unlike most employer plans, MSAs are truly portable, follow-
ing an employee when he or she leaves a job, changes jobs, or
retires.

MSAs also empower the individual in regard to medical care pur-
chasing, I believe, and an individual with an MSA will benefit from
taking responsibility for staying well and avoiding health costs or
buying carefully when medical services are necessary.

These new incentives for individual consumers of health care
should keep costs down, since those with MSAs are personally re-
sponsible for how much they spend on a significant portion of their
health care needs.


Cm YN AH ea WD &

N ee
RBREBREBVSCweIUIFARESESEAS

XIV
ll

subparagraph, all medical savings accounts of

the account holder shall be treated as 1 ac-

count.

“(2) ACCOUNT ASSETS TREATED AS DISTRIB-
UTED IN THE CASE OF PROHIBITED TRANSACTIONS
OR ACCOUNT PLEDGED AS SECURITY FOR LOAX.—
Rules similar to the rules of paragraphs (2) and (4)
of section 408(e) shall apply to medical savings ac-
counts, and any amount treated as distributed under
such rules shall be treated as not used to pay quali-
fied medical expenses.

“(f) TAX TREATMENT OF DISTRIBUTIONS.—

“(1) INCLUSION OF AMOUNTS NOT USED FOR
QUALIFIED MEDICAL EXPENSES.—

“(A) IN GENERAL.—Any amount paid or
distributed out of a medical savings account
which is not used exclusively to pay the quali-
fied medical expenses of the account holder
shall be included in the gross income of such
holder to the extent such amount does not ex-
ceed the excess of—

“(i) the aggregate contributions to
such account which were allowed as a de-
duction under this section or which were

excluded under section 106(b), over


Testimony of Representative Jon Christensen
Before the Health Subcommittee
of the
Committee of Ways and Means
June 27, 1995

Mr. Chairman, I want to thank you and the other members of the Subcommittee for
this opportunity to testify today regarding a health care reform measure that represents a
significant step in solving the problems facing our health care system. What I’m referring
to, of course, is the Medical Savings Account.

Medical Savings Accounts, or MSAs, are a revolutionary idea whose time has
come. Although there are countless variations, MSAs generally allow individuals to save
money in a tax-exempt account, much like an IRA. Instead of purchasing an expensive
“first-dollar” type of insurance policy, the individual would purchase a less costly, high-
deductible catastrophic health insurance policy to cover major medical expenditures. The
individual can use the money in the MSA to cover routine medical expenses with the
catastrophic policy covering major medical expenses.

MSAs have many benefits. First, MSAs create strong incentives for cost- and
quality-conscious health care decision making. Most health care experts will tell you that
the main reason health care costs have skyrocketed in recent years is because there is little
or no price-sensitivity in health care purchases. Under the third-party payment model that
currently dominates our health care system, transactions between health care providers and
individuals are paid by a third party such as an insurance company of the government.
Current estimates reveal that 95 percent of hospital bills and over 80 percent of physician
fees are paid by some third party. This system perpetuates the misconception that someone
else is picking up the health care tab and, thus, the individual doesn’t have to worry about
the cost or need for care. This has created increased health care consumption, which in
tum has caused inflationary pressure on health care costs.


18

How do working Americans fect about tax advantages which could be associated with Medical Savings

Accounts? Workplace Pulse asked: “Congress has not yet decided on the tax advantages associated with
Medical Savings Accounts. How much money, if any, would you want your cmployer to withhold from

your salary each month and put in a Medical Savings Account for you under the following conditions? If
hone, just say 30.”

‘© Ifthe moncy you put in a Medical Savings Account is taxed like your regular carnings, but
you do not have to pay taxes on any interest or gain from investments in this account.

‘© IF the money put into a Medical Savings Account is tax deductible just like an Individual
Retirement Account where you pay no taxes on the money invested in the account or the
‘camnings from the account. ‘

Employee Varticipation In Medical Savings Accounts"

No Taxes On
No Taxes On Mency lavexted
Iaterest Or Gait _| "On Interest Or Gain

Ginployces Participating aK Coy
‘Employees Not Participating a7 6
Undecided Employee 9 7 %
‘Average Monthly Investment - All Employees $35.17 saz
“Average Monthly investment - Participating Employ S7L09 $99.09

== BULSESG
eee SURVEYS OF AMERICA INC.


1

had one at home from an earlier procedure. Because I was enrolled in an MSA, I had
an economic incentive to refuse something I just did not need. In contrast, if an
insurance company were going to be picking up the entire tab, what incentive would I
have had to say anything?

The bottom line is this: the American people aren’t afraid to make informed
judgements about their own health care needs. As consumers, we make thousands of
purchasing decisions each and every year. What we do fear is losing the right to make
choices for ourselves through third-party rationing. We don’t think government, or our
employer, should have the power to determine what health care we are eligible to receive.
We want to retain that power unto ourselves. And that’s why MSAs are so popular --
they keep the power to choose in our hands as patients, instead of putting it into the
hands of government, employers, insurance companies, or health care providers.

“The Family Medical Savings and Investment Act of 1995" will make MSAs even
more attractive and will accelerate their usage. It will stop the foolish practice of treating
funds that an employer deposits imto an MSA as taxable income. Under HR 1818, only
the unspent funds that an employee is rebated at year’s end would be taxable.
Individuals would also be given the option of starting a "medical IRA," whereby unspent
funds accumulated from their MSAs could be saved, tax-free, for future m
This too is a great idea, which will expand the affordability, and portability, of health
insurance.

Unlike most tax expense legislation, HR 1818 will not put a dent in the federal
treasury. Right now, employers deduct 100% of their employees’ health insurance
premiums as a business expense. This practice will continue with MSA contributions
treated the same way as premium payments, but because total health care costs to the
employer will decrease with MSAs, the cost to the Treasury of this tax exclusion will also
decrease. Further, when employees are rebated any extra funds remaining in their
MSAs at year end, this additional personal income will be taxable.

I would recommend that Congress take this proposal one step further and offer
MSAs as a voluntary option to federal employees, as well as to Medicare and Medicaid
recipients. It would improve the coverage provided by these programs, reduce their cost,
and slow down their future cost growth — again, not by third-party rationing, but by
giving individuals an incentive to take an active interest in the quality and cost of the
medical care they receive.

MSAs are the solution to maintaining health care choice while restraining health
care inflation. But there is an additional benefit from MSAs that you cannot put a price
tag on. By providing a financial incentive for Americans to take an active interest in
their health care needs, MSAs will also help to increase American health consciousness,
and will encourage Americans to practice even greater preventative care. Let’s hope that
the House Ways and Means Committee moves quickly to pass the "Family Medical
Savings and Investment Act of 1995."



XV

12
1 “(ii) the aggregate prior payments or
2 distributions from such account which were
3 includible in gross income under this para-
4 graph.
5 “(B) SPECIAL RULES.—For purposes of
6 subparagraph (A)—
7 “(i) all medical savings accounts of
8 the account holder shall be treated as 1 ac-
9 count,
10 “(ii) all payments and distributions
Wu during any taxable year shall be treated as
12 1 distribution, and
13 “(iii) any distribution of property
14 shall be taken into account at its fair mar-
15 ket value on the date of the distribution.
16 “(2) PENALTY FOR DISTRIBUTIONS NOT USED
17 FOR QUALIFIED MEDICAL EXPENSES.—
18 “(A) IN GENERAL.—The tax imposed by
19 this chapter for any taxable year in which there
20 is a payment or distribution from a medical
21 savings account which is not used exclusively to
22 pay the qualified medical expenses of the ac-
23 count holder shall be increased by 10 percent of

24 the amount of such payment or distribution


i

‘On the subject of Medical Savings Accounts, Workplace Pulse asked: “Congress is considering a new
Medical Savings Account that would allow you to have money put aside for current or future medicat
expenses. This would be somewhat similar to the current Individual Retirement Account, except the
money would be set aside to meet medical expenses now and after you retire. Do you think Congress

should or should not create this new Medical Savings Account?"

Should Congress Create Medical
Savings Accounts

Uncertain |

Workplace Pulse National Survey
bie reel SURVEYS OF AMERICA INC



82

STATEMENT OF CHARLES R. RATELIFF, SENIOR VICE PRESIDE}
BENEFITS ADMINISTRATION AND RISK MANAGEMENT, WAL-MART STORES, ING.

Thank you for giving us an opportunity to speak to you today.

Wal-Mart, Stores, Inc. is a member of the Intemational Mass Retail Association, a
trade association representing the nation's $282 billion mass retail industry, and
which collectively employs over a million people.

‘Our message is very simple. We at Wal-Mart have looked at Medical Savings
‘Accounts or medisave, carefully and believe itis simply an excellent idea

Patient control is at the heart of medisave. It is our belief that health care consumers
will make better health care spending decisions through the freedom medisave
would provide. They will be able to work with their doctors to tailor care to their
needs if more of their spending is free of the rules and procedures which are
necessarily part of health insurance.

Critics of medisave fee! that patients and doctors won't be able to make sound health
care decisions without the help of institutional managed care. We believe that
notion greatly underestimates the American public. For example, Wal-Mart
pharmacies answer tens of thousands of inquiries a week from customers who
personally pay for their own prescriptions and who are shopping for the best prices.

In the short-term medisave will:

+ Give people ~ health care consumers ~ more control of their health care dollars,

«Give people more insurance options,

+ Give people an affordable way to choose higher deductible, lower cost
insurance, and

+ Lead to more portability in health coverage.

‘Additionally, in the long run medisave will:

«Improve doctor-patient relationships by removing insurance "managed care”
from many health care services,

Lower health insurance costs,

Provide a way to pay for long term care,

Promote personal savings, and most importantly,

Lead to a healthier America, which is what we all want.

We have been able to speak with a number of other employers about the medisave
concept. The way we see it, medical savings accounts would be offered as
voluntary options to employees, funded by either employer contributions, voluntary
employee contributions, or a combination of both.

Medisave is an idea the working men and women of America want and will
understand. We have received a number of calls and letters from Wal-Mart
associates around the country asking for the kind of belp medisave would provide.

One of our hourly associates, Joi Easterling, had a good idea. Wal-Mart offers four
health plans with deductibles ranging from $250 to $1000. Joi switched from the
250 plan to the 1000 plan and put her bi-weekly payroll deduction savings in a
special savings account. She figured out that she and her family would soon have
‘enough savings to cover the higher deductible and then some. However, not all


- 98

‘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 feel 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? Unfortunately, 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
‘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.

‘MSAs will spur much needed competition in the health care marketplace. MSAs as contained
in the Archer-Jacobs bill represents 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, the AMA believes the Archer-Jacobs bill
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.

‘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 a 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, two northeast
companies, have had virtually the same experience with their MSAs ~ the cost of the premiums
for their employee's health insurance fell significantly.

Further, by allowing unspent balances in MSAs to be carried over to subsequent years as set
forth in the Archer-Jacobs bill, 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 plans of their choices, MSAs as contained in this
legislation, represent one of the best approaches to achieving cost savings in a competitive
environment.

‘We believe the Archer-Jacobs bill would have the capacity to increase portability of health care
policies, a goal which has 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.
According to the NCPA, a leading advocate of MSA legistation, of the 37 million Americans
who are uninsured this month, more than 50% will be insured four months from now. More
than 70% will be insured within one year. While the greater availability of MSAs will not
completely solve the portability problem, they could result in greater access to our health
delivery system.


Conclusion, Employers, insurers, and providers
have built a complex web of management controls
and discounts that have already squeezed much of the
savings out of the health care industry. Most of these
programs offer several ways for the employee to opt
‘out of the highly managed care but with control
‘mechanisms that overcome the effect of adverse selec-
tion. The major problem for employers and insurers
will be to expand and restructure their programs to
fold in an MSA/high deductible option without losing
the savings already achieved by the current program.

6. Effects on Health Care Costs

‘To estimate what savings (or losses) might be antici-
pated from the new MSA/high-deductible plans,
three actuarial assumptions are needed. ‘These are
(1) the distribution of health care expenditures
under current plans; (2) the change in utilization and
cost that would ensue from the higher copayments of
the high-deductible components; and (3) the extent
to which the availability of an MSA fund would off-
set the savings from high deductibles.

‘The work group compiled the best available data
on how health dollars are spent today. The group
selected a range of factors used in predicting how
‘much utilization and cost might decline when copay-

ease. This information was employed to
the consequences of substituting a new
-deductible plan for a fee-for-service plan
that has little or no management of care.

“The new MSA's effect could range, on average, from
almost full offset of the expected dampening impact
of a higher copayment to lite impact at all, ‘The key
the employees’ perception of their MSAs. Do they
think of their MSAs as their own personal savings
which must be conserved for medical emergencies?
(Or do they view their MSA as merely additional insur-
ance money to spend as they like on health care? It is
this spectrum of differences in how employees would
view their MSAs that requires the use of ranges in the
estimates below.

Bearing this in mind, we can anticipate the impact
of increasing a deductible for an individual from
$200 to $1,500. Co-insurance above the deductible is
20%. ‘Then, total expenditures for health care costs
would decrease from $3,041 per employee to a range
of $2,695 to $2,976.

4 RESEARCH BRIEF MAY 1995

45,

Also, the premium for the health plan would drop
by a range of $585 to $690, Assuming that the
employer holds constant how much it spends for its
employees’ health care, this is the amount that the
employer would pay into each employee's MSA.

The average worker's out-of-pocket expenditures
would fall from $882 to a range of $536 to $817.
However, the range of out-of-pocket charges for
individual workers would be much greater.

The largest average savings for the 17% of employ-
‘ees who have no medical expenses reimbursed by their
current health plan would be $574 to $676, This
money would actually accrue for those workers, per-
sonally, in their MSA accounts.

At the other end of the spectrum, the largest cost
increase would be experienced by the 8% of employ-
‘ees who have high medical expenses. They could see
an average increase in their cost ranging from $827 to
$926. And an individual worker could have a much
higher increase than the average. ‘These are their
incurred out-of-pocket expenses that would be added
to the out-of-pocket expenses under their old plan,
less the employer MSA contribution.

These numbers are predicated on two assump-
tions. First, all employees are covered by the MSA, so
there is no adverse selection. Second, managed care
in the current plan is minimal. Under this scenario,
roughly two-thirds of all employees would stand to
gain financially by the introduction of MSAs. The
other one-third would lose, because less of their high
‘medical costs would be covered.

Conclusion. It is reasonable to expect some sav-
ings in health care expenses from the introduction of
MSAs. However, that expectation is predicated on a
favorable outcome with a long list of factors. Some
of these factors will be within the control of the indi-
vidual company (plan design features). But others
(notably, tax treatment) are external to the company.

Therefore, achieving the greatest possible savings
via MSAs will require well-designed legislation. It
will also rest upon careful planning on the part of
those employers that decide to establish health care
plans with MSAs. Finally, the savings will depend on
the extent to which individuals believe they have
some stake in spending their MSA dollars wisely,
along with their ability to become more sophisticat-
ed, cost-conscious health care shoppers.


51

Now, not all employers may choose to design their plan the way
that we have, but of the plans I have looked at in the marketplace,
most of them have this type of design. In other words, if you look
carefully at choices people are exercising, you will find that in most
cases sick people gain by choosing the medical savings account al-
ternative.

I would also like to address one other criticism that has been
made this morning, and that is the idea that medical savings ac-
counts interfere with managed care. The fact of the matter is they
really do not. At the NCPA, we have to decide when our employees
have actually met the $2,000 deductible before the plan starts pay-
ing for all medical expenses. As it turns out, we count all of their
expenses as long as they stay in a network that has been selected
for us by the insurer. If the employees go outside the network,
which they can, then we only pay 75 percent of the usual and cus-
tomary fees.

What we have is essentially a network, a point-of-service plan
that is very common in managed care plans around the country,
but we also have a medical savings account. What we have done
is we have integrated the medical savings account with managed
care. We think, in this way, we get the advantages of both.

The problem, Mr. Chairman, that several others have pointed out
this morning, is the tax law. The tax law discriminates against this
kind of plan. It subsidizes other kinds of plans. What we ask for
is a level playingfield. Let us let the market decide what the right
kind of plan is. Let us not do so legislatively.

Thank you.

{The prepared statement follows:]


a a ee nS

NY NKR ND] — ee ee me es
Ae ON FSF BCMA AA RHENH AS

XX
17

“(i) specified incurred expenses may
be reimbursed (subject to reimbursement
maximums and other reasonable condi-
tions), and

“(ii) the maximum amount of reim-
bursement which is reasonably available to
a participant for such coverage is less than
500 percent of the cost of such coverage.

In the case of an insured plan, the maximum

amount reasonably available shall be deter-

mined on the basis of the underlying coverage.

“(4) COORDINATION WITH DEDUCTION LIMITA-
TION.—The amount excluded from the gross income
of an employee under this subsection for any taxable
year shall not exceed the limitation under section
220(b)(1) (determined without regard to this sub-
section) which is applicable to such employee for
such taxable year.”

(2) EXCLUSION FROM EMPLOYMENT TAXES.—

(A) SOCLAL SECURITY TAXES.—

(i) Subsection (a) of section 3121 of
such Code is amended by striking ‘‘or” at
the end of paragraph (20), by striking the
period at the end of paragraph (21) and

”

inserting “; or’, and by inserting after


9”

A final Medical Savings Account question looked at how these accounts should be handled. Workplace
Pulse asked: “Do you think Medical Savings Accounts should be handled through your place of
employment where money is automatically deducted each month and your employer handles the
paperwork, or would you prefer that Medical Savings Accounts be handled by individuals who can open
‘an account at a focal bank or investment firm?”

Handling Of Medical Savings Accounts
c L L I I

ae PULSEGB
SURVEYS OF AMERICA,

June 27, 1995


H.R. 1818, THE FAMILY MEDICAL SAVINGS
AND INVESTMENT ACT

TUESDAY, JUNE 27, 1995

HousE OF REPRESENTATIVES,
COMMITTEE ON WAYS AND MEANS,
SUBCOMMITTEE ON HEALTH,
Washington, DC.
The Subcommittee met, pursuant to call, at 11 a.m., in room
1100, Longworth House Office Building, Hon. Bill Thomas (Chair-
man of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]

c6))


30

Chairman THomMas. I thank the Chairman for his testimony.

I thank all the Members for their testimony.

Are there any Members who wish to inquire of the Members?
The gentleman from Nevada.

Mr. ENSIGN. Thank you, Mr. Chairman.

One of the points that was brought out by you, Mr. Salmon, was
the administrative costs. I do not think that that can be
downplayed at all, because every hearing we have on health care
somebody brings up administrative costs and the bureaucracies
that are set up in the private sector as well as the public sector.
Because one of the criticisms that we always hear people that criti-
cize Medicare and Medicaid and the whole Federal bureaucracy is
that they respond by saying that we have this huge bureaucracy
in the private sector. I think that is one place that medical savings
accounts will help address, is the huge costs that we have in both
the public and the private sector.

Chairman Archer, could you please address—how potentially this
could be applied after somebody has been in the system for years,
when they get older? Because one of the problems we have now is
in long-term care for the elderly. How could this be applied if some-
body has been in it for 20 years and now they have a medical sav-
ings account built up versus the system we have now?

hairman ARCHER. Well, each individual that was able to accu-
mulate any savings, and, obviously, not every individual could do
so, but I think most would, will then have access to that later on
in life, which would be very helpful to offset some of the additional

nses that come later in life.

fe also are in the process of trying to develop, in fact we will
develop, a medical savings account for retired persons, for senior
citizens. It will have to be somewhat different than this, but I
think it should be an option for Medicare enrollees also, should
they elect to use it.

Mr. ENSIGN. Thank you.

Dr. Ganske, you mentioned that you were one of the only doctors,
well, maybe a different profession, but certainly I experienced the
same things in veterinary medicine that you experienced with your
elective plastic surgery.

Can you address, because this was something I experienced, the
communication between the doctor and the patient, when you are
having to educate them on the cost as well as everything else in
that elective part of your practice. One of the things you hear
about, is that we have lost the doctor-patient relationship that used
to exist.

Mr. GANSKE. Well, I think that a question concerning the pa-
tient’s ability to be a wise consumer is going to relate to the kind
of access they have to information that would allow them to com-
parison shop. And there are mechanisms and agencies we will de-
velop that will allow a person not just to phone other surgeons or
physicians in the medical area, but to get a comparisons.

Insurance companies have already developed a lot of data on
comparison costs in the medical area. We already have RBRVS
data and it would be very simple for a practitioner to simply cal-
culate a conversion factor, for instance, on relative value standards
for data that we already have on specific types of services that you


1)

I am a board member of the Employers Council on Flexible
Compensation which, coincidentally, has just conducted research into
working Americans’ attitudes on medical savings accounts. Since 1992,
the Council has co-sponsored Workplace Pulse, the only periodic survey
of full-time employed workers.

This most recent Workplace Pulse, which was conducted during
the first week of June and released earlier today, found that 85% of
American workers believe that the Government does not provide adequate
incentives through tax advantages for the average working person to save
for their current and future healthcare needs.

Asked specifically whether Congress should create medical savings
accounts, a majority of workers support such legislation. By a margin of
56 to 32 percent, working Americans want MSAs. Moreover,
Participating workers said that if their contributions are tax exempt, they
would be willing to contribute as much as $99.00 monthly to an MSA--or
$72.00 if their interest or investment gain were not taxed. Two out of
three, 66 percent, said that they would participate in medical savings
accounts if they were not taxed on the principal or interest accruing in
their accounts.

Mr. Chairman, we believe that many of the healthcare reform
proposals put forth last Congress failed to account for the diversity of
today’s workforce and the desire of working Americans to make their own
decisions about their healthcare needs. We believe that the public rejects
the “big brother knows best” attitude that has characterized so much
federal policy-making in this area. Rather, we are encouraged that this
Congress may pursue creative solutions such as medical savings accounts--
solutions that respond to employers’ and employees’ desires to control
their own healthcare destinies.

Thank you.


13

Chairman THomas. Now we will hear from our friend, the Chair-
man of the House Agriculture Committee, the gentleman from
Kansas, Mr. Roberts.

STATEMENT OF HON. PAT ROBERTS, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF KANSAS

Mr. Roserts. I thank the Chairman not only for his leadership
but for his strong support of the MSA concept, the medical savings
account concept, and would only opine, in regard to Mr. Stark’s ob-
servation that he is raining somewhat on the MSA parade, that
you do not necessarily have to be that Al Capp character in regard
to Li’l Abner, which really dates me, Joe Boozlefoop, or whatever
his name was—Mr. Jacobs has the name, you know, I can’t remem-
ber that—but, at any rate, this is not really doom and gloom. It is
just not a program to get the wealthy and the healthy to take away
or skim and scam or film and flam in regards to your regular pol-
icyholders.

My remarks come, obviously, because of my association with the
House Agriculture Committee. One quarter of the U.S. population,
about 65 million persons, do reside in the rural areas. We have
very special characteristics and special needs that pose challenges
to providing our rural health care services. We are more likely than
the urban residents to be simply uninsured. We are often out of the
mainstream of employment-based health insurance coverage be-
cause we are self-insured farmers and ranchers or small business
people or seasonally employed workers such as a custom cutter.

lany rural residents are employed by small businesses that do
not provide health insurance benefits or are unemployed alto-
gether. As a result, a higher proportion of our residents must pur-
chase individual health insurance policies on their own. These poli-
cies are generally more costly than the group coverage and make
the coverage less affordable in the rural area.

But we in rural America are used to developing our own solu-
tions to our health care problems. Rural consumers are not looki!
for more Federal handouts or any more regulatory schemes. Rural!
Americans are looking for the proper tools to make their own deci-
sions and to help themselves. The medical savings accounts are
such a tool that will help our farmers and ranchers and our small
business people certainly meet their health care needs.

The farmers and small business folks really prefer an approach
to health insurance coverage that puts them in charge of their own
health care dollars. The family savings account does just that. This
approach will allow the individual to control ‘ir spending

ugh the use of a high-deductible and catastrophic plan com-
bined with the MSA trust to pay for the smaller medical bills.
These plans encourage savings and responsible spending decisions.
They help ensure that individuals and families have the adequate
health insurance in times of economic hardship or unemployment.
Since they are portable, they also really start to eliminate fear
of losing health benefits due to a job loss or a chai And finally,
the individuals have the option to choose the plan that works best
for them.

I know we are moving into a new managed care world. The MSA,
the medical savings account will become an even more important


Recommendations for Modifying H.R.

113

‘The current health care marketplace has evolved to limit selection bias and to ensure
that various coverage options serve similar populations. Contrary to statements that
have been made about selection patterns in HMOs, evidence is accumulating that
HMOs care for unhealthy and chronically ill populations at approximately the same rate
as the fee-for-service (FS) sector. A study published recently in the peer-reviewed
journal Health Affairs ("Do HMOs Care For the Chronically I1I?", Health Affairs,
Spring 1995) noted that there is no consistent pattern to the types of individuals with
chronic conditions that are enrolled in HMO or FFS plans. An analysis by the
‘National Research Corporation found similar results, concluding that the self-assessed
health status of the HMO and FFS populations is virtually identical.

Leaves individuals with considerable exposure for out-of-pocket costs.

MSA/catastrophic coverage proposals that rely on employer funding for MSAs with
money saved from switching from “comprehensive” coverage plans to catastrophic-type
plans could leave individuals with considerable out-of-pocket expenses. According to
analyses by the Congressional Research Service (CRS) (using the Hay Group) and Ford
Motor Company, annual employer contributions to MSAs are likely to be significantly
lower than the catastrophic plan's deductible, requiring individuals to pay for the majority
of their care on an out-of-pocket basis. For example, catastrophic coverage with a $2,500
deductible would reduce premiums by only about $600 for individual coverage over a
typical comprehensive coverage alternative. Assuming that the employer puts all of the
“savings” in the employee's MSA, it would take over four years for the employee to
accumulate enough funds to cover the deducible, assuming that the individual does not
withdraw any money to pay for medical expenses.

To ensure that MSA proposals do not provide a competitive advantage to catastrophic coverage
and to maintain a level playing field among all types of health benefits coverage offered within
the employer-based health care system, we recommend that MSA proposals be modified by
incorporating the following elements:

Eliminate the catastrophic coverage link. Allow an MSA option to be offered to any
eligible employee, whether they receive health benefits coverage through a

coverage or a comprehensive coverage option, such as an HMO. MSAs should be
available to all eligible employees regardless of the type of coverage they select in order
to promote choice among coverage options based on quality and cost-effectiveness.

Ensure that MSAs do not receive inequitable tax treatment, by limiting the amount of
funds that could be maintained in an individual's MSA in a given year and by allowing
MSA withdrawals only for health-related expenses. Limiting MSA balances
(contributions and accumulations) to a set amount would limit MSAs savings potential and
therefore, limit the perception of MSAs as a non-bealth care related savings account.
Individuals currently have access to individual retirement accounts (IRAs) which are
designed explicitly as a vehicle for long-term savings and will serve the purposes of long-
term savings more effectively than MSAs.

Limiting MSA withdrawals to health-related expenses also would minimize the chance
that individuals would use their MSAs for purposes other than health benefits coverage
(e.g... savings for future non-health related purchases or as a tax shelter). Allowing MSA
participants to use unspent MSA funds on non-health related expenses, even with strict
penalties, provides an incentive to avoid obtaining preventive and/or routine health care
services in order to build up balances to pay for cars, homes, etc.

Establish strict rules for switching between catastrophic and comprehensive coverage.
Require employees to indicate their intent to switch from catastrophic to comprehensive
coverage at least one year before the start of the new plan year. Requiring MSA
participants to wait a year before switching to comprehensive coverage would protect


Ce YN AH Pe BW DN =

= 6

XXI
18

paragraph (21) the following new para-

graph:

“(22) any payment made to or for the benefit
of an employee if at the time of such payment it is
reasonable to believe that the employee will be able
to exclude such payment from income under section
106(b).”

(ii) Subsection (a) of section 209 of
the Social Security Act is amended by

striking “or” at the end of paragraph (17),

by striking the period at the end of para-

graph (18) and inserting “; or”, and by in-
serting after paragraph (18) the following
new paragraph:

“(19) any payment made to or for the benefit
of an employee if at the time of such payment it is
reasonable to believe that the employee will be able
to exclude such payment from income under section
106(b) of the Internal Revenue Code of 1986.”

(B) RAILROAD RETIREMENT TAX.—Sub-
section (e) of section 3231 of such Code is
amended by adding at the end the following
new paragraph:

“(10) MEDICAL SAVINGS ACCOUNT CONTRIBU-

TIONS.—The term ‘compensation’ shall not include


41

CONCLUSION

The concems noted above about the effects of H.R. 1818 emphasize that employers wil] need to give
some thought to redesigning their overall health benefits programs to incorporate an MSA/high-
deductible plan. This new kind of plan could be a valuable new option for employees. However,
to integrate the new MS./high-deductible plan successfully, employers will need to design them
carefully and get accurate estimates of their probable cost. In addition, employers will need to
communicate effectively with their employees about how the new plan works,

‘The work group has not yet completed its analysis of H.R. 1818, One important point to note at this
time, however, is that the $3.600 lower limit on the deductible for a family plan may be overly
burdensome. Most employer plans currently provide @ deductible per individual family
member—often with a maximum on the total deductibles for a family. The individual deductible
is usually the same as the deductible for a single-person plan. If the family plan requirement of
$3,600 is read as a minimum expenditure that the family must meet, then the increase in out-of-
pocket expenses will be much greater for a family than for an individual

The Academy work group is available to answer additional questions.


110

Mr. Chairman, you have before your committee today health reform legislation that will
accomplish more than any other health reform plan I have seen. At little or no cost to the
federal government, H.R. 1818 will return our health care system to individuals by
allowing them their choice of physicians, facilities and services, it will allow them to save
for their long-term care and to pay for services not covered by their insurance; it will
stabilize and reduce the spiraling cost of health insurance by dramatically reducing
administrative costs; it will avoid adverse selection, it will strengthen the doctor-patient
relationship; but more importantly to the House Committee on Ways & Means, it will save
the federal government precious dollars in the long run by reducing health care costs
without artificial controls, price caps, or a new and potentially costly bureaucracy

Our current health care system is not broken, but it has been badly harmed by over-
regulation, tax inequities, and incentives to spend money rather than save, H.R. 1818, the
Family Medical Savings and Investment Act of 1995, will not solve all our nation’s health

care problems, but it will certainly go a long way in providing choice and quality of care to.
all Americans, giving them proper incentives to stay healthy, get preventive care, and save
for the future. H.R. 1818 is an American solution to an American problem and should be

enacted. Thank you, Mr, Chairman,


94

section 213(d) of the Internal Revenue Code, which includes
dental care. Long-term care insurance and catastrophic health
plan coverage may also be purchased with MSA funds.

Employer-provided coverage under an accident and health plan may
continue without such contributions being taxed as gross income
to employees. Employers will also be able to continue to exclude
such contributions from employment taxes.

Dental Benefits and MSAs

The ADA supports the use of MSA funds for dental service
expenditures not covered by dental benefit plans. Oral health is
an essential part of total health care. Many medical conditions
are self-limiting, but dental diseases are chronic, progressive
and destructive, becoming more severe over time. Dental disease,
however, is almost entirely preventable with regular
examinations. The ADA believes that MSAs are an excellent
opportunity for those with no or inadequate dental coverage to
better access the dental delivery system.

It is essential, however, that MSAs remain an option and not a
substitute for employer-provided free-standing dental insurance
that is tax deductible for the employer and excluded from
employees’ income. Twelve million Americans had dental coverage
in 1970, by 1992 that number expanded to 110 million. From 1980
to 1992 the percentage of school children free of tooth decay
increased from 37 to 50 percent. This success is attributable,
in part, to the increased access to care afforded through the
availability of dental plans. Most dental benefit plans fully
cover services that prevent disease. Significantly, the National
Institute of Dental Research estimates that Americans saved
nearly $100 billion in dental care bills during the 1980s because
of dentistry’s emphasis on preventive oral health measures. The
Association believes that it would be contrary to sound public
policy to undermine the current cost-effective dental benefit
system by taxing those benefits.

The Association notes that some MSA proposals restrict
individuals who elect the MSA option to high-deductible medical
benefit plans. The ADA understands the rationale for such a
restriction as it applies to medicine, but believes it is
unnecessary and inappropriate to apply such linkage to dental
benefit plans.

Standard dental benefit plans have historically required
significant beneficiary cost-sharing through copayments,
deductibles and limits on the type and frequency of care, and
they invariably use annual maximums. As a result, the dental
patient with dental coverage is already sensitized to the cost of
dental treatment. Indeed, currently about 50 percent of all


96

The Association believes its reading of H-R. 1818, which permits
individuals (or employers on behalf of employees) to continue to
purchase dental only coverage with pre-tax dollars while
participating in the MSA option, indicates that thie bill
supports the ADA’s position that the integrity of free-standing
dental plans must not be threatened.

In closing, Mr. Chairman, the Association is very pleased to be
given an opportunity to comment on H.R. 1818. The ADA believes
it is an outstanding bill that takes the proper approach toward
health care cost containment -- the establishment of a systen
with market-based incentives to empower individuals to make wise
health care purchasing decisions.


Co Oo YA We wWwHNH

RPBBRESCRSEWIABDREERAS

VII

5

“(A) IN GENERAL.—This subsection shall
be applied separately for each married individ-
ual and without regard to any community prop-
erty laws.

“(B) SPECIAL RULE.—If individuals who
are married to each other are covered under the
same catastrophic health plan, then the
amounts applicable under subparagraphs (A)
and (B) of paragraph (1) shall be divided equal-
ly between them unless they agree on a dif-
ferent division.

“(5) DENIAL OF DEDUCTION TO DEPEND-

ENTS.—No deduction shall be allowed under this
section to any individual with respect to whom a de-
duction under section 151 is allowable to another
taxpayer for a taxable year beginning in the cal-
endar year in which such individual’s taxable year
begins.

“(c) DEFINITIONS.—For purposes of this section—

“(1) ELIGIBLE INDIVIDUAL.—The term ‘eligible

individual’ means, with respect to any month, any

individual—

“(A) who is covered under a catastrophic

health plan at any time during such month, and


73

Asked specifically whether Congress should create medical sav-
ings accounts, a majority of workers support such legislation. By a
margin of 56 to 32 percent, working Americans want MSAs. More-
over, participating workers said that if their contributions are tax
exempt, they would be willing to contribute as much as $99 month-
ly to an MSA or $72 if their interest or investment gain were not
taxed. Two out of three, 66 percent, said they would participate in
medical savings accounts if they were not taxed on the principal or
interest accruing in their accounts.

Mr. Chairman, we believe that many of the health care reform
proposals put forth last Congress failed to account for the diversity
of today’s work force and the desire of working Americans to make
their own decisions about their health care needs. We believe that
the public rejects the “big brother knows best” attitude that has
characterized much Federal policymaking in this area and we are
encouraged this Congress may pursue creative solutions such as
medical savings accounts, solutions that respond to employers’ and
employees’ desires to control their own health care destinies.

[The prepared statement and attachment follow:]


18

I am also proud to be a cosponsor of the same bill. I would like
to make a comment because I have been involved in this debate for
a few years, having sponsored a medical savings account bill in the
Arizona State legislature, and having successfully shepherded that
through. I have heard all the arguments from A to Z as to why this
is not going to work, and it predominately comes from those insur-
ance companies that I think are paralyzed with fear they will lose
market shares, and I think that is really what this gets down to.

I have heard the arguments that people will skimp when it
comes to taking care of their preventive medicine, that they will
not make intelligent decisions in purchasing their health care. I
think that is balderdash. In fact, I do not think people are as
dumb, as government believes they are. I think that individuals
make better decisions than bureaucrats do and I believe that that
is the same for government bureaucrats and insurance bureau-
crats.

I think individuals have more of a vested interest in the success-
ful outcomes and the health of their families than bureaucrats
could ever hope to. I think the best attributes of a medical savings
account are, number one, it empowers people; it allows them to
shop for the best deals and it gives them incentives to control costs.

Second, it cuts dramatically administrative costs. During the
course of my campaign, I spent a lot of time in hospitals, health
care centers, doctors’ offices, and I found that across the board, doc-
tors are spending about 35 to 40 percent of their time on adminis-
tration, on red tape and bureaucracy, and on sending paperwork to
either Medicare or to insurance companies.

Let me illustrate how we can save if you are dealing on a cash
basis with your health care provider.

About 7 years ago my last child was born, Matthew. The cost,
through my third party payer, as with many people, was $3,500.
Seven years ago, for a healthy delivery.

My sister-in-law had a baby 2 months later, same hospital, same
doctor, only they didn’t have insurance so they paid cash, $1,500.
You cannot tell me that we are not going to see a cut, a reduction
in our costs, by cutting out needless bureaucracy and paperwork.

Let’s talk about the need, though, for a Federal tax incentive. I
was successful in getting a State law passed in Arizona. I believe
we are one of seven States now that provide State tax benefits for
medical savings accounts, but it is not even close to the whole en-
chilada.

I think we understand that in order to really give people the in-
centives toward medical savings accounts, we have to have a level
playingfield with other kinds of medical insurance and give the
same types of tax preference to medical savings accounts we do to
other kinds of coverage.

Several companies have found when they went onto MSAs they
have cut their costs without the Federal tax deduction, and the Ar-
cher bill will expand this greatly. Almost 90 percent of Americans
spend less than 33,000 a year on their health care expenses.

I also feel, personally, that medical savings accounts would be a
great step in helping us to resolve the crisis with our Medicare sys-
tem. I think that Federal employees should be able to put their
government contribution toward a catastrophic plan with an MSA.


105

HLR. 1818, like most MSA proposals, provides that contributions to MSAs would
‘be tax deductible. Because tax deductions are worth more to high income taxpayers who
are subject to higher marginal rates, MSAs would be highly regressive.

What’s more, MSAs would be utilized disproportionately by high income persons
because low to moderate income individuals often lack sufficient liquidity to establish
MSAs.

On the other hand, MSAs would hurt the poor and the sick. MSAs, by design,
require dramatically increased cost-sharing by consumers. Yet studies show that
increased cost-sharing adversely affects health outcomes for persons with unhealthy life
styles, a group which is disproportionately poor.

In the end, medical savings accounts would serve only the healthy, and only the
wealthy could afford healthy insurance.

How to Contain Health Care Costs

If medical savings accounts are not the answer, how do we contain health care
costs?

The debate over the issue of health costs takes many forms and directions,
bringing with it an increasingly emotional dialogue that, for the most part, overlooks the
fact we are in the midst of a medical revolution as great in magnitude as was the
Industrial Revolution. It is important to understand this when we address the issue of
health care costs, for it is not like debating another trade agreement, public works
project, or entitlement program.

We must deal with the growing expense of medical care, but we must understand
that a substantial part of the cost is a dual health care system, one encumbered by the
past with a vast network of hospitals no longer needed, but costing more and more to
maintain.

This health care system represents Parkinson’s Law at work — over time, the
structure of our medical community has expanded without any direct relation to the
nature of services or delivery system required to meet efficiently the public’s needs.

The second system we are supporting is in the vanguard of the medical revolution:
the technologically advanced, research oriented, vertically integrated delivery systems,
and more sophisticated concepts of managed care. This system is designed to provide
ambulatory outpatient care for more than 80% of those services previously provided on
an inpatient basis.

America cannot afford to support two health care systems. In the debate over
health care cost containment, too little consideration has been given to this reality.
Instead, health care reform proposals have tended to focus on how to pay to maintain
what is already in place.

Rather than concentrate on new ways to fund our wasteful dual system, we need
to search harder for ways to save money.

One in three hospital beds goes unused in this nation. We need to close more
hospitals and work to build a vertically integrated system that brings doctors, hospitals,
and insurers together as a team to manage costs. This must be done to combat excess
capacity and duplication of high technology that hospitals use to compete with each
other.


80

Chairman THOMAS. Thank you very much, Miss Samuelson.

Next we will hear from Mr. Rateliff, from Wal-Mart, and I under-
stand he is accompanied by an employee or should I say an associ-
ate?

Mr. RaTELIFF. Associate, yes, sir.

Chairman THOMAS. Associate, Miss Cindy Pierce.

Mr. RaTELIFF. I appreciate that.

STATEMENT OF CHARLES R. RATELIFF, SENIOR VICE
PRESIDENT, BENEFITS ADMINISTRATION & RISK MANAGE-
MENT, WAL-MART STORES, INC., BENTONVILLE, AK; ACCOM-
PANIED BY CINDY PIERCE, ASSOCIATE

Mr. RaTELIFF. Thank you for giving us this opportunity to speak
to you today. My name is Charles Rateliff and I am senior vice
president for benefits administration and risk management at Wal-
Mart Stores, Inc., and as you mentioned, with me today is Cindy
Pierce. Cindy is an associate from Missouri and I will refer again
to Cindy later in my testimony.

Wal-Mart Stores, Inc. is a member of the International Mass Re-
tail Association, a trade association representing the Nation’s $282
billion mass retail industry and which collectively employs over a
million people.

Our message is very simple and short. We at Wal-Mart have
looked at medical savings accounts, or Medisave, carefully and
think it is simply an excellent idea. Patient control is at the heart
of Medisave. It is our belief that health care consumers will make
better health care spending decisions through the freedom
Medisave would provide. They will be able to work with their doc-
tors to tailor care to their needs if more of their spending is free
of rules and procedures which are necessarily part of health insur-
ance.

Critics of Medisave feel doctors and patients will not be able to
make sound health care decisions without the help of institutional
managed care. We believe that notion greatly underestimates the
American public. For example, Wal-Mart pharmacies answers tens
of thousands of inquiries a week from customers who personally
pay for their own prescriptions and who are shopping for the best
prices.

In the short-term Medisave will give people, that is health care
consumers, more control of their health care dollars; give people
more insurance options; give people an affordable way to choose
higher deductible, lower cost insurance; give people a financial in-
centive to shop prudently in the medical marketplace, and lead to
more affordability in health coverage.

Additionally, in the long run, Medisave will improve doctor-pa-
tient relationships by removing insurance-managed care from
many health care services, lower health insurance costs, provide a
way to pay for long-term care, promote personal savings, and most.
importantly, lead to a healthier America, which is what we all
want.

We have been able to speak to a number of other employers
about the Medisave concept. The way we see it, medical savings ac-
counts would be offered as voluntary options to employees funded


21

Chairman Tuomas. Thank you very much.
And our friend from Iowa, Hon. Dr. Ganske.

STATEMENT OF HON. GREG GANSKE, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF IOWA

Mr. GANSKE. Thank you, Mr. Chairman. And I want to applaud
the Chairman of the Full Committee, Chairman Archer, and Mr.
Jacobs for their leadership in this area. I have had the opportunity
to discuss MSAs with Chairman Archer on several occasions and
his insights have proven very valuable to me and I am sure will
help guide this Congress.

I want to look at MSAs from a little different angle. I may be
the only Congressman who has actually practiced medicine under
a free market.

Prior to becoming a Congressman last November, I was a plastic
surgeon and I know from personal experience that when the
consumer pays the bill, medical costs are controlled. While about
90 percent of my practice was reconstructive, some of my practice
was cosmetic surgery. I can assure you that when the patient
spends his own money, the free market can work to hold down
medical costs.

Before most patients ever crossed my doorway, they had phoned
every other plastic surgeon within a 50-mile radius to find out
what the total cost of their package would be. Consequently, medi-
cal inflation in this field has been virtually zero for the last decade.

All of my patients had questions about options, outcomes, and
risks, but unlike my reconstructive patients, those who came to me
for cosmetic procedures were also concerned about price because
nobody else, t! ernment or insurance company, was paying for
their treatment. they were very much aware of the financial as-
pects. There lies the basic reason that health care costs have risen
far above regular inflation.

There is a fundamental disconnect in our country between the
payor and the patient. When somebody else is perceived as the
payor, the goods and services are perceived as being free and de-
mand explodes and the patient does not care what it costs. The rec-
ognition of the “it is free syndrome” is why even managed care is
moving to higher deductible policies.

The problem with higher deductible policies is that preventive
care may be avoided leading to more serious and expensive health
care costs later on. That is why a mechanism is needed that pro-
vides an individual with the ability to pay the deductible for
ventive and necessary care and, at the same time, provides them
with a carrot not to overutilize the services. That is why I am very
hopeful that Congress will enact legislation to allow for the tax free
funding of medical savings accounts, because it is MSAs that pro-
vide the mechanism to cover that high deductible while, at the
same time, making the patient cost conscious.

Critics of savi accounts will claim that health care has be-
come so complex that patients just are not capable of making qual-
ity or cost-conscious decisions about their treatment. I would say
it is the current system of third party payment and not the com-
plexity of medicine that has created these incentives.