N O V E M B E R 2 0 0 0

R E P O R T T O T H E C O N G R E S S

Medical Savings Accounts

and the Medicare Program
N O V E M B E R 2 0 0 0

R E P O R T T O T H E C O N G R E S S

Medical Savings Accounts

and the Medicare Program

1730 K Street, NW • Suite 800 • Washington, DC 20006

(202) 653-7220 • Fax: (202) 653-7238 • www.medpac.gov
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Executive summary

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Executive summary

v

Medicare Medical Savings Account (MSA) plans are one of the choices given Medicare beneficiaries in

the Medicare+Choice program, which was created by the Balanced Budget Act of 1997. The Medicare

MSA was designed to give beneficiaries more control over their health care by giving them the freedom

to use whatever provider they might want under whatever financial arrangements they could negotiate.

Because these plans have high deductibles, beneficiaries would become more conscious of the costs of

health care and presumably decrease their use of discretionary health care. Although Medicare MSAs

were authorized to be offered beginning January 1, 1999, to date no organization has applied to offer one.

Congress asked MedPAC to determine how the program might be modified to make it a desirable option

for organizations and beneficiaries.

The Commission believes that the current demonstration has shown that the private sector will not offer

Medicare MSAs because of two basic market characteristics: (1) little demand from the risk-averse

Medicare beneficiary population, and (2) the expense and difficulty of marketing a complex product such

as Medicare MSAs to a fragmented and scarce set of customers. These two market characteristics

make it unlikely that changing program-specific conditions that may have discouraged insurers would

engender much participation. Nevertheless, we investigated several options, including removing limits on

the number of beneficiaries and the length of the demonstration, decreasing the encounter and quality

data required, changing payment methods, and extending balance-billing protection to Medicare MSA

participants. None of these options seems likely to overcome the underlying market characteristics that

discourage participation. Furthermore, steps to increase participation would be accompanied in most

cases by increased financial risk to either beneficiaries or the Medicare program.

A possible viable MSA alternative (in the sense of a program beneficiaries could enroll in) could be a

Medicare-run MSA demonstration, which would provide a test of the MSA principle—that beneficiaries

would decrease use of discretionary health care—at relatively low risk to the program. Such a

demonstration might help create new market conditions by familiarizing beneficiaries and providers with

the MSA concept. If the demonstration succeeded in doing so, the private sector might then decide to

enter the Medicare MSA program, which could be modified to incorporate lessons learned from the

demonstration. However, in light of the basic market realities facing MSAs for the Medicare population,

the Commission does not see a compelling reason to pursue a Medicare MSA option and makes no

recommendations for specific legislative changes in this report.
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Medical Savings Accounts

and the Medicare Program

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The Balanced Budget Act of 1997 created the Medicare+Choice (M+C) program, which allowed

Medicare beneficiaries to join a variety of health plan types instead of the traditional Medicare fee-forservice program. Among those choices—which included Medicare health maintenance organizations

(HMOs), preferred provider organizations, provider sponsored organizations, and private fee-forservice plans—were Medicare Medical Savings Account (MSA) plans, which were to be offered

beginning January 1, 1999. The Medicare MSA was intended to give beneficiaries more control over

their health care by giving them the freedom to use whatever provider they might want under whatever

financial arrangements they could negotiate. A corollary benefit of this approach is that as beneficiaries

became more conscious of the costs of health care, they would decrease their use of discretionary

health care (American Academy of Actuaries 1995). The regulations governing the M+C program in

general and the MSA program in particular were published June 26, 1998, with the final rule published

June 29, 2000.

To date, no organization has applied to offer an MSA plan to beneficiaries under Medicare+Choice.

The Congress is concerned about this and wants to know how the program could be modified to make

it a desirable option for organizations and beneficiaries. Therefore, the Congress required that by

November 29, 2000, MedPAC should “submit to Congress a report on specific legislative changes that

should be made to make MSA plans (as defined in section 1859(b)(3) of the Social Security Act, 42

U.S.C. 1395w-29(b)(3)) a viable option under the Medicare + Choice program.” (Balanced Budget

Act of 1999, PL 106-113). This report responds to that charge.

What is a Medicare Medical Savings Account?

A Medicare MSA plan is a combination of a high-deductible insurance policy and a tax-favored savings

account for medical expenses. The Medicare program would pay premiums for the insurance policies

and make a contribution to beneficiaries’ individual MSAs. The beneficiaries would use the money in

their MSAs to pay for their own medical care before the high deductible was reached. The sum of the

premium and the contribution would equal the payment made by Medicare to any other M+C plan for a

beneficiary.

 An MSA program for Medicare is a new arrangement for sharing the risk of health care coverage

among Medicare, beneficiaries, and health care plans. In the traditional Medicare program, beneficiaries

take the risk for all Medicare deductibles and coinsurance with no liability limit. Beneficiaries also retain

the risk for all non-covered health care expenses, such as outpatient prescription drugs. The Medicare

program retains the risk for all covered expenses beyond the deductible and coinsurance.

Under current MSA regulations, beneficiaries would take on the risk of all health care expenses up to a

high deductible amount. The risk for all covered expenses beyond the deductible would be borne by a

health care plan. (Technically, beneficiaries could still be liable for expenses beyond the Medicareallowed amounts if the plan chose not to cover them. However, the plan could set an out-of-pocket

maximum equal to the deductible or some larger amount. The plan could also choose to define more

broadly, compared with traditional Medicare, the expenses that count toward the deductible.) Medicare

would no longer bear the risk for any health care expenses for beneficiaries in MSA plans.
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To induce beneficiaries to trade their current risk for the risk of the high deductible, Medicare would

make contributions to MSAs in beneficiaries’ names. Beneficiaries could then use this money to pay for

part of the deductible or for other health care expenses for which they would have paid out of pocket in

the traditional system. 1 Although beneficiaries would be assuming the risk of the high deductible, they

would also, assuming the MSA plan had an out-of-pocket maximum, be removing the risk of an

unlimited liability for cost sharing in the traditional Medicare program.

To induce a health plan to accept the remaining risk for covered expenses, the Medicare program would

pay a premium to the health care plan. So far, no plan has decided that there is a sufficient market for

this product to make the payment offered by HCFA reason enough to enter the program.

Example

To understand which beneficiaries would benefit from an MSA, take as an example an MSA plan with

an annual contribution from the Medicare program of $1,000 into the beneficiary’s MSA, a deductible

of $2,000, and a plan that provides coverage for all expenses over the deductible for a premium of

$4,000.

Compared with traditional Medicare, beneficiaries enrolling in MSAs would be better off in two cases.

• First, if beneficiaries had very low medical expenses; specifically, if their medical expenses minus

Medicare’s contribution to the MSA was less than their cost-sharing in traditional Medicare. In

this example if expenses were less than $1,000, beneficiaries would have money left in their

MSAs at the end of the year, whereas under traditional Medicare, those beneficiaries would

have had cost sharing to pay out of pocket. 2

• Second, if beneficiaries had no low-cost supplemental coverage and very high medical

expenses; specifically, if their expenses would have resulted in cost sharing of greater than

$1,000 under traditional Medicare. In this case, they would have to pay the $2,000 deductible,

but $1,000 of that would come from the MSA, resulting in a net out-of-pocket cost of $1,000,

less than their cost sharing under traditional Medicare would have been. 3

In this example, Medicare would pay a total of $5,000 per beneficiary (the $1,000 contribution to the

MSA plus the $4,000 premium to the plan), equal to what the program would have paid to any other

M+C plan for this beneficiary. If a beneficiary had medical expenses that would have resulted in

program costs exceeding $5,000, then the program would be better off financially with the beneficiary in

an MSA. If the beneficiary would have enrolled in some other M+C plan the program would break

even because its payment would be the same. If program payments would have been less than $5,000

for this beneficiary, the Medicare program would be worse off financially.

1 Within limitations and subject to a tax penalty, the MSA could also be used to pay for non-medical expenses.

2 Using HCFA data for 1996, about 59 percent of aged beneficiaries who were in the program in 1996 and 1997 had program payments of less than

$1,000. Seventy-two percent of those same beneficiaries also had program costs of less than $1,000 in 1997, so they would do well with the MSA

plan in this example.

3 Based on HCFA data for 1996, about 8 million beneficiaries met this criterion for very high medical expense. About 48percent of aged beneficiaries

who met it in 1996 and were in the program in 1997 had liabilities of more than $1,000 in 1997 also.
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Plans would make a profit if payments for beneficiaries’ medical expenses and expenses for marketing

and administration were less than the premiums it received from HCFA. If the expenses were greater,

then the plan would incur a loss.

As is evident from the example, the key variables are:

• beneficiaries’ annual medical expenses,

• the potential program costs and liabilities under traditional Medicare, and

• the amounts of the MSA contribution, the premium, and the deductible.

One other factor of interest is any decrease in use that might result from beneficiaries’ increased

awareness of health care costs. This decrease could be of worth to beneficiaries because it would allow

use of funds for other purposes that beneficiaries might prefer.

Favorable selection

Because who benefits and who does not is so dependent on medical expenses, the question of

favorable selection into MSAs has been a key issue (Rodgers 1995, Kendix 1999). If the beneficiaries

who chose to enter MSA plans had significantly lower health care expenses, the health care expenses of

those left in the traditional fee-for-service program (or in other M+C plan types) would, on average, be

higher. Unless payments were adjusted to take this difference between health care expenses into

account, this division of beneficiaries into MSA plans and other plan types including traditional Medicare

fee-for-service could feed on itself, making MSA plans even more attractive for those with low

expenses and increasing average expenses even more for other plans. This favorable selection concern

has influenced regulations for MSAs in Medicare and for the under-65 population.

Current statutes and regulations limit certain aspects of the program, such as eligibility and deductibles,

and specify the payment system. Requirements under these statutes and regulations are summarized in

Table 1 and discussed in more detail later in this paper as we consider how they affect the putative

suppliers of MSA plans.

Lessons learned from commercial MSAs

To make Medicare MSA plans a viable option in the M+C program, it is important to understand why

they are not being offered. MedPAC convened an expert panel in May 2000 with participants from the

insurance industry, benefits purchasers, health benefit consultants, insurance brokers, and the policy

research community to help define the problem. The following sections draw on what we learned from

this panel as well as the current literature on MSAs. We first look at the experience in the non-Medicare

MSA (or commercial MSA) market.

Tax-favored MSAs first became available to the non-Medicare population in 1997, when the Health

Insurance Portability and Accountability Act (HIPAA) went into effect (some non tax-favored MSAs

had been available earlier). The designers of the legislation anticipated that many insurers would offer

MSAs and that many individuals would open accounts. Instead, the market has been slow to develop.

There were approximately 59,000 policies nationwide by our estimate (45,000 participants nationwide

in 1999, according to Department of Treasury counting rules, which omit previously uninsured

participants) (IRS 1999). Looking at why the market has been so slow to grow may help explain the

lack of entry into the Medicare MSA market.
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Limited supply

HIPAA limited eligibility for MSAs to self-employed people and those employed in firms with fewer

than 50 employees—that is, to the individual and small-group markets. This, in turn, limited the suppliers

of MSAs to insurance companies that participate in or want to enter those two markets. The individual

market is further constrained in some states by community rating laws that limit the ability of insurance

companies to underwrite policies and require them to charge the same premium regardless of prior

health history. In some states, this has reportedly reduced the number of companies in the individual

market to one or two. Also, many of the companies that initially entered the MSA market (often by

modifying a high-deductible policy) were doing so as a defensive measure in case the program became

very popular. Now that it has not, many firms are not marketing MSAs vigorously or at all.

Lack of broker interest

Policies in the individual and small-group markets are usually sold by insurance brokers and agents to

individuals and companies. Agent commissions tend to be a set percentage of the premium. Because

MSA policies have lower premiums than other policies, agents receive lower commissions for selling

them. In addition, it takes more time and effort to sell an MSA policy because customers are generally

unfamiliar with the product. An additional complication is the need to set up an account and trustee for

the MSA itself, which also requires more of the agent’s time. All of these factors make agents reluctant

to commit the time necessary to learn about and sell the product.

Status no plans available, no enrollees

Limits

time enrollment could begin January 1, 1999; no new enrollees after January 1, 2003

number total enrollment cannot exceed 390,000

deductible maximum $6,300 deductible in 2000, indexed

balance billing no limits on balance billing to beneficiary

Payment

contribution to MSA difference between M+C county payment rate and plan-determined average premium, constant for

all plan members in county

payment to plan difference between risk-adjusted M+C county payment rate for individual and constant contribution

to MSA, can differ for each member

Data

encounter data full encounter data required as for other M+C plans

quality data network model MSA plans similar to other M+C plans less required minimum performance levels,

non-network plans must measure and report performance

Summary of Medicare MSA program TABLE

1

Note: MSA (medical savings account), M+C (Medicare + Choice).

Source: MedPAC, based on Federal Register, HCFA Medicare+Choice Final Rule, June 29, 2000. .

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Limited demand

One potential source of demand is self-employed individuals who face high premiums in the individual

insurance market. They need to find health insurance with an affordable premium and may find MSAs

attractive. For those with relatively high incomes, the tax-favored status of the MSA may be a further

attraction and the risk of having to pay a high deductible is not unbearable. It is not clear how large that

market is, however, and many individuals still prefer the typical employer-sponsored health insurance

policy—with relatively low deductibles—that they have grown used to. Few potential buyers for MSAs

even know they exist or have the time or incentive to educate themselves about the product.

Specific program design problems in HIPAA

HIPAA policy for MSAs was prescriptive in part because of concerns that if the program were very

popular among healthy and wealthy people, there would be negative effects on tax revenues and on the

health insurance market. Tax revenues could be adversely affected by wealthy participants using MSAs

as tax-favored savings accounts. Health insurance markets could be adversely affected by favorable

selection into MSA products, leaving a sicker population in other kinds of health insurance polices. This

would produce higher premiums for those policies, possibly making them too expensive for some

people. Because of that fear, HIPAA limited the number of policies (750,000) and the duration of the

demonstration (no new policies could be sold after December 31, 2000). It also imposed minimum and

maximum deductibles on the MSA-linked insurance offerings, imposed a limit on out-of-pocket

amounts, limited the amount that could be contributed to between 60 percent and 75 percent of the

deductible, and allowed only the employee or the employer to contribute, but not both. All of these

policies have been cited as reasons for the slow growth of the commercial MSA market. 4

Many firms were loath to spend substantial sums on developing the MSA product, getting it approved in

each state, educating a sales force, and marketing the program to possible customers in the face of a

time-limited program with, at most, 750,000 policies nationwide. Marketing is particularly difficult and

expensive in the individual market, where demand may be greatest.

The minimum and maximum deductibles and the maximum out-of-pocket amounts were looked upon as

unnecessary limitations on design flexibility, particularly in an untried market where consumer

preferences had not been established. The low limits on the maximum deductible were looked upon as

particularly limiting in high-cost urban markets.

Several of these limitations have been recognized in legislative proposals. The Patient’s Bill of Rights Act

(S.300), for example, if enacted would reduce the minimum deductible, allow contributions equal to the

deductible (rather than only 60 percent to 75 percent of the deductible), remove the limit on the number

of MSAs, allow all employers to offer MSAs, and make MSAs a choice for Federal Employee Health

Benefit Plan (FEHBP) participants.

4 In South Africa, MSAs have been more popular. By one estimate (Medical Savings Accounts in South Africa, NCPA Policy Report No.234) they account

for about 50% of the private insurance market, which serves about 20% of the population.
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Results

As a result of the uncertainty of demand, the high cost of marketing the product, and the program design

limitations, few companies have chosen to invest in the product and market it actively. This limited effort

combined with limited demand has resulted in few policies being sold.

Limitations in the Medicare MSA market

Some aspects of the commercial MSA market translate directly to the Medicare marketplace. The

reluctance of firms to make sizable investments to develop and market a product for a demonstration

project of limited size and scope translate directly. Medicare MSAs are limited to 390,000 and no new

enrollments are allowed after January 1, 2003. Concerns about the limit on maximum deductibles are

also shared (although there is no minimum deductible under current regulations). However, plans that sell

supplemental products and M+C plans already participate in the individual market, so that aspect is less

of a barrier than it is in the world of commercial insurance.

The critical aspect of the market that concerns potential suppliers is the uncertainty of demand by

Medicare beneficiaries for an MSA product. Beneficiaries are viewed as a risk-averse population

unlikely to take on the risk of a high deductible, even if it would reduce potential maximum liability.

Some see the high percentage of beneficiaries with supplemental (Medigap) insurance as evidence of

this risk aversion, and of a willingness to pay a large amount of money for first-dollar coverage. A major

beneficiary education effort would be required to overcome current attitudes, and successfully reaching

Medicare beneficiaries with a complicated message is considered even more difficult than reaching the

commercially insured population.

Also, unlike the commercial population, Medicare beneficiaries already have a low premium option to

choose: traditional Medicare. The traditional program provides substantial benefits for a low premium; in

areas where M+C HMOs are active, an even more generous benefit package may be available. In

addition, the tax benefit for Medicare MSA participants is less than in commercial MSAs because the

contribution is from the Health Care Financing Administration (HCFA) and not deductible.5

 In sum,

these factors tend to limit potential demand for the product.

On average, medical costs for Medicare beneficiaries are higher than for the commercially insured

population, so premiums—and conceivably, MSA contribution amounts—may be greater than in the

commercial MSA market. Some argue that the larger amounts of money in play would allow more

flexibility in product design and possibly greater accumulations in Medicare MSA accounts than in

commercial accounts. However, because Medicare beneficiaries often have chronic conditions with

predictably high medical expenses, they may not want to expose themselves to a high deductible. On

balance, high medical costs may also dampen demand.

5 There is a small tax benefit because income earned on the account is not taxed, which could be attractive to wealthier beneficiaries who essentially use

the MSA as a tax-sheltered savings account and pay for medical expenses from other sources.
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Regulations

Even though HCFA worked with the insurance industry to develop the MSA regulations and some of

the MSA provisions are less prescriptive than HIPAA provisions (for example, no minimum deductible),

the Medicare program is perceived as more highly regulated than the commercial market. In addition,

Medicare’s approval cycle can be relatively long for first-of-a-kind plans. For example, the only private

fee-for-service plan application took 18 months to be approved. If an application were to take 18

months to approve and the demonstration expires in 2003, only 3 years of marketing and sales would

have been possible, given that regulations for the M+C program were published in late June 1998.

Medicare MSA payment issues

According to some panel participants and letters commenting on the implementing regulation, HCFA’s

payment regulations for Medicare MSA plans have discouraged entry into the program. Of particular

concern is that payment to plans for some individuals could be negative, if the MSA contribution were

high and the payment and risk factors for the individual were low. In other words, plans could have to

pay HCFA if enough beneficiaries with particular characteristics chose their plan.

This possibility arises because the contributions to beneficiaries’ MSAs are equal for all participants in

an MSA plan in a county, while the total payment for a particular beneficiary varies according to

demographic and health status. HCFA chose to require that its contribution be the same for all plan

members in a county because that would make the MSA program easier to explain to beneficiaries and

administer, and comported with the uniform premium requirement in the legislation. (Analogously, in

M+C HMOs for example, all beneficiaries in a plan in a county pay the same premium, although their

expected costs and HCFA’s payment for them differ.) The equal MSA contribution is computed by

subtracting the average (or community-rated) premium proposed by a plan for a county from the county

M+C payment rate (which is the same for all M+C plan types).

By law, payments for beneficiaries in all M+C plans must be adjusted for demographic and health

status. Therefore, when the actual payment to an MSA plan is calculated (by subtracting the constant

contribution to beneficiaries’ MSAs from the varying payments for those beneficiaries), the possibility

arises that the payment might be negative. This possibility, however remote, reportedly raises doubts

with insurers about the payment methodology. More generally, requiring a constant contribution to each

beneficiary’s MSA struck insurers as arbitrary. (Plans could avoid negative payments by setting average

premiums high enough, but that might result in such low MSA contributions that no one would be

interested. The average premium is also supposed to result from a calculation of likely plan participants

and not be arbitrary.) More generally, if a plan guessed incorrectly about who would join and set its

premium too low, the MSA contribution would be higher than it should be, and the resulting payments to

the plan would be too low to cover the plan’s costs. Covering this additional uncertainty would result in

higher premiums, reducing the MSA contribution and the attractiveness of the option to beneficiaries.

The text box gives an example of how the payment method would work. (Page 10)
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Payment method example

The payment to a medical savings account (MSA) plan for an individual would be the

difference between the Health Care Finance Administration’s (HCFA) Medicare + Choice

(M+C) payment (demographic and health status adjusted) and the constant contribution to

the MSA, which results from the plan’s average (community-rated) premium. The resulting

payment could differ widely for beneficiaries with different demographic and health statuses.

In this example the county payment rate is $500/month and the plan proposes an average premium

of $400/month. The difference is $100/month, which results in a $1,200/year contribution from

HCFA to the beneficiary’s MSA.

 The payment to the plan varies by beneficiary. We show the payment for two different

beneficiaries. The first is a 65-year-old woman at low risk. Her total risk factor is 0.5; therefore,

her M+C payment rate would be $250 ($500 x 0.5). The $100 difference is subtracted, resulting

in a $150/month payment to the plan. The second beneficiary is a high-risk 75-year old-man. The

total risk score for him is 2.0 (the demographic factor of 0.9 plus the risk factor of 1.1 related to

his prior health history); hence, the payment to the plan for him is $900/month. (Note that although

the total risk factors 0.5 and 2.0 differ by a factor of four, the payments to the plan differ by a

factor of six.) 1 The payment to a plan for a low-risk individual could theoretically be negative for

cases in which the contribution to the MSA is high and the payment and risk factors are low. In the

example above, if the average premium were $200, the payment for the 65-year-old low-risk

female would be negative; the plan would have to pay HCFA $50/month for each such

participant. ■

1 This example assumes payment to plans is based solely on the risk-adjusted payments. Under current law, risk adjustment is being phased in

and does not reach 100 percent until 2004.

County payment rate $500/month

Plan prosed average premium $400/month

Difference $100/month

HCFA contribution to MSA $1,200/year = 12 x $100/month

Payment to plan

Age 65, female, low risk $150/month = ($500 x 0.5) - $100

Age 75, male, high risk $900/month = ($500 x 2.0) - $100

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Balance billing

HCFA followed what it believed to be Congressional intent by not extending balance-billing protection

to MSA plan participants. 6 This policy would allow MSA plan participants to make whatever financial

arrangement they wanted with whatever providers they wanted. However, members of MedPAC’s

expert panel cited the lack of balance-billing protection as a serious impediment to establishing MSA

plans in the M+C program. Beneficiaries face the risk of unlimited liability when balance-billing

protection does not apply. A provider can charge whatever the provider wishes unless the beneficiary

has come to some understanding in advance of what the charges will be. Although some would argue

this makes beneficiaries more aware of charges and will help control medical expenses, others think it

places a burden on beneficiaries and that most beneficiaries are not eager to bargain with health care

providers. Even after the deductible is reached, the plan must cover all charges only up to the

Medicare-allowed amount; thus, beneficiaries could still be liable for excess charges. Plans could cover

excess charges beyond the deductible, but they would then be at risk unless they had a network of

providers with agreed-upon fee schedules. Resolution of this issue may be necessary to induce plans to

participate.

Provider participation could also be constrained because of the high deductibles in MSA plans.

Providers have raised a concern that they would have difficulty getting paid if beneficiaries were faced

with high deductibles. If they provided a service and then billed the beneficiary, the beneficiary might be

unwilling or unable to pay it even though it was less than the deductible. The provider would then either

have to go to additional expense to collect the bill or write it off as uncompensated care. Some

providers might not want to take this risk and, therefore, not provide care to participants in MSA plans.

Data requirements

Plans would be required to provide two kinds of data under current regulations, encounter data and

data on quality.

Encounter data

To adjust payments to plans appropriately, HCFA must know beneficiaries’ health status. HCFA

determines health status using encounter data. Currently, only inpatient encounter data are used, but

starting in 2004, HCFA intends to use data from more settings, including physician and outpatient

settings. Because payments to all M+C plans are risk adjusted in this way, HCFA requires plans to

report encounter data. This requirement is a reason given by insurers for not participating in the

Medicare MSA program.

Insurers aver that it would be either impossible or too costly for them to report all encounter data for

MSA participants because they anticipate that those who do not have sufficient expenditures to meet

their deductible will not send any claims or documentation to the MSA plan. (In fact, not processing as

many claims is considered one possible source of savings for MSA plans.) For claims beyond the

deductible, the plans would have to forward the data to HCFA, which would add to their costs. Plans

consider the data requirement to be a major roadblock to their participation.

6 Balance billing is the amount a beneficiary is billed above the Medicare-allowable amount. For physician services, for example, when the physician

does not accept assignment, balance billing is limited to 15 percent over the Medicare-allowable amount.

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If encounter data were not collected for some beneficiaries, then payments for those beneficiaries

cannot be risk adjusted in future years. Even if the MSA plan were willing to accept that limitation and

the resulting lower payments, a lack of risk adjustment would be a major problem if the beneficiary

were to switch to another form of M+C plan in a future year because that plan could be underpaid.

Data on quality

Insurers contend it is inappropriate and impractical to ask MSA plans to provide quality data or run

quality programs because they are bill payers, not managed care plans. MSAs are specifically designed

to enable beneficiaries, not plans, to control health care decisions and choice of providers. According to

this reasoning, holding plans responsible for measuring quality is inappropriate. In addition, collecting

data on quality from providers would be an extra cost to plans. Current regulations require plans with a

network of providers that beneficiaries would be required to use (network MSA plans) to meet the

same quality requirements as other M+C plans. They must have ongoing quality assessment and

performance improvement programs. Plans in which a beneficiary can go to any provider with no

penalty (non-network MSA plans) are not required to have quality improvement programs, but they

must report quality assessment data (namely, the Health Plan Employer Data and Information Set).

Reconsidering the Medicare MSA program

Clearly, if the Medicare MSA program were to be made viable, revisions to the current program would

be necessary. Below we outline several options to modify the current program. We begin by establishing

some design principles against which these options can be measured.

Design principles

Certain design principles must be kept in mind when considering options to the current Medicare MSA

program. These principles are beneficiary protection, equity with other M+C plan types, and fiscal

impact.

Beneficiary protection

Plans have objected that they are not given enough design flexibility under current regulations. For

example, they would like to be able to tailor benefits and MSA contribution amounts to individual

beneficiaries. The disadvantage of this is that beneficiaries may not be able to judge whether the resulting

package is a desirable one; comparing deductibles, out-of-pocket maximums, and MSA contributions is

difficult enough. However, if a plan also covered services not covered by traditional Medicare or had

cost-sharing provisions beyond the deductible, comparisons would become very difficult. Some

constraints on plan design may be necessary for beneficiary protection.

Maintaining equity with other M+C plan types

Because Medicare MSAs are part of the larger M+C program, it is desirable to maintain equity with

other M+C plan types, such as HMOs and private fee-for-service. Three types of equity need to be

kept in mind: payment, enrollment, and requirements of participation.

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At its most basic definition, payment equity requires that the Medicare program’s costs for any M+C

plan type be the same. For most plan types, the Medicare program’s cost is the payment to the plan. As

currently constructed, Medicare’s cost for an MSA plan would be the payment to the plan plus the

contribution to the beneficiary’s MSA. Because payments are adjusted for health status and

demographic factors as well as by county of residence, this would imply that the mechanism for risk

adjustment and the data for risk adjustment be the same for all plan types. A slightly looser definition of

payment equity might be that payment for the group enrolled in a plan be the same across plan types.

Strict enrollment equity would require that restrictions on enrollment eligibility and rules on open

enrollment periods and disenrollment be consistent across all types of M+C plans. A less rigorous

standard might allow some variation. For example, the current M+C law does not permit beneficiaries

with other government coverage to join MSA plans, although they may join other M+C plans.

The requirements of participation for plans could be equal as well. For example, the rules on

accessibility and network adequacy for network plans could be held constant across plan types, as

could quality and data requirements. In the current regulations, these requirements differ by plan type.

Fiscal impact

A final design principle is minimizing negative fiscal impact on the Medicare program. There is a real

danger of favorable selection into MSAs, which would increase Medicare spending if it were not

accounted for by risk adjustment. At its simplest, if each MSA beneficiary cost the program $5,000 in

contributions to MSA and premium payments to plans, and yet had medical expenses that otherwise

would only cost the program $1,000, the program would lose $4,000 per capita. Because beneficiaries

have traditional Medicare to return to—and under current law, they can switch out of the MSA program

annually—there is a real possibility of plan switching if a beneficiary had a high-cost medical expense

that could be postponed for a few months. Plan switching exacerbates the problem of favorable

selection. How to deal with favorable selection must be kept in mind as options for revising the MSA

program are considered.

Options

We consider reform options in three categories: removing limits in the current program and lessening

data and other regulatory requirements, changing payment policy, and having Medicare offer an MSA

benefit package.

Removing limits

The simplest option would be to remove the limits placed on the number of beneficiaries (390,000) and

the time limit on enrollments (none after January 1, 2003). These limits could be removed by legislative

action, similar to what has been proposed for the commercial MSAs. There is no risk to beneficiaries

from this action and, as there are no limits on other M+C plan types, it would move the MSA program

toward equity with them. Removing these limits could increase the fiscal risk to the Medicare program,

however, if the payment scheme does not adequately adjust for favorable selection into M+C MSAs.

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The current risk-adjustment system modifies payments by health status and demographic factors, but it

was not designed to adjust for a group of beneficiaries chosen specifically for very low total health care

costs. For example, the current risk adjustment methodology puts approximately 88 percent of the feefor-service population into the lowest risk adjustment category for health status. The group of people

choosing MSAs might well be at the lowest cost end of that 88 percent, and it is unlikely that the current

risk adjuster would completely account for such extreme favorable selection. This could result in some

negative fiscal impact for almost any increase in plan participation.

The limit on the maximum deductible could be removed; it has been cited as discouraging participation

by plans in some high-cost urban areas. There would be some decrease in beneficiary protection,

although beneficiaries ought to be aware of the deductible when they sign up for the MSA option. There

is no comparable limit in other M+C plan types, so equity with other plan types is not an issue. There is

no increase in government liability from this option except to the extent that higher deductibles increase

the likelihood of favorable selection.

The current program limits beneficiary eligibility. In addition to the eligibility requirements for other M+C

plan types (that is, eligible for Part A, participating in Part B, and not having end-stage renal disease),

certain other beneficiaries are not allowed to participate, including those covered by some other federal

health plan for first-dollar coverage (such as those who are on Medicaid, FEHBP annuitants, and those

covered by the Veterans Administration and the Department of Defense). In addition, there is a United

States residency requirement of more than 186 days. Some or all of these excluded groups could be

allowed to join MSAs. Removing the eligibility limitations would not be a beneficiary protection problem

because beneficiaries would not only have the first-dollar coverage of the government programs, but

also a government contribution to their MSAs. It would also not be a M+C equity problem because it

would be a return to the same eligibility requirements as other M+C plan types. This change would not

be fiscally responsible, however, because the government would be paying for coverage twice unless

payments were changed to reflect other coverage. In addition, it would destroy the incentive to

decrease the use of discretionary medical care, which is part of the rationale for MSAs.

Extending balance-billing protection

Extending balance-billing protection to people enrolled in MSAs would add limits to the program, but it

may be desirable. This would be a very important step toward protecting beneficiaries. If it applied to all

providers, it would limit the liability of plan members and if a plan agreed to cover any balance billing

after the deductible, it would limit liability to the deductible alone. It could conceivably make some

providers unwilling to treat beneficiaries, and is in some sense antithetical to the idea of MSAs allowing

complete freedom of provider choice and financial arrangements. However, the lack of balance-billing

protection appears to be a major impediment to plan participation because plans think beneficiaries will

not sign up without it.

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It is not clear how balance-billing protection could be extended to Medicare MSA participants. In

M+C HMOs, this issue does not arise (except in out-of-network emergency situations) because each

plan has arrangements with the providers in its network and enrollees do not receive bills from

providers. In the private fee-for-service plan, providers are deemed to have a contract with the plan if

they agree to provide services to a beneficiary and the contract has limits on charges. For an MSA

participant however, there is no implied contract between providers and the plan for expenses below the

deductible and, possibly, for expenses beyond the deductible in a non-network plan. The ordinary

Medicare limits should not apply, because beneficiaries have removed themselves from the traditional

fee-for-service program and presumably can make any arrangements they want with providers and can

go to providers who do not participate in Medicare. Therefore, it is not clear how to extend balancebilling protection to MSA participants and still allow unfettered provider choice and discretionary

financial arrangements. One possibility would be to extend balance-billing protection to beneficiaries

only when they choose participating providers.

Decreasing requirements for data on quality

The requirement for MSA plans to collect quality data could be eliminated and replaced with a

requirement to collect consumer satisfaction data, focusing on whether beneficiaries are satisfied with the

level of service provided by the plan rather than on clinical data. Although consumer satisfaction does

not equate to clinical quality, it would provide some beneficiary protection in that it could help

beneficiaries select MSA plans more knowledgeably. The data collection requirement would not be the

same as other M+C plans, but should have no ill effect on program spending.

Decreasing encounter data requirements

Removing the requirement to submit encounter data would make it impossible to apply the currently

contemplated risk-adjustment system to MSA participants. If the payment scheme requires risk

adjustment, then the option of not requiring encounter data submission may not be feasible. This option

also would not be consistent with equity with other M+C plan types.

Compromises in this area are possible, however, such as requiring plans to submit data only for

encounters reported in claims beyond the deductible. Arguably, this might be sufficient for any high-cost

diagnoses or treatments, which are what the risk adjustment system is interested in. Even this much data

reporting could discourage some plans from participating.

Table 2 (page 16) summarizes the effects these options would have on the three design principles of

beneficiary protection, equity with other types of M+C plans, and fiscal impact, and their likely effects

on plan participation. As is shown, options that increase plan participation have the potential to lead to

negative fiscal impacts because of possible extreme favorable selection.

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Changing the payment method

No matter the other changes made, the method for calculating payments is essential to determining plan

participation. In the extreme, if payments were set absurdly high—assuring high MSA contributions for

the beneficiaries, high premiums for the plans, and a small gap between contribution and deductible—

there would be no lack of supply of plans or demand by beneficiaries. Such a method would, however,

be neither equitable for other M+C plan types nor fiscally responsible for the program.

The current method requires both absolute equality of payments with other plan types and equal

contributions to the MSA for each beneficiary in a plan in a county. We consider three options that relax

these requirements.

One option would be not to require identical contributions. Instead, plans could be allowed to set

contributions as the difference between the payment and the premium determined for individual

beneficiaries. The contribution could be set as a percentage of premium, or in some other way. If set in

percentage terms, it would increase beneficiary equity in percentage terms but increase variance in dollar

terms. This option would be more difficult to explain to beneficiaries and for HCFA to police, and

therefore could have negative effects on beneficiary protection. It would be equitable across plan types.

It would have no more negative fiscal impact on the program than current policy has.

A more radical alternative would be to jettison the principle of strict equity on an individual basis and

settle for equity on a plan-wide basis. That is, Medicare could ensure that payments for a group of

beneficiaries would be equivalent regardless of M+C plan type, rather than require that the payment for

each beneficiary be equivalent. This alternative would require some sort of experience rating for the

group of beneficiaries in a plan and might allow fewer data to be collected. The difficulty is that no such

rating system is currently available to the program.

Remove limits

number o + o/– +

time o + o/– +

deductible – o o/– +

eligibility o + – +

Add balance billing + o o/– +

Decrease data

quality – – o/– +

encounter – – – +

Effect on plan

Options Beneficiary protection M+C equity Fiscal impact participation

Impact of options to remove limits, lessen requirements

 ..................................................................................................................................................................................................................................................................................................................................................................

TABLE

2

Note: M+C (Medicare+Choice), + positive effect, o no effect, – negative effect.

Source: MedPAC.

 ....................................................................................................................................................................................................................................................................................................................................................................

 ..................................................................................................................................................................................................................................................................................................................................................................

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A third option would make payments on the base risk factor (technically, the risk factor that

corresponds to a beneficiary with no high-cost hospitalizations). The base factor adjusts for age and

sex, whether the beneficiary was previously disabled, and if the beneficiary is on Medicaid. In this

option, MSA plans would not get equitable payment compared with other M+C plan types. They could

get the same payment, assuming all of the beneficiaries in the plan were at the lowest risk, or they could

get less.

This third option essentially assumes perfect favorable selection into the plan. In other words, it assumes

all beneficiaries selecting the plan are in the lowest risk group. To the extent that was true, beneficiaries

in the plan would be no worse off and the payment would be equitable. It would also require no

encounter data collection, simplify administration, and reduce uncertainty for the plan because the plan

would know the payments in advance. It would also be fiscally responsible for the program. However, it

is not clear that there would be much more supply or demand for MSAs as a result. As long as the riskadjusted portion of the payment is a small amount, as it is through 2003, this option would result in

payments that are nearly the same as current payments. When payment is fully risk adjusted, however,

the effect would be greater and might discourage participation. Because beneficiaries could switch plans

annually, a plan could experience almost perfect favorable selection. Beneficiaries anticipating major

medical expenses could switch back to traditional Medicare and possibly buy a supplemental plan if

they knew they would have to pay a substantial part of the deductible. (One way of dealing with this

possibility would be to make the choice of an MSA permanent and not allow switching back to

traditional Medicare or other M+C plan types, or allow just one switch. This would be unlikely to

encourage plan participation unless it were combined with other options.)

Because beneficiaries under the third option would not have a risk score, their choice if they left the

MSA plan would have to be limited to entering traditional fee-for-service Medicare. They could not join

another M+C plan for a year after they left the MSA because the receiving M+C plan could not get a

risk-adjusted payment for the beneficiary. (This would not hold for someone in the first year of eligibility

because no one entering Medicare has a risk rating before coming into the program.)

Contributions to the MSA under this option could be set constant for all beneficiaries, according to

demographic adjusted rating, or as a percentage of payment. If they were set, as now, constant for all

beneficiaries, plans would have to have a good idea of who would be in their plan for the next year to

set a contribution that would work out for the plan. If they assumed an older mix than occurred, they

could be at risk. If the contribution were set by demographic rating or as a percentage of payment, it

would be more difficult to explain to beneficiaries and beneficiaries in the same county would get

different amounts in their MSAs.

The effects of these three payment options are summarized in Table 3 (page 18) .

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Offer MSA benefit package through Medicare

A completely different option, which could be considered an interim approach, would be for Medicare

to retain the risk for covered services beyond the high deductible, rather than pay a premium to a plan

to cover that risk. In this option, the Medicare program would make a set contribution to an MSA for a

beneficiary. The beneficiary would pay all medical expenses up to a set deductible amount. The

Medicare program would cover all expenses beyond the deductible (or retain some minimal cost sharing

after that level is reached). No private plans would be involved.

This proposal would radically simplify the Medicare MSA program. First, having Medicare retain the

risk for coverage beyond the deductible would cut out all the difficulties of contracting with private plans

to provide the coverage. Second, a single program could be available to beneficiaries with standard

benefits and conditions across the nation. (Making the payment into the MSA standard nationwide

rather than adjusting it to the fee-for-service county average or the managed care rate by county would

give beneficiaries the freedom to move without having to worry about whether the MSA payment would

change. It would also make a choice available in areas where M+C plans are unavailable.) Third,

beneficiaries could use all Medicare-participating providers and retain the balance-billing protections

and favorable rates negotiated by the Medicare program, which would remove the uncertainty inherent

in not having a network of providers with pre-negotiated rates. If beneficiaries wanted to see other

providers, they could, and they would pay the providers from their MSA. However, only the Medicareallowable costs would be credited to the deductible.

This approach has several additional advantages:

• Theoretically, if an entity can bear the risk of self insuring, it should do so. Medicare clearly can

in this case because it already holds the greater risk of paying for all covered medical care after

cost sharing.

• Because this is not a managed care product, no efficiency gains from a private plan managing

care would be foregone. However, the reduction in the use of medical services that the high

deductible should induce would still occur.

• The high administrative and marketing costs of private plans would be avoided.

Variable contribution

Effect on plan

Payment options Beneficiary protection M+C equity Fiscal impact participation

Impact of options changing payments

 ..................................................................................................................................................................................................................................................................................................................................................................

TABLE

3

Note: M+C (Medicare+Choice), + positive effect, o no effect, – negative effect.

Source: MedPAC.

 ....................................................................................................................................................................................................................................................................................................................................................................

 ..................................................................................................................................................................................................................................................................................................................................................................

to individual MSAs – o o +

Group equity o + o unknown

Base risk factor for all o – + unknown

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• Beneficiaries would only have to deal with Medicare, removing some of the uncertainty of the

new arrangement from the beneficiary perspective.

• The ability of beneficiaries to spend MSA dollars on non-covered but desirable medical

expenses, such as prescription drugs, would be retained. (Because most preventive care—such

as routine physicals—is not currently covered by Medicare, the usual objection to MSAs that

people will forgo needed care could in part be reversed.)

• The magnitude of possible increased costs to the Medicare program resulting from favorable

selection into the MSA option would be less because Medicare would make only the

contribution to the MSA rather than the contribution and the premium payment.

This simplified program would be much easier to explain to beneficiaries and to implement than the

current design. It would also provide a good test of the hypothesis that a high-deductible plan would

lead to lower use of health care services. If undertaken as a demonstration with limits on enrollment, the

financial risk for the program could be controlled.

Conclusion

The Commission believes that the current demonstration has shown that the private sector will not offer

Medicare MSAs because of the basic market characteristics of little demand from a risk-averse

population and the expense and difficulty of marketing a complex product to a fragmented and scarce

set of customers. Although some of the program-specific conditions that have discouraged participation

could be changed, doing so is unlikely to engender much participation because of the underlying market

characteristics. Furthermore, most steps to encourage plans’ participation would decrease beneficiary

protection or increase the financial risk to the Medicare program.

A possible way to make the program technically viable—that is, make it possible for beneficiaries to

enroll—would be a Medicare-run MSA demonstration. Such a demonstration would, at relatively low

risk to the program, test if beneficiaries would be willing to enroll in a high-deductible option, show

whether use of discretionary health care would decrease, and show whether providers would be willing

to take on the risk of treating beneficiaries with high deductibles. However, the creation of another

special program within Medicare should not be undertaken without some thought about its purpose and

reversibility. History is replete with examples of temporary programs taking on an air of permanence and

becoming difficult to eliminate. Special rules also would have to be created on how to treat participating

beneficiaries at the end of the demonstration.

If the demonstration yielded positive results and beneficiaries became more familiar with the MSA

product, the private sector might reassess the market. At that time, HCFA would have a better sense of

the characteristics and health care use of beneficiaries who choose MSAs and could set payment rates

more equitably. The options discussed in this paper—such as paying plans at the base rate for all

beneficiaries, minimizing data requirements and administrative rules, and extending balance-billing

protection to MSA enrollees—could then be reevaluated and Congress might then be able to make

MSAs a viable option in Medicare+Choice. ■

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References

American Academy of Actuaries. Medical savings accounts, cost implications and design issues.

Washington (DC), AAA, May 1995.

Internal Revenue Service. IRS announcement 99-95. Medical savings accounts. October 1999.

Kendix M, Lubitz J. The impact of medical savings accounts on Medicare program costs, Inquiry. Fall

1999, Vol. 36, No. 3, p. 280-290.

Rodgers J, Mays J. Medical savings accounts for Medicare beneficiaries, Henry J. Kaiser Family

Foundation. August 1995.

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More about MedPAC

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M e di c a l S a v i n gs Ac c o u nt s a n d t h e M e di c a r e Pro gr a m • N ove m b e r 2 0 0 0

Term expires April 2001

Spencer Johnson

Michigan Health and Hospital

Association

Lansing, MI

Joseph P. Newhouse, Ph.D.

Alice Rosenblatt, F.S.A, M.A.A.A.

Wellpoint Health Networks

Thousand Oaks, CA

John W. Rowe, M.D.

Aetna US Healthcare

Hartford, CT

Gail R. Wilensky, Ph.D.

Term expires April 2002

Beatrice S. Braun, M.D.

AARP

Spring Hill, FL

Floyd D. Loop, M.D.

The Cleveland Clinic Foundation

Cleveland, OH

Janet G. Newport

PacifiCare Health Systems

Santa Ana, CA

Carol Raphael

Visiting Nurse Service of New York

New York, NY

Mary K. Wakefield, Ph.D.

College of Nursing and Health

Science

George Mason University

Fairfax, VA

Commission members

Gail R. Wilensky, Ph.D., chair

Project HOPE

Center for Health Affairs

Bethesda, MD

Joseph P. Newhouse, Ph.D., vice chair

Harvard University

Boston, MA

..........................................................................................................

23

Term expires April 2003

Autry O.V. “Pete” DeBusk

DeRoyal

Powell, TN

Glenn M. Hackbarth, J.D.

The Bard Group

Newton, MA

Alan R. Nelson, M.D.

American College of Physicians -

American Society of Internal Medicine

Washington, DC

Robert D. Reischauer, Ph.D.

The Urban Institute

Washington, DC

David A. Smith

AFL-CIO

Washington, DC

Ray E. Stowers, D.O.

Oklahoma State University College of

Osteopathic Medicine

Tulsa, OK

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M e d i c a l S a v i n g s A c c o u n t s a n d t h e M e d i c a r e P r o g r a m • N o v e m b e r 2 0 0 0

Analysts

Matthew Barry, M.P.A.

Sharon L. Bee, M.S.

David V. Glass, M.S.

Janet C. Goldberg, M.P.H.

Timothy F. Greene, M.B.A.

Jesse Kerns, M.P.P.

Craig Lisk, M.S.

Mary B. Mazanec, M.D., J.D.

Anne Mutti, M.P.A.

Nancy Ray, M.S.

Deborah Walter, M.P.A.

Raymond Wedgeworth, M.A.

Chantal Worzala, Ph.D.

Daniel Zabinski, Ph.D.

Commission staff

Murray N. Ross, Ph.D.

Executive director

Lu Zawistowich, Sc.D.

Deputy director

Jennifer Jenson, M.P.H., M.P.P.

Special assistant to the executive director

Helaine I. Fingold, J.D.

General counsel

Research directors

Jack Ashby, M.H.A.

Elizabeth Docteur, M.S.

Scott Harrison, Ph.D.

Kevin J. Hayes, Ph.D.

Sally Kaplan, Ph.D.

Julian H. Pettengill, M.A.

.................................................................................................. ..................................................................................................

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Administrative support

Reda Broadnax, B.S.

Wylene Carlyle

Diane E. Ellison

Plinie (Ann) Johnson

Cheron McCrae

Cynthia Wilson

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