Changing Medicare To Help Seniors Save
THE debate over Medicare reform has neglected one important point: Most seniors would save money if medical savings accounts (MSAs) are allowed.
Critics of MSAs claim that only a few "healthy wealthy" seniors would choose MSAs, thereby diverting money away from the sick. But there is no evidence to support that claim. In fact, research shows that most seniors would benefit financially with an MSA. Whether or not Congress raises Medicare premiums, most seniors could accrue more money next year by opting out of the traditional Medicare system and instead opening an MSA.
The most significant feature of MSAs is that they give seniors the freedom to choose their health-care provider. As it stands, Medicare collects money from taxpayers and then turns around and pays their medical bills for them. Medicare bureaucrats decide which health-care providers and treatments are cost-effective. MSAs would give decisionmaking power to seniors.
MSAs were designed to make consumers more aware of how their health- care dollars are spent. Rather than Medicare making payments for health care, seniors would be allowed to keep a portion of their Medicare money in an individual tax-exempt account. This money could be used to pay for any treatment or provider that is currently considered tax deductible under Internal Revenue Code (IRC) Section 213. The range of treatments and providers is much broader under IRC Section 213 than what is currently covered by Medicare. In addition, Medicare would pay for a catastrophic health insurance policy that protects seniors against major medical expenses.
An analysis by the actuarial firm Milliman & Robertson found that at the current spending level, Medicare could deposit on average $1,500 into a senior's MSA at the beginning of the year. Medicare would also pay for catastrophic health insurance that covers 100 percent of expenses after a senior's medical bills reach $3,000. The senior would thus be required to pay $1,500 out-of-pocket before catastrophic health insurance becomes effective. For the average Medicare enrollee, the Medicare MSA plan would provide the first $1,500, the senior would pay the next $1,500, and then catastrophic insurance would pay all remaining expenses.
Milliman & Robertson also estimates that if seniors chose a catastrophic health insurance plan with a managed-care insurer, then Medicare could deposit $2,100 into each senior's MSA. The senior would thus be responsible for only $900 out-of-pocket before catastrophic insurance becomes effective.
Today's Medicare system limits the types of providers and treatments that qualify as a deductible expense. However, private insurers of catastrophic policies could potentially do the same. Moreover, the amount of MSA money deposited into seniors' accounts will most likely be adjusted for age, geographic location, and health status. But the bottom line is that Medicare enrollees will be given greater choice and lower out-of-pocket costs than they have under Medicare today.
Any unspent MSA dollars could be (1) accrued for future medical expenses, or (2) withdrawn at the end of the year contingent upon meeting a minimum-balance requirement and paying income tax on the money and a withdrawal penalty. These requirements are imposed to ensure that individuals do not forgo preventive care. However, the MSA plan would create an incentive for seniors to compare the price of health-care services, since they could keep a portion of unspent MSA money.
The claim that only a few "healthy wealthy" seniors would benefit from MSAs is a fallacy. Research shows that the majority of seniors are healthy and could actually benefit from choosing MSAs. According to the government's National Center for Health Statistics, 71 percent of Americans aged 65 and over report that they are healthy (rating from good to excellent). Actual Medicare payments support these reports. In 1992, 73 percent of seniors incurred Medicare payments of less than $2,000. Some 54 percent had no Medicare payments or payments of less than $500 made on their behalf. Consequently, more than half of the seniors could accrue $1,000 in their individual MSA at the current Medicare spending level. Clearly, many healthy seniors stand to gain with MSAs.
But healthy seniors are not the only winners with MSAs. Some 480,000 seniors face a Medicare cost-sharing liability of $5,000 or more. Cost-sharing liability is the amount of money that seniors must pay. These include co-payments for doctor visits and a deductible payment for hospital care. The cost-sharing liability of $5,000 that many seniors are faced with does not include money spent on Medigap supplemental insurance or out-of-pocket expenses for noncovered expenses and noncovered hospital days.
Moreover, 3.6 million seniors do not have supplemental insurance and are at full risk for any cost-sharing liability. The MSA plan would provide greater financial security to those seniors without supplemental insurance and those facing significant cost-sharing liabilities.
Whether or not seniors' premiums are raised under Medicare reform, it is clear that the majority of beneficiaries could gain financially if medical savings accounts are included in the reform bill. Congress should use this opportunity to guarantee seniors greater choice in health care and to lower their financial burden.