The medical savings saga

Legislation in Congress would incorporate the concept of medical savings

accounts into the Federal Employees Health Benefits program. The jury is

still out as to whether this would be a positive development for feds.

Under existing law, individuals who are self-employed or work for a company

with fewer than 50 employees can elect to participate in a medical savings

account (MSA). Congress has approved a four-year pilot to apply the concept

in the federal government and make MSAs available to the first 750,000 people

who apply.

MSAs work in conjunction with major medical insurance providers and

allow patients to choose their own doctors. Participants can use MSA money

to help pay deductibles and expenses not covered by a major medical policy.

Contributions to an MSA are made with pre-tax dollars. The tax treatment

is similar to money you elect to contribute to the Thrift Savings Plan.

Because three-fourths of Americans spend less than $500 a year on medical

care, proponents of MSAs say these account holders could accumulate large

sums over a lifetime. A study by the National Bureau of Economic Research

predicted that more than half of the workers would amass $50,000 in their

MSAs.

Little information exists about the impact of the MSA program so far,

but it appears to have been unsuccessful in the marketplace, with far fewer

people enrolling than the demonstration allowed.

By expanding MSA eligibility to feds, critics are concerned about dividing

the marketplace into healthy and sick categories. Consumers Union estimates

that under the current pilot program, it costs the federal government about

$3,600 to insure each previously uninsured person who purchases an MSA.

In contrast, it costs about $1,178 to cover each additional child enrolled

in Medicaid.

Imposing MSAs into FEHB could result in higher costs for federal employees

and annuitants who remain in traditional plans. MSAs tend to attract healthier

enrollees because they reward those who don't use much health care and have

cash balances. As a result, less healthy individuals left in other plans

could drive up costs and force insurers to raise premiums, cut benefits

or both. This is called "adverse selection."

According to the Congressional Budget Office, adverse selection will

result in increased costs of nearly $1 billion over five years if MSAs are

introduced into FEHB. When MSAs were offered to public employees in Ada

County, Idaho, and Jersey City, N.J., the National Association of Retired

Federal Employees said adverse selection occurred. Consequently, the two

stopped offering MSAs to their employees.

Although it's impossible at this point to determine if MSAs are a good

idea, if Congress wants to experiment with MSAs, it shouldn't use feds as

guinea pigs. Let Congress extend its current MSA trial and let the free

marketplace be the judge. Shoving MSAs down our throats isn't necessary

or fair.

—Zall is a retired federal employee who since 1987 has written the Bureaucratus

column for Federal Computer Week. He can be reached at miltzall@starpower.net.