Medical Savings Accounts: Progress and Problems under HIPAA

August 8, 2001 • Policy Analysis No. 411
By Victoria Craig Bunce

Medical savings accounts (MSAs) have shown that they can help health care consumers control costs, exercise greater choice in and control of their own health care, improve access to medical care, and increase personal savings. Early experiments with MSAs achieved modest success by the mid‐​1990s. The Health Insurance Portability and Accountability Act of 1996 established a five‐​year MSA demonstration project for a select group of individuals–employees of small firms with 50 or fewer workers and self‐​employed individuals. MSAs under HIPAA provided federal tax deductions for contributions to multiyear savings accounts established for medical purposes.

HIPAA MSAs were handicapped by rules that limited their availability and growth over the last four years. HIPAA imposed unnecessary complexity, restricted the scope of the MSA project, and created a number of MSA design problems. Last December the HIPAA MSA project was about to sunset when Congress renewed it for another two years, until December 31, 2002. However, Congress failed to fix any of the underlying problems plaguing HIPAA MSAs. It simply renamed them “Archer MSAs” in recognition of the role of Rep. Bill Archer (R‐​Tex.) in enacting them.

On February 28 President George W. Bush proposed that MSAs be made permanent and liberalized. The Bush administration’s budget plan for fiscal year 2002 would remove HIPAA’s cap on the number of MSAs and the restriction related to employer size. All employees and individuals covered by a high‐​deductible health plan would be eligible for MSAs. The Bush MSA reforms would lower the minimum annual deductible amount eligible for tax advantages as a high‐​deductible health plan, allow annual MSA contributions up to 100 percent of the applicable maximum deductible, and permit employees and employers to combine their MSA contributions to reach that annual limit.

To provide a fairer test of MSAs for all Americans, Congress should peel away the remaining legislative and regulatory restrictions on federally qualified MSAs. Expanding the availability of tax‐​advantaged MSA plans with high‐​deductible insurance could allow many Americans to economize on insurance costs, save for future medical and long‐​term‐​care expenses, and still remain protected against the risks of catastrophic illness. Potential MSA customers cer‐​tainly will be interested in purchasing more‐​flexible and better‐​structured MSA plans.

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About the Author
Victoria Craig Bunce is director of research and policy at the Council for Affordable Health Insurance in Alexandria, Virginia.