© July, 2001

    Three powerful trends have combined to cause many employers to explore offering individualized health care benefit accounts to their employees --  (1) the resurgence of double-digit health care inflation;  (2) a backlash by employees and physicians against managed care and other provider-side cost constraints; and (3) a rise in health care consumerism fueled by the internet and direct-to-consumer advertising for health products and services.   Employers are investigating whether new approaches involving defined contribution benefits might not only contain health care costs, but also increase employee choice and satisfaction concerning their health care.   This is the origin of this site: MediChoice.

    This web site provides an overview of the advantages and disadvantages of the three main types of individualized health care benefit accounts in the field today.  It is intended to help employers, employees, and public policy makers better understand these options and choose among them.  In addition to offering free information, this site is also intended for development for e-commerce.  Currently, customized research is also offered.  Please see below.  Future web site development may include additional services and products.  Suggestions for improvement of this site or corrections are welcome (please see contact information at the end).

MEDICAL SAVINGS ACCOUNT (MSA)

    A Medical Savings Account (MSA) is a form of individualized health care benefit account which has been relatively well-defined by federal legislation.  An MSA is a tax-advantaged personal account from which an individual pays their health care bills.  It is usually accompanied by a high-annual-deductible ("catastrophic") insurance policy which pays 100% of health care bills above the deductible.  The amount put into the MSA each year is generally less than the annual insurance deductible.  MSA funds which are unspent as of the end of the year can be kept in the account to pay health care bills in future years.  Many MSAs also allow individuals to withdraw funds for non-health-care purposes after payment of taxes (and a 15% penalty).

    In theory, an MSA could be funded by an employer, employee, or both.  Current federal legislation, however, does not allow contributions by both employer and employee.  In current MSAs, employee contributions into an MSA are exempt from federal income tax, social security tax and (in many states) also state income tax.  Employee contributions remain subject to Social Security tax, so employee-funded MSAs are generally less desirable.

    In many MSA plans, all expenses which qualify as health care expenses under the IRS income tax code are eligible for MSA reimbursement.  This scope of services is more generous than under many traditional health plans.  Many MSA plans also allow an individual to see any provider.  This provides more freedom of choice than with most managed care networks.  Some MSA proposals incorporate care management into the high-deductible insurance plan; others do not.

    MSAs are currently authorized under a four-year pilot study initiated by the Health Insurance Portability and Accountability Act of 1996.  This pilot limits MSAs to: individuals at firms with under 50 employees; the self-employed; and the uninsured.  It also limits annual MSA contributions to no more than 65% of the accompanying insurance deductible for individual coverage and 75% for family coverage.  The scope and flexibility of MSA design may expand or shrink in the coming years, depending on what legislation follows the pilot.

    MSAs have been hotly debated in the public policy arena.  MSA supporters say that MSAs would: contain health care costs without the intrusion of managed care into the patient-physician relationship; empower people to take greater control of their own health and health care -- improving their health and shopping for value in health care services;  expand individuals' choice of providers and thus their satisfaction; provide equitable tax treatment for individuals who choose high out-of-pocket insurance plans instead of more expensive low-deductible plans; and reduce the number of uninsured people by offering a low-cost tax-exempt insurance alternative.

    MSAs opponents say that MSAs would: disproportionately attract healthy and wealthy people -- leaving the sick and the poor in traditional health insurance with increasing premiums; provide a tax break for the wealthy which would overshadow health care effects; cause people to neglect preventative care; and not significantly contain costs or decrease the number of uninsured people.   Some of these negative effects could be reduced if employer contributions to MSAs are adjusted for health status and/or income level.  This would require employers to modify the concept of equal defined contributions for all employees.  It may also be possible to reduce adverse selection by balancing MSA design incentives.

    MSAs are not yet common in the U.S., but could become so. In a recent survey of 400 health care executives by PricewaterhouseCoopers, 60% of the executives believed that most U.S. employers will offer MSAs to their employees by 2010 (Wrobel and Metropulos, 1999).

HEALTH CARE REIMBURSEMENT ACCOUNT (HCRA)

    A Health Care Reimbursement Account (HCRA) is a second form of individualized health care benefit account which is relatively well defined.  Each employee funds their own HCRA with tax-free contributions from their earnings and then uses the account to be reimbursed for allowable medical expenses that are not paid by their primary insurance (such as co-pays or non-covered health-related services).  HCRAs have been used for many years in a secondary role -- supplementing an employee's traditional, low-deductible health insurance policy.    With an HCRA, employees determine how much they want to put into the account, but money left unspent in the HCRA at the end of the year is lost to the employee.  Each year, the employee must "use it or lose it."  Also, HCRA funds can not be withdrawn for non-health-care purposes.  The inability of consumers to save unspent funds for future years or to withdraw funds for non-health-care purposes differentiate a HCRA from an MSA.

    Although both MSAs and HCRAs both allow employees to avoid paying income tax on medical expenses not covered by the employee's primary health insurance, the design of HCRAs is currently more flexible than MSAs because of the MSA pilot legislation.  HCRAs are not as restricted with respect to employer size or plan design.  This is a key advantage of HCRAs today.  The main disadvantage of an HCRA is the risk of losing unspent funds at the end of the year.  HCRAs may also dilute the utilization control purpose of copays and deductibles in primary health insurance.

COMPREHENSIVE INDIVIDUAL MEDICAL ACCOUNT (CIMA)

    A Comprehensive Individual Medical Account (CIMA) is a variation on an MSA or a HCRA in which an employee purchases health insurance through the account, instead of having an insurance policy provided separately by their employer.  A CIMA is called "comprehensive" because, unlike the situation with traditional MSAs or HCRAs, all health care benefits are purchased through the account.    If a CIMA qualifies as an MSA under current federal legislation, including employer size and deductible criteria, then it is a variation on an MSA;  multi-year saving and cash withdrawals (after penalty) are possible.  If a CIMA does not quality as an MSA, then it is a variation on a HCRA; unspent funds are lost at the end of the year.

    An employer generally makes a defined contribution into a CIMA for each employee.  The employer does not pay directly for a catastrophic or primary health insurance policy.  Each employee uses their CIMA to purchase a blend of health insurance and individual health care services.  A key advantage of a CIMA is that each employee can individually customize their own health benefits package.

    Insurance purchased through a CIMA can be: a single capitation contract with an HMO or other care system; or a combination of sub-capitation contracts with individual providers.  With a single capitation contract, the HMO or care system is paid a fixed amount per month to provide the care that the employee needs from all types of providers in the system network.  With sub-capitation contracts, each provider is paid a fixed amount per month to provide only the care that the employee needs from that provider.  Ideally, multiple sub-capitation contracts combine to form comprehensive coverage for the employee.

    Advantages of a CIMA with multiple sub-capitation contracts include: greater choice of providers and customized network creation by employees; and greater price and quality competition among individual providers.  A potential disadvantage of CIMAs with multiple sub-capitation contracts is the possibility of cost-shifting among independent providers.  HMOs often have risk pools and other internal arrangements to: align primary care physician, specialist and hospital incentives; coordinate physician referrals and hospital admissions; and avoid cost-shifting among providers.  When an HMO is replaced by multiple sub-capitation contracts in a CIMA, such coordination may be lost.

    Another potential disadvantage of CIMAs concerns risk segmentation.  CIMAs can allow individual employees to select insurance packages with different levels of copays and deductibles.  This increased choice can be good for employees, but it can also lead to greater risk segmentation for a firm offering CIMAs than a firm offering MSAs.

CONCLUSION

    Many employers are investigating new defined contribution options to provide their employees with health care benefits.  These options include: Medical Savings Accounts (MSAs), Health Care Reimbursement Accounts (HCRAs) and Comprehensive Individual Medical Accounts (CIMAs).   MSAs and CIMAs are relatively new and their results are not well documented yet.  Will they cause risk selection in insurance markets and leave the chronically ill paying higher insurance premiums?  Can negative effects may be avoided through balanced plan design?  Will these accounts provide cost containment, greater employee choice, and improved service -- a win-win situation for employers and employees?  As the results of pilot programs and early innovation become known and these benefit arrangements are refined, then we will learn whether they live up to their promise to improve employee choice and satisfaction with health care.

SITES PROVIDING SERVICES (CURRENT & PLANNED)

benefitpoint.com = BenefitPoint
benefitport.com = Benefitport.com
careassured.com = CareAssured.com - Health Care
channelpoint.com = ChannelPoint
definedcare.com = Defined Care
ebenx.COM = eBenX - Home Page
ehealthclaim.com = Welcome to eHealthClaim.com
employease.com = Employease - Home Page
employeelife.com = Welcome To EmployeeLife
healthallies.com = HealthAllies.com
healthecare.com = HealtheCare
healthmarket.com = Welcome to the HealthMarket website
healthsync.com = Healthsync
ibenefits.com/index2. html = Welcome to iBenefits
mcol.com = MCOL the Internet's B2B Managed Care Resource Company
mpowerinc.com/em p_benefits.htm = XCare.net - Employee Benefits
my.webmd.com/benef it_central = WebMD - Benefit Central
myhealthbank.com = myHealthBank - Your Money | Your Health | Your Choice
online-benefits.com = OnlineBenefits, Inc.
sageo.com = Sageo
selexsys.com/index.htm = SelexSys
simplyhealth.com = Welcome to SimplyHealth.com
vivius.com = Vivius - A Personalized Healthcare System.
wellmed.com/wellmed = WellMed: Home
wetfeet.com/companies/quicks/internet/benefitmall.asp = BenefitMall.com CompanyQuick

SITES PROVIDING COMMENTARY/RESEARCH

access.md/dogho use/doghouse.asp = First Consulting Group
ada.org/adapco/daily/archives/9911/1123def.html = Workers Want Defined-Contribution Health Plan
cmwf.org/programs/medfutur/moon_restructure_317.asp = Restructuring Medicare: Impacts on Beneficiaries
global8.com/H80 5/benefits.shtml = Internet Health Care Companies - HCIS 2000 Conference Agenda
hr-today.com/main 6302000.html = HR-Today.com Main Story
m anagedcaremag.com/2000_07_23_daily_arch.html = Managed Care Magazine's Daily Briefing
mcare ol.com/mcolfree/mcolfre1/yharkey.htm = Harkey Report Publications
mcar eol.com/mcolsecw/webpages/artcl636.htm = Defined Contribution: An Alternative to Managed Care or An Option Within Managed Care?
ncpa.org/press/nr 061200a.html = Defined Contribution Heath Plans Wave Of The Future For Employer Based Health Care, Expert Predicts
selexsys.com/ articles/defcont.htm = Defined Contribution
strategy-business.com/strategy/98405/page1.html = HMO's R Us
ucop.edu/b encom/rs/dcpspd/intro.html = UCbencom Retirement
webmd-practice.medcast.com/Z/Channels/39/article57961  ; = Defined Contribution Models: Shaking Up the Employee Health Status Quo
wrhambrecht.com/research/newsletters/wrh /issue002030/index.html#e health = WR Hambrecht + Co: Research: Newsletters: WRH+Co Weekly: Volume II: Issue 30

BIBLIOGRAPHY

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Archer, Bill, "Give People Private Health Insurance with Choice," The Houston Chronicle, January 25, 2000, A21.

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Elizondo, Juan B., "Medical Savings Accounts Pay Off for Employer," The Detroit News, 7/17/95.

Gawande, A. A., R. Blendon, M. Brodie, J.M. Benson, L. Levitt, L. Hugick, "Does Dissatisfaction for Health Plans Stem from Having No Choices?" Health Affairs, Sep-Oct, 1998, 17:5, 184-94.

Gleckman, Howard, "The Nasty Side Effects of Medical Savings Accounts," Business Week, October 25, 1999, p. 42.

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Goldman, Dana P., Joan L. Buchanan, and Emmett B. Keeler, "Simulating the Impact of Medical Savings Accounts on Small Business," Health Services Research, 31:1, Part I, April, 2000, 53-75.

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