A medical savings account unites the advantages of a highly deductible health insurance policy with the benefits of a personal savings account. Federally authorized medical savings accounts have been available to Americans since 1997 and is used by nearly 2000 companies worldwide. The traditional health insurance plans in existence, reduce individual patient costs to such an extent, that they make the individual research on the lowest possible cost, redundant.
In contrast to that, a medical savings account makes the patient aware of the rising costs of health care and allows him to choose the lowest priced, health care service available. The participants save the money in a tax sheltered account, which can be used to cover low cost and routine health care expenses that is currently tax deductible. For the unspent fund accounts, there are two options available, either the money can be saved for future medical expenses and the interest accrued would be tax free or the participant can withdraw the money from the account retaining a minimum balance. If the user's medical spending corresponds to the insurance policy's deductible, the insurance covers other inclusive needs.
Individuals need to first purchase a health insurance policy before deposits to the savings account can be made. There are a wide range of medical expenses that are covered under this scheme which include long term health coverage, disability, dental care, vision care etc. There are financial restrictions on the insurance policies that one can take. The people who qualify for a policy are limited financially as - an individual can take one deductible between $1,650 and $2,500 and a family can have deductibles between $3,300 and $4,950. Along with this, the maximum allowable out-of-pocket expense is $3,300 for individuals and $6,050 for families.
Taxation of the Medical Savings Account
These accounts which are state authorized, provide a state tax advantage to the holders and are subject to federal income taxation at the time of deposit. Spending on allowable medical expenses is tax free, however under most state laws any non medical spending from the account is subject to a tax penalty. On the other hand federally authorized plan established under The Health Insurance Portability and Accountability Act (HIPAA) and The Balanced Budget Act of 1997 (the BBA) are not subject to federal income tax. The deposits made to the savings account as well as the interest income earned, is not subject to taxation.
Medicare Medical Savings Account
This account is a type of Medicare Advantage plan, which links the highly deductible health plan to a savings account. First proposed in The Balanced Budget Act of 1997, under this scheme any Medicare beneficiary is eligible to acquire this account. The beneficiary will need to acquire a high deductible health care insurance policy to link to the savings account, deposits to which may not exceed $6000. Only beneficiaries with both Medicare Part A and Part B can enroll in the plan.
Advantages
The advantage of this account is, it allows users to spend the funds held in personal accounts. This not only sensitizes the user to the costs of health care but also allows him to shop for the least costly service. As consumer pressure builds up with consumers looking for the best prices, the widespread use of medical service accounts will create price reductions in the health care market. The other advantage of this account is, it gives individual patients the freedom to make cost conscious health care spending decisions. Along with this, a medical savings account might serve as a hedge against future expenses and provide long term health care and retirement benefits.
Criticisms
The introduction of this account has been criticized on many fronts. Critics argue that these plans will be more attractive to healthy people who would not be likely to spend from the account. As they start acquiring the plans they would be moving out of the health insurance risk pool, leaving behind much sicker individuals for whom the premium prices would rise. There is also the risk of the increase in Medicare program costs, as spending on beneficiaries choosing MSA with Medicare, will take an upward turn, as opposed to those without MSA.
There are other possible problems linked to this account, like the possibility that people may be reluctant to spend from their savings account and the tax free nature leading to widespread adoption of the plans and loss of state revenues. With the escalation in the health care costs, largely driven by patients who do not make intelligent cost-effective decisions while shopping for health care insurance policies, a medical savings account might be the answer to the problem.
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