Edited from a speech delivered by the then AFCM President, Dr. Art Astorino, Red Lion Hotel, Costa Mesa CA, December 11, 1993
Good afternoon, ladies and gentlemen:
The Medical Savings Account (MSA) is the future for health care financing. It is the best option available today for returning control, responsibility and freedom of choice to the individual and will thereby preserve and advance quality medical care.
Many of our current healthcare financing problems, such as lack of affordability and portability, result directly from government incentives that discourage personal responsibility and restrict individual freedom of choice.
MSAs are a moral and practical solution to all these problems.
What are Medical Savings Accounts?
An MSA is a trust account set up to pay for medical expenses at the discretion of the individual. It is generally tax-advantaged, either excluded or deducted from income. Each individual chooses the medical care he wants at the price he is prepared to pay the doctor of his choice.
Money not spent during the year on medical care stays in the MSA and accumulates tax-free and with interest.
Under existing laws, the MSA may be funded with contributions ranging from $500 to $3,000 depending on the design of the plan. Ideally, the only limits would be those the individual chooses for himself.
The MSA is combined with an indemnity type insurance that has a deductible higher than the annual MSA contribution. For example, a family plan may have $2,000 in the MSA and a $3,000 deductible policy.
This means that the family essentially has first dollar coverage for the first $2,000, and $1,000 out of pocket costs before their insurance policy kicks in to cover expenses. This $1,000 is often referred to as the “corridor.”
The understanding of the savings achieved by an employer who self-insures may be applied to the MSA concept. The individual is essentially self-insuring for the relatively small dollar costs, but covers the catastrophic costs with a stop-loss type plan. If the individual has a good year and is a prudent shopper, he saves money. If he is very sick, he is covered with a good plan after a manageable, predetermined out-of-pocket cost.
The MSA is generally designed such that most participants never use the insurance part to pay for medical care in any given year; as many as 75% of MSA holders will have money saved in the MSA at year end.
The potential savings are a tremendous incentive. The individual accurately perceives he is spending his own money for his own medical care; there is no more powerful economic force than a consumer empowered with his own money.Freedom of Choice
With an MSA, patients are free to consult doctors and specialists of their choice. They can negotiate their own cash discounts, with or without the assistance of an MSA administrator. Doctors are paid at the time of service, without costly administration. Patients control the medical decisions with their doctors’ advice, without third party intervention.
This is a refreshing contrast to the many mechanisms used today to attempt to reduce medical care spending through restrictive access to physicians, specialists, and treatments as well as unnecessary administrative and regulatory expenditures.
The difference stems from a fundamentally different philosophy. The MSA is developed from the basic premise that an individual has the right to freedom of choice.
Principles of Our Founding Fathers
The Declaration of Independence holds the truth to be “self-evident, that all Men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the Pursuit of Happiness…” The tyrannies of the British Government, including the charge that the King of Great Britain “has erected a Multitude of New Offices, and sent hither Swarms of Officers to harass our People and eat out their Substance,” could be held in direct comparison to the growing health care bureaucracy with similar tyrannies suffered at the hands of the very government our forefathers had established to protect us from.
The ideas that founded this country are being subverted or ignored and this has resulted in many of the problems in health care. Americans for Free Choice in Medicine (AFCM) has been established in the commitment to educate about the important role that ideas play in producing results.
Ideas have consequences and the wrong ideas produce wrong action and bad consequences. The history of health care financing bears this out.
What Does “Freedom” Mean?
Individual liberty is the freedom to act. It means your right to take the actions necessary to advance your life and pursue your happiness. It is not a liberty to take the things you want or need from others by force. With liberty comes corresponding responsibility. The individual and no one else is responsible for the actions necessary to sustain his life and pursue his happiness.
One’s right to pursue happiness is not a claim on others to provide. When something is needed to sustain life, it must be obtained through voluntary cooperation, without force otherwise someone else’s liberty is destroyed. This voluntary cooperation is called trading, market exchange, or, more accurately, Capitalism.
Individual liberty, personal responsibility and voluntary exchange of goods and services are the founding principles of this country. They are the sound ideas by which to base our actions and to understand any reforms being contemplated by the government.
The Portability of Health Insurance
Many health care today advocates look at lack of portability of healthcare insurance and identify that as the problem. In fact, portability is simply a benefit feature not usually present in employer policies. Lack of portability is a symptom of a more fundamental problem—namely a tax incentive that has discouraged personal responsibility.
Making the Connection Historically: How MSAs fit into the Solution
In the 1940s, the government imposed a price and wage freeze. The logic was that the shortage of employees (the men who left as soldiers) would cause businesses to raise wages to entice workers and consequently prices would go up to cover the new, increased cost of production. The government tried to stop this normal market-correcting mechanism by forcing employers to fix their wages, forcing distributors to fix their prices and ignore reality.
The reality was that businesses still needed workers. One of the consequences was that employers figured out other ways to entice workers: they provided benefits such as medical benefits that did not show up as increased wages.
In 1942, the Internal Revenue Service (IRS) decided these benefits were a substitute for wages and wanted to tax them. This caused an uproar, particularly by unions who had been most successful at getting these benefits included. Congress complied by establishing that employer-based medical care would not be taxable as income.
This health policy decision was fundamentally flawed on principle. It actually says that if you are personally responsible for paying your healthcare, you are penalized with taxes. And if you can get your employer to be responsible for paying it, you get it at a better deal—tax-free.
Consequently, personal responsibility is being penalized in favor of group responsibility. If the group—the employer—selects and pays for medical care, it is cheaper. If an individual opts for free choice and selects his own care and makes his own decisions and chooses his own insurance and pays for it himself, he is paying twice as much because after-tax dollars must be used.
The idea that the responsible unit is the group or the collective and not the individual is a distinctly un-American idea and it will raise its ugly head again and again.
Has the Market Responded to This Bad Idea?
Over the last fifty years this incentive has been so powerful that employers own over 85% of health insurance policies. There is at least $100 billion of tax incentive for employer-based coverage. Less than 15% of the market is personally responsible for paying their medical care.
Insurance is usually something people don’t want to use—it is purchased to protect against costly, catastrophic, unexpected events.
The fact that people want to use their medical insurance in contrast to other types of insurance is the consequence of the bad idea of collective responsibility for paying health insurance.
Soon after 1942, it became obvious to individuals and unions that dollars spent through the employer on medical care were tax-free. Therefore, the incentive was to create 100% coverage for all medical care, whether routine or not, whether expensive or not. Health care insurance became a vehicle through which to bill employers for all medical services.
The concept of the consumer was split in two. The payer was the employer, and the recipient of care was the individual employee. As long as the payer did not balk and did not have a say in the purchasing decisions, the individual gets all the care they want or need without any worry over the price.
Normal consumer pressures did not restrain the doctor charges at the time of the service. Advanced technology focused on improving quality without the need to focus on reducing costs.
The shift of personal responsibility to group responsibility resulted in undermining another principle of our American heritage: free market exchange. Market exchange can not exist when the recipient of the service is not also the payer most of the time.
Medical Care as a “Right”
By the mid-1960s most people began to think of medical care as something they should get for free. It was “given” to them by employers. It began to be perceived by them as a right, something the group must take care of.
Employees Begin to Retire
As employees that were once covered under their employer’s plans began to retire, many were not prepared to purchase personal insurance and some had already developed conditions that made their insurance expensive. By 1965 there were about 7 million insured elderly and about 7 million uninsured. Instead of recognizing that the problem was a system that discouraged personal responsibility, President Johnson kept with the mentality of collective responsibility and passed a law that said the medical care for the elderly is the responsibility of society.
This tremendously expanded the third-party payment system and further entrenched the idea in the American psyche that paying for health care was someone else’s responsibility. Due to this fact—that many more individuals relied on someone else to pay for their medical care—costs continued to rise and employers began to take notice.
In the Face of These Beliefs, How Does an Employer Solve the Problem of Rising Costs?
Those responsible for paying for something are eventually responsible for implementing control over what is being purchased.
Systems were established to begin controlling the consumption of medical services through Pre-paid Organizations (PPOs) by limiting fees and access to doctors, through HMOs by limiting access to specialists, and through capitation by motivating doctors to be “efficient” with their care.
All these approaches limit the individual’s freedom of choice.
There is no individual liberty without personal responsibility. Freedom of choice is not possible without accepting responsibility. When an individual accepts responsibility for acquiring the goods and services he needs, market forces are aligned and the individual makes the decisions about cost, access, and quality.
This is why MSAs attack the cause of the problem. It is the only reform that increases choice to the individual by allowing the individual to accept the responsibility to shop for and pay for a significant amount of his medical care with the same tax advantage as other medical care options. And the savings are portable—they can move with the employee. MSAs also return the function of insurance to its proper function of protection against catastrophic, unexpected events.
The solution is simple: tax equity. Individuals should be allowed the same tax advantage for purchasing medical insurance plans that is provided for employers.
If this were instituted and individuals wanted portability, they would simply take their employee-benefit dollars and purchase a personal, individual policy that is portable. If many employees wanted this and selected individual instead of group coverage, group insurance would have to respond to the newly empowered individuals if they wanted to maintain market share. Group insurers would simply write policies that were convertible to an individual plan on leaving the employer with a pre-determined agreed-upon price.
HR3103
This is not, however, the approach that was written into HR3103. Forced portability, forced guaranteed issue, forced community rating are examples of restricted choices and a destruction of individual property. The legitimate role of government is to facilitate the market exchange by eliminating the use of force and upholding contracts-not by writing the contracts and imposing their use by force.
However, the MSA provision in HR3103 is the chance to begin to reverse the trend in legislation that promotes group responsibility in favor of individual responsibility.
MSA administrators must be able to design plans that will meet the objectives of the employers and the employees.
MSAs will open an entire industry of information seekers. As individuals accept responsibility for purchasing medical care services directly from doctors, they will have questions. Doctors and groups who make their pricing easy to understand as well as competitive will be rewarded by a greater percentage of MSA holders and consequently fewer administrative problems.