Blue Cross Ignores The Real World
Dr. Peter Somani, Governor Voinovich’s Director of Health, has suggested a creative idea that could save the State of Ohio, and eventually the state’s private businesses, millions of dollars in reduced health care expenditures. Dr. Peter Somani’s proposal calls for the creation of Medical Savings Accounts (MSAs) – tax-free accounts allowing employees to save money for their future medical needs. Similar proposals have passed in three other states and another is awaiting final approval in Michigan, following passage by both houses of the legislature.
As MSAs have grown in popularity, however, those with an interest in preserving the status quo have struck back. John Burry, President of Blue Cross and Blue Shield of Ohio, has attacked the idea of MSAs, claiming that MSAs would “bankrupt” Ohio, create a healthcare “deficit” of $50 million, and “seriously undermine the financial viability of doctors, hospitals, and other healthcare providers.” Are Burry’s claims to be taken seriously? Before addressing them, we must first understand what MSAs are and how they work.
Although MSAs can be structured in many ways, the basic idea is simple. The average business in Ohio now pays approximately $4,500 in health insurance premiums per employee per year. MSAs allow the employer to put as much as $3,000 into an employee’s health care savings account tax free. The employer then buys an inexpensive, high deductible ($3,000) catastrophic insurance policy, costing approximately $1,500. The employee’s benefits do not change. The difference is that rather than having an insurance company pay the first $3,000 in medical bills, the employee pays that amount from his or her MSA. After the first $3,000, the insurance plan covers subsequent expenses. If the employee spends less than $3,000, then the money which the employee does not spend in a given year rolls over into the next year, continuing to draw interest. Thus, an employee can accumulate substantially more than $3,000 over time in their MSA.
Under Dr. Somani’s proposal, money accumulated in an MSA may only be spent for health care, but it belongs to the individual employee. Thus, one of the principle benefits of the MSA is that the employee’s account is portable: Employees laid off or caught between jobs can use their MSA savings to pay for health insurance and incidental health expenses. Retirees can use their MSA savings to purchase long-term care, prescription drugs, and other medical services and supplies not covered by Medicare.
But, perhaps the greatest benefit of MSAs is their proven ability to control costs. By allowing employees to realize the savings from prudent health care spending, MSAs encourage better shopping and smarter utilization of health care services. MSAs also reduce high administrative costs. Studies show that more than 85 percent of American families have annual medical costs under $3,000 – an amount which would be covered by their MSA. Thus, most people in most years will never even have to file a health insurance claim, saving millions of dollars in claims administration and countless hours of aggravation.
John Burry, however, as head of Ohio’s largest health insurer, claims MSAs will lead the state toward financial cataclysm, basing his conclusions on what he calls “real-world healthcare economics.” In fact, Burry’s analysis ignores the real world, relying instead on a computer extrapolation of limited claims data which does not take into account real world experience with MSAs or the behavior of real people.
Burry’s mode of analysis is simple. He begins with the experience of 38,759 Blue Cross insured families in a recent year. According to Burry, these families had health care claims totaling $159.3 million. If MSAs had been in effect, says Burry, these families would have paid $46.5 million in health insurance premiums and $62.6 million from their MSAs for health care costs, totaling $109.1 million. Another $53.7 million would be left in the MSAs of those families spending less than $3,000 on health care. Burry figures that the money left in MSAs of those spending less than $3,000 on health care, would not be available to subsidize those spending more than $3,000, thereby creating a funding deficit. As total claims were $159 million, and premiums and MSA expenditures totaled just $109.1 million, Burry sees a $50.2 million health care “deficit.” This, claims Burry, is “real world” economics.
In fact, the real world is excluded from Burry’s analysis. Burry assumes that people spending their own money from MSAs will spend it exactly as they do now with insurance company money. In study after study, the real world experience of companies that have tried MSAs – and just plain common sense – prove that this key assumption of Burry’s is wrong.
One study, by the well-respected Rand Corporation, found that when families moved from first dollar insurance coverage to a deductible of approximately $2,200 (in today’s dollars), spending on health care dropped by one third, with no decline in overall health. A more recent study by the National Federation of Independent Businesses (NFIB) Foundation came up with similar results.
In 1993, the Indianapolis-based Golden Rule Insurance Company adopted MSAs for its employees and found that health care costs declined by 40 percent. Another “real world” company, Dominion Resources, adopted MSAs in 1989. Dominion’s healthcare costs have not gone up in five years since the plan was implemented. Forbes Magazine reduced its health care costs by 17 percent in 1992 and an additional 12 percent in 1993 after implementing an MSA with only a $1,000 deductible and only 50 percent funding by the company.
This is real world experience, and these are real world savings. And to top it off, employees would have millions more dollars left in their MSAs. At present, however, employers, including the State of Ohio, are discouraged from offering MSAs by a tax code that subsidizes low deductible plans and penalizes MSAs. Dr. Somani’s proposal would start to change that. In the real world, MSAs will be good for the State of Ohio, good for Ohio businesses, and good for Ohio employees.
Brad Smith, J.D., is Chairman of the Federal Elections Commission. Prior to his appointment to the FEC, he was an adjunct scholar with They Buckeye Institute and also served on the Institute’s Board of Trustees.
