Contradictory incentives in the Medicare+Choice Medical Savings Account program.

• Author: Hauge, Janice A.

With the creation of the Medicare+Choice program (M+C), the Balanced Budget Act of 1997 (BBA) instituted one of the largest changes to Medicare managed care since Medicare's inception. The Medicare+Choice program encompassed a variety of measures designed to increase Medicare beneficiaries' healthcare choices and to expand Medicare managed care offerings to more of the Medicare eligible population. One of the newly created offerings was the Medicare+Choice Medical Savings Account (M+C MSA) program. MSA plans combined a high deductible M+C plan with a contribution from the Centers for Medicare and Medicaid Services (CMS) to an MSA for the enrolled beneficiary. (1) The Department of Health and Human Services (HHS) Federal Register stipulated that any state-licensed risk-bearing entity would be permitted to offer an M+C MSA plan. This would include among others, private sector companies currently offering MSAs in the under-65 commercial market, and the newly created M +C organizations (M+COs)." (2)

Various studies have analyzed the profitability of M+C MSAs for private companies. (3) The November 2000 Medicare Payment Advisory Commission's report (MedPAC) concluded that the private sector would not offer Medicare MSAs because of low beneficiary demand and the expense and difficulty of marketing the new offering (MedPAC 2000: v). It is not clear whether HHS anticipated M+COs would offer MSAs or if companies currently offering MSAs to the non-Medicare population would enter the M+CO MSA market. It is logical to suppose that the latter would incur higher expenses entering the government program from the private sector, so the MedPAC findings seem credible. However, given that M+COs were already part of the Medicare system and were not subject to the same increase in initial expenses, their lack of participation is curious.

The primary purpose of this article is to examine formally the structure of the MSA program and to identify the incentives of both M+COs who might choose to offer an MSA plan, and beneficiaries who might choose to enroll in such a plan. Because the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) reauthorized the MSA program under the newly named Medicare Advantage, understanding the program's shortcomings is critical to ensuring the success of the Medicare Advantage (MA) MSA program. (4) As late as January 2005, HHS was still uncertain as to why the M+C MSA program had been unsuccessful. The Federal Register notes, "With regard to MSA plans, we remain uncertain, as noted in the proposed rules, about participation and enrollment in MSAs.... We are unable to determine whether the MMA provisions will result in such plans being introduced and the extent to which beneficiaries might enroll in such plans" (HHS Federal Register 2005: 4693). This analysis will illustrate that the incentives of M +COs and beneficiaries to participate in the MSA program were incompatible, and that an M+CO would always earn at least as much profit per enrollee by offering an M+C plan as it would by offering an MSA plan. The model suggests that given self-interested seniors and insurers, the MSA program was almost certain to fail, and given the similarity of the new MA MSA plan to the M+C MSA, success under the new program is unlikely. The empirical evidence that no MSA plans were implemented or even proposed during the demonstration project period supports this theory.

Structure of the Medical Savings Account Program

In the BBA, Congress authorized a limited number of beneficiaries to participate in an MSA program demonstration. The M+C MSA plans were designed to be a combination of a high deductible M+C plan (health insurance policy) and a medical savings account. Medicare was to pay the beneficiary's premium for the M+C plan and to make a monetary deposit into a Medicare savings account for the beneficiary. (5) The beneficiary would use the money in the account along with his own personal money as necessary to pay for healthcare services until the deductible was met. After the deductible was met, the M+C plan was to pay for 100 percent of all Medicare covered healthcare services.

As defined by the HHS Federal Register, the MSA was "a tax exempt trust created solely for the purpose of paying the qualified medical expenses of the account holder" (HHS Federal Register 1998: 35082). Under the MSA demonstration project, qualified M+COs were authorized to accept enrollees in an MSA plan from January 1, 1999, until January 1, 2003, at which point the project would be evaluated and the MSA program either continued or terminated. The program was limited to 390,000 enrollees, or approximately 1 percent of the Medicare population. Two restrictions on enrollment differed from enrollment in an M+C plan. First, an enrollee had to reside in the United States for at least 183 days of the year in which he was enrolled. Second, beneficiaries with "first dollar" government health plans were specifically excluded (i.e., those with Medicaid or Veterans Administration benefits). These exclusions ensured enrolled individuals used their account funds rather than other insurance to pay for healthcare services until the deductible had been met.

The MSA program imposed requirements on beneficiaries, M+COs, and CMS that differed from the requirements each assumed under an M+C plan. Under the MSA program, beneficiaries had greater responsibilities than they had under standard M+C plans. Because MSA plans combined an MSA account with an M+C plan policy, eligible beneficiaries had to choose a policy offered by an M+CO, and then choose a bank or other institution to serve as trustee for the account. Beneficiaries then could enroll for one year beginning January 1. (6) At the beginning of the year, CMS was to make a lump sum deposit into the beneficiary's account for the entire year. The beneficiary then would use that money to pay for his healthcare. The money could be used for medical or nonmedical expenses. If the money was used for anything other than a qualified medical expense, the money was to be taxed as income and might carry an additional tax penalty. (7) After exhausting the money in the account, the beneficiary was to use his own money to pay for healthcare services until he reached his deductible. If the account money was not used, it was to remain in the beneficiary's account the following year and would be increased by another annual lump sum on January 1. If the beneficiary disenrolled, any money in his account remained and could continue to be used to help pay for healthcare. (8) Beneficiaries may or may not have been restricted to particular doctors and hospitals, depending on the policy. (9) Once the deductible was met, the policy coverage would become effective and the policy would pay for covered Medicare expenses. The only payment beneficiaries would be required to make was the Medicare Part B (medical insurance for doctors' services and other outpatient healthcare) monthly premium. (10) The beneficiary was to pay no monthly premium to the M+CO. In theory, the beneficiary was to pay a lower monthly premium than under a standard M+CO plan, for what was essentially a catastrophic insurance policy with a high deductible. He would use the lump stun payment and his own money to cover expenses before reaching the deductible.

M+COs' responsibilities also were different under an MSA plan than under a standard M+C plan. M+COs were to make available to an enrollee or provide reimbursement for all Medicare covered services after the enrollee's countable expenses reached the plan's annum deductible. The M+CO was to count toward the deductible either the actual costs paid by the beneficiary for services, or the amount that would have been paid by a beneficiary under a Medicare fee-for-service arrangement, whichever was less. (This feature would encourage the beneficiary to obtain reasonably priced healthcare services, as only reasonable expenses would be counted toward the deductible). M+COs were free to include additional expenses in the countable expenses if they so desired. After the deductible was met...