Updated: May 3, 2013 12:14PM
Originally published: August 1, 2007
If you’re completely satisfied with your health insurance, you can skip this column. But if you’re self-employed and paying exorbitant premiums, stuck in an HMO that’s making your life miserable, wishing the small business you work for could afford health insurance - or if you don’t have any health insurance at all - read on.
I’m going to show you how to get first-class health insurance, which includes the choice of your own physicians and medical providers. Your monthly premiums will be low and affordable. Your annual maximum out-of-pocket expenses will be capped. Above the deductible amount, you will be fully insured for all medical expenses. And you might even get to invest the money you don’t spend on health care in a tax-deferred investment account. Plus, it’s easy to get started.
You must be wondering - as I was - why you haven’t heard much about such a great deal. Well, you probably have heard the name - Medical Savings Account Plans - but your eyes glazed over at the concept of blending a health insurance policy with a tax-free investment plan. It’s such a hybrid concept that health insurers aren’t pushing it because they make more money on traditional health policies and managed care. And the investment industry isn’t pushing it because it can’t sell the health insurance to get you started.
Allen Wishner has been fighting that dilemma - combining the insurance and the investment opportunity - since he started marketing his Flex-MSA service (888-FLEX-MSA or www.flexMSA.com) to individuals and small businesses. He represents many major health insurance companies that specialize in the insurance part of the program - a high-deductible health care plan offered by companies such as Blue Cross; Blue Shield of Illinois, Anthem Health, Unicare, Fortis and Golden Rule Insurance. And he arranges the savings and investment portion of the MSA concept through Mellon Bank and its Dreyfus Investments subsidiary.
Wishner’s creativity was in making the vital link between the insurance policy and the tax-deferred savings; investment account.
It’s the Flex-MSA MasterCard that allows you to tap into the tax-free savings; investment account you’ve set up to pay for any qualified medical expense.
You can pick the best-priced insurance policy and combine it with a choice of investments for your MSA in a turnkey operation for a family or business.
Here’s how it all works. Let’s divide the program into its two key components: a high-deductible health insurance policy and a tax-free investment account.
High-deductible health insurance
If you’re self-employed or work for a small business, you either suffer through the various restrictions of an HMO or a more traditional health insurance policy with a $250 deductible and an 80; 20 co-payment requirement.
That is, you must pay the first $250 of medical bills each year, and after that your insurance company will split the costs with you, paying 80 percent of your bills up to a set amount. For example, your total out-of-pocket expenditures (including the deductible and your co-payments) might be capped at $1,250 per individual.
For a family of four, headed by a 35-year-old, self-employed man, the premium for this coverage would be about $470 a month or $5,640 a year. Because of the cap, this family would be guaranteed not to have out-of-pocket expenses of more than $3,750 a year - an amount that includes three $250 deductibles (which is the maximum, no matter how large the family), plus another $1,000 per person in maximum co-insurance expenses.
Just as with your homeowners insurance, one way to save money on premiums is to increase the deductible on your policy. I’ve long advised homeowners to increase deductibles to $500 or $1,000. If you’re willing to pay more of the smaller bills, your premium drops substantially. The same thing holds true for health insurance policies. Perhaps you wouldn’t mind increasing your deductible - if you were absolutely sure your total out-of-pocket expenses in case of a very serious illness would still be capped at a reasonable level.
Suppose you increase the total family deductible on your health insurance to $4,500. The policy covers all eligible expenses above that amount with no co-payments required. That $4,500 maximum sounds like a lot of exposure, but it would be used only in a year in which the family had large medical bills. Statistics show that 70 percent of insured Americans don’t meet or exceed their $500 annual deductible. And this policy costs a lot less. The monthly cost of this higher-deductible policy for the same family would drop to only $268 - an annual savings of $2,424.
If we stopped right here, this higher-deductible policy might be the key to making comprehensive major medical health insurance affordable to many of the 47 million of Americans who are uninsured because they think they can’t afford it. Even though this family’s exposure is $4,500, they’re covered above that amount for as much as $2 million or more in case of a serious illness. They won’t have to put their home on the line if a family member has a serious illness.
Now let’s look at the second half of this package: the medical savings account. Under a pilot program authorized by Congress, a chunk of the money that this family saves in insurance premiums by purchasing the high-deductible policy can be set aside tax-deductible in a specially authorized MSA. The money in this account grows tax-deferred in investments of your choice. But any or all of it can be taken out at any time to pay for qualified medical expenses that are not covered by the insurance policy. And since you’re paying the bills, you pick the doctor.
For example, if your child goes for an annual physical examination and booster shots that cost $120, you have the choice of paying the bill yourself or taking the money out of your MSA to pay the bill. Taking money out of the MSA is easy. In this program, the Flex-MSA Mastercard acts as a debit card that automatically deducts from the account, or the account has check-writing privileges. But if your MSA account is invested in a high-tech mutual fund that is growing at 30 percent a year, you might want to pay this small bill yourself instead of tapping into this tax-deferred account.
Over the years, the money invested in your MSA will continue to grow, and you’ll make a new contribution each year. In a few years, if there is a really catastrophic illness in your family, there will be enough to cover the entire $4,500 deductible.
Eligibility and limitations
Medical savings accounts are available only to self-employed individuals such as sole proprietors or those who earn income from a partnership, a limited liability corporation, or a subchapter S corporation. You may also set up this plan if you work for a small business with two to 50 employees. The MSA must be combined with a high-deductible insurance policy. There are limitations on both the amount of the deductible and the amount that may be contributed to the MSA by an individual or family under this plan. If inflation returns, the limits will be increased.
For an individual, the high-deductible insurance policy must have at least a $1,500 deductible, with a maximum deductible of $2,250. The amount of the allowable MSA contribution is a maximum of 65 percent of the policy deductible. Thus, an individual can contribute from $975 to $1,462 to the MSA each year.
For a family, the high-deductible health insurance policy must have a deductible of at least $3,000 but not more than $4,500. That family can contribute a tax-deductible amount of 75 percent of the deductible to the MSA. That implies a contribution of between $2,250 and $3,375 to the MSA. Sometimes, employers make all or part of the allowable contribution to the MSA on behalf of the employee - out of the money saved in premiums on the high-deductible insurance policy.
Contributions on behalf of an employee are excluded from the employee’s income. You have until the April 15 tax deadline to make MSA contributions for the previous year, although it makes sense to make the contribution as early as possible. MSA contributions also may be made monthly, within the deadline.
Remember, these MSA contributions are tax-deductible - and the money in the account grows tax-deferred. It’s just like an IRA, except the money can be withdrawn at any time to pay for medical expenses, without penalty. If the money is withdrawn before age 65 for any purpose other than medical expenses, a 15 percent penalty plus ordinary income taxes will apply.
The money must be invested with an approved MSA custodian. But because people aren’t rushing into MSAs, there aren’t a lot of custodians. One large mutual fund told me that they’re marketing IRAs and Roth IRAs, but not MSAs because people don’t know enough to set them up!
Typically, the insurer also acts as custodian of your MSA and may offer limited investment choices and high fees. That’s one thing to compare along with premium prices when choosing an MSA offered by a good company. Lower monthly insurance premiums may be offset by very low interest rates paid on your account until it reaches a certain size. Wishner’s Flex-MSA plan uses Mellon Bank as custodian.
It pays as much as 4 percent interest until the account grows to $3,500. Then the account balance can be transferred to Mellon’s Dreyfus brokerage subsidiary to be invested in a variety of mutual funds or individual stocks.
Congress put limitations on the number of people who can set up MSA; insurance programs. It’s supposed to be a test program for only 750,000 participants, and no one is quite sure when the industry will stop offering new plans. But existing plans will be allowed to continue.
All of this uncertainty has affected marketing of MSAs, except for a few insurance companies and consultants such as Wishner. But he’s enthusiastic, saying: ``As people see the economic advantages of these plans, I’m sure there will be a rush to enroll. Then Congress will be forced to expand the program so even large corporations can take advantage of it.’’
So if you want control over your health care, lower cost insurance and a tax-deferred investment, it’s time to check into medical savings accounts.
Terry Savage is a registered investment adviser for stocks and commodities and is on the board of directors of McDonald’s Corp. and Pennzoil Co. You can send her questions via e-mail at email@example.com. Her second book, published by HarperCollins, is Terry Savage’s New Money Strategies for the ‘90s. Copyright Terry Savage Productions.