Vermont Medisave Plan

Summary: This brochure, first published in 1993, explains the idea of the Medical Savings Account as an alterantive to a health care system built upon government rationing and patient control. It is addressed to Vermonters but may be addressed to citizens of any state. Since 1993, some 15 states have enacted a form of MSAs, and the U.S. Congress passed a comprehensive MSA bill, which was vetoed as part of the 1995 Balanced Budget Act by President Cinton.

--------------------------------------------------------------------------------

Vermonters have long enjoyed excellent medical care from competent, dedicated health care professionals and good hospitals. That's worth preserving and improving - and protecting against the threat of government-run, bureaucratically-controlled, assembly-line medicine.

The main health care problem facing Vermonters is that the financing system is a mess - a mess largely created by unwise government intervention. That's what needs to be reformed, not the medical care system.

Some believe that "reform" means putting the government in charge of all medical care and sending the bill to the taxpayers. That's called the single payer system.

Others believe that "reform" means a government controlled insurance purchasing cartel, mandating costs on businesses, and assigning people to "alliances" they may or may not want to join.

These are not true reforms. These are simply schemes to expand the power of government over patients and providers alike, raise tax rates, impose mandates on small businesses, enact price controls, and ration care. They are schemes favored by those who think that more government, higher taxes and less freedom to choose is the solution to every problem caused by more gvvernment, higher taxes, and less freedom to choose.

What can be done to bring down the cost of health care to ordinary Vermonters, without making our good health care system look like a combination of the Pentagon, the IRS, and the welfare department?

In every other area of our lives, consumer choices determine prices. Those who overprice their products lose their customers.

But when it comes to consuming medical care, patients today are barely consumers. They pay for very little: 95% of hospital bills and 80% of doctors' bills are paid for by insurers or government programs. Why? Because for most families health insurance is a tax free employment benefit.

Patients who don't realize that they are paying for services naturally are not economical about their choices - after all, very little of it is their money. Why choose a Yugo when you can choose a Cadillac?

The hard fact is that everyone cannot have everything - there are limits. And the key question is, who will ration consumer choice, the consumer, or a government bureaucrat?

A true health care reform would put the consumer back in charge of his or her own health care. Instead of having complete tax free third party insurance benefits, which lead to overuse and waste, consumers should once again become responsible for their own health care choices - up to the level where serious medical costs require strong insurance protection. That would restore insurance to its proper role - protecting people against large and unexpected costs (like auto crashes), not paying for ordinary maintenance (like brakes and tires.).

The mechanism for doing this is the proposed Vermont Medisave Account (MSA).

With a Medisave account - like an Individual Retirement Account (IRA) - individuals would set aside funds into a tax-free account every month. From this account they would pay cash for routine medical care, including preventive care. They (or their employer) would also purchase major medical coverage, but with a high deductible - say $2000 per family.

The difference in cost for a family of three, between a major medical plan with a $2000 deductible and the same plan with a $100 deductible is astonishing.

In a recent study involving insurance purchasers in Louisiana and Minnesota, the extra cost in buying a $250 deductible policy instead of a $2000 deductible policy turned out to be was $2166 - $416 MORE than the difference in coverage!

Why? Because consumers shop more wisely when they are spending their own money. A RAND Corporation study showed that consumers paying out of their own pocket bought 30% less in medical care than fully covered consumers - with no difference in medical outcomes. That 30% is simply wasted resources - and higher insurance premiums for everyone.

And there's more. Handling lots of little claims costs the insurance company money. Ninety percent of families do not use $2000 worth of medical services in any given year. If they have a low deductible policy, however, they submit claims month after month, all of which have to be adjudicated, at considerable cost. Get rid of 90% of the small claims, and insurance administration costs will sink like a stone.

You can create your own Medisave account now, under federal law. But there are some catches. Your employer must have a "cafeteria" benefit plan, and most do not. If you're self employed, you are completely out of luck: you will pay for your insurance out of after-tax dollars. Worst of all, if you direct your employer to set more money aside in your MSA at the beginning of the year than you actually use to pay benefits during the year, the unused balance goes back to the employer, not to you.

This is called "use it or lose it", and it is extremely bad policy - because it takes away the financial incentive to live a healthy lifestyle and purchase necessary medical care wisely.

Hundreds of bills have been introduced in Congress, buy members of both parties, to correct these problems and make MSAs fully available to everyone. But Vermont does not have to wait until Congress acts.

A Vermont Medisave plan would allow Vermonters to create MSAs, still under the federal rules, and roll over unused balances to the next year. Self employed Vermonters, or people whose employers do not offer health benefits, could also create MSAs, but until Congress changes the law they cannot get the benfit of full deduction from their Federal tax liability. They can only be given a deduction from Vermont income tax, 25% of the Federal levy.

The self employed, and those without employer paid benefits, may need help putting funds into their own MSAs. They can be helped to do this by a sliding income tax credit. This will reduce state revenues, but it will also decrease the costs now shifted onto insured patients by the uninsured - those who turn up at the emergency room needing care - and those paid for by government programs which do not cover the full costs. In Vermont hospitals, this undercompensated care - called the "cost shift" - require a markup of 43% on everyone else's hospital bills!

What about those eligible for Medicaid? Instead of running a costly but yet underfunded, pennypinching state self-insurance program for the poor, the state would simply buy a high deductible major medical policy for Medicaid recipients and subsidize their MSAs. If a recipient had a balance at year end, some of it would go back to the taxpayers, and she could use the rest of it to pay for day care, education, training or tools to help her become self- sufficient.

The Medisave Plan, based on individual responsibility, consumer choice, and market-regulated costs, offers an economically sensible alternative to the bureaucratic control schemes proposed by people who yearn to have the government control every aspect of our health care industry. It would -

• restore the proper role of health insurance in covering the cost of relatively rare medical events, instead of paying for routine and expected medical care through expensive low-deductible or first-dollar coverage.

• lower the administrative costs of health care, by eliminating costly insurance claims examination and reimbursement for many minor provider payments.

• lower the costs of health care, by giving consumers a real incentive to stay healthy and, if requiring care, to purchase that care cost-effectively.

• strengthen the doctor-patient relationship, by eliminating most third party payments.

• increase cost competition in the medical marketplace, and preserve the independent insurance broker.

• expand consumer health care benefits through tax-free accumulation, giving consumers an incentive to build a health care nest egg for later years, including nursing home insurance and care.

• eliminate the need for a costly and intrusive state bureaucracy to administer rationing, price controls, mandates, subsidies and regulations.

No plan can solve every health care problem, such as those of people with chronic wasting diseases and those who are retired and on Medicare, which is beyond State control. The Vermont Medisave plan does, however, provide an economically sound solution to the medical care financing problems of over 90% of Vermont's population.

The Medisave plan is based on individual self-rationing, not government rationing.

It is based on payment by consumers to providers, not "free" goods allocated by governments. From the state's standpoint, it is relatively low cost; the costs are in the form of reduced tax revenues from increased deductions and, if used, credits, and the plan should result in significant Medicaid savings.

It uses informed consumer choice in the marketplace to restrain health care costs, which have escalated primarily because of unwise government tax and health care spending policies.

It offers affordable health care to presently uninsured Vermonters, excepting only those with preexisting conditions at the time of adoption, and those who receive benefits under the federal Medicare program.

It encourages consumers to practice healthier lifestyles, because they will lead to lower health care and insurance costs, and thus accumulated savings to the individual's account.

Vermont Medisave - a sound answer to Vermont's health care problems.