97-643 EPW
Updated March 4, 1998
CRS Report for Congress
Received through the CRS Web
Medical Savings Accounts:
Legislation in the 105th Congress
Bob Lyke
Specialist in Social Legislation
Education and Public Welfare Division
Summary
Medical savings accounts (MSAs) are tax-advantaged personal savings accounts for
unreimbursed medical expenses. In the 105 Congress, a number of bills have bee
th
n
introduced to expand the MSA demonstration that Congress authorized in 1996 for
employed individuals not yet eligible for Medicare. Bills have also been introduced to
authorize MSA plans under the Federal Employees Health Benefits Program (FEHBP).
The Balanced Budget Act of 1997 (P.L. 105-33) authorized a limited number of
Medicare MSAs under a demonstration beginning in 1999. One of several new options
to traditional Medicare, “Medicare+Choice MSAs” will be coupled with health insurance
that has a high deductible but could offer additional benefits such as prescription drugs.
Both the health insurance premiums and MSA contributions will be paid from Medicare
capitation rates that vary by county and are adjusted for age, gender, and other risk
factors. One bill has been introduced to remove limitations on participation in
Medicare+Choice MSAs.
Medical savings accounts are tax-advantaged personal savings accounts for
unreimbursed medical expenses. They can be used to pay health insurance deductibles,
coinsurance, and copayments as well as medical expenses that the insurance does not
cover. The Health Insurance Portability and Accountability Act of 1996 (HIPAA, P.L.
104-191) authorized a limited number of MSAs under a demonstration beginning in 1997.
Eligibility for these MSAs is restricted to individuals who have qualifying high deductible
insurance and who are either self-employed or employees covered by small employer plans.
Individuals eligible for Medicare may not participate in the HIPAA demonstration.
In the 105 Congress, a Medicare MSA demonstration was authorized during th
th
e
budget reconciliation process. Medicare MSAs were first approved by the House
Committee on Ways and Means on June 9, 1997, and the House Committee on Commerce
on June 12, 1997; the House approved them as part of H.R. 2015 on June 25, 1997. The
Senate Finance Committee approved similar provisions on June 17, 1997; the Senate
Congressional Research Service ˜ The Library of Congress

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CRS-2
approved them as part of S. 947 on June 25, 1997. The conference agreement on H.R.
2015 was approved by the two chambers on July 31, 1997, and was signed by President
Clinton on August 5, 1997.
1

Medicare Medical Savings Accounts
Eligibility and Enrollment. Under the Balanced Budget Act of 1997, individuals
eligible for Medicare Part A and enrolled in Part B may elect an MSA as one of several
new private plan options under Medicare. The “Medicare+Choice MSA” will be coupled
with an “MSA plan” that provides high deductible health insurance.2 Coverage will first
be available in 1999. Enrollment can occur upon initial eligibility for Medicare or during
annual election periods; it can be changed to other options during these periods and at
certain other times. Transition enrollment rules apply through 2000.3
Medicare+Choice MSAs are limited to a demonstration: new enrollments cannot
occur after 2002 or when the number of enrollees reaches 390,000, whichever happens
first.4 (H.R. 2668 (Representative Salmon) would remove this sunset and numerical
limitation.) MSA plans cannot be chosen by certain low-income or disabled individuals,
among others. When enrolled in an MSA plan, individuals may not have other health
insurance (including Medigap policies), with some exceptions, and they have to reside in
the United States for at least half the year.
Contributions to Accounts. For all private plan options, the Secretary of Health
and Human Services will make monthly advance payments to the health plan based upon
annual capitation rates for the enrollees. These rates will vary by county and be adjusted
for age, gender, disability status, institutional status, and other risk factors that the
Secretary determines are appropriate. For individuals electing an MSA plan, the Secretary
will deposit the difference between one-twelfth of the annual capitation rate and the
monthly insurance premium into the MSA; the deposit for the first month of eligibility will
include sums for all successive months in the year. Contributions cannot be made by
individuals or employers.
Insurance Coverage. An MSA plan will provide reimbursement for items and
services covered under Parts A and B of Medicare, though only after the enrollee incurs
countable expenses equal to the annual deductible. The deductible cannot be more than

1 One Medicare MSA bill had been introduced prior to budget reconciliation: S. 246, the Medicare
Improvement and Choice Care Provision Act (Senator Gregg).
2 In the House legislation, the MSAs were called “MedicarePlus MSAs,” while in the Senate
amendment, they were called “Medicare Choice MSAs.”

3 For additional information about Medicare changes made by the Balanced Budget Act of 1997,
see CRS Report 97-640, Medicare: Budget Reconciliation Action in the 105th Congress, by
Jennifer O’Sullivan, Celinda Franco, Beth Fuchs, Bob Lyke, and Richard Price.

4 In the House legislation, the numerical limit was 500,000, while in the Senate amendment it was
100,000.

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$6,000, indexed for inflation.5 Countable expenses include at least those payable by
Medicare under Parts A and B as well as the deductibles, coinsurance, and copayments the
individual would have paid under those parts. At a plan’s option, other expenses (such as
prescription drugs) may also be counted. After the deductible is met, the plan must
reimburse at least 100% of Parts A and B expenses (the provider charges) or 100% of
what Medicare would have paid for these expenses without regard to Medicare deductibles
or coinsurance, whichever is less. MSA plans are not subject to balance billing limitations,
nor will they have to pay balance billing charges, though some might do so. (Balance
billing refers to the additional amount that is charged by physicians or medical suppliers
who do not accept assignment. By accepting assignment, physicians and suppliers agree
to accept the Medicare-approved amount as full payment under Part B. They bill patients
only for coinsurance and any unmet deductible. There are limitations on how much
physicians can charge over the approved amount if they do not accept assignment.)


Account Withdrawals and Taxation. Contributions to Medicare+Choice MSAs
will be exempt from taxes, as will account earnings. Withdrawals will likewise not be
taxed nor subject to penalties if used to pay unreimbursed medical expenses deductible
under the Internal Revenue Code. However, qualified withdrawals cannot be used to pay
insurance premiums other than for long-term care insurance, continuation coverage (such
as COBRA), or coverage while an individual is receiving unemployment compensation.
Non-qualified withdrawals will be included in the individual’s gross income for tax
purposes; they will also be subject to an additional 50% penalty to the extent they exceed
the amount by which the account balance on December 31 of the prior year was greater
st
than 60% of the MSA plan deductible for the year of withdrawal. For example, if the
account balance on December 31 were $3,500 an
st
d the plan deductible the next year were
$5,000, the amount that could be withdrawn for non-qualified purposes without the
penalty would be $500 (i.e., $3,500 minus 60% of $5,000). The 50% penalty will not
apply in cases of death or disability. Account balances at death will be subject to various
tax treatments depending on their disposition.
If MSA plan enrollees switch to another private plan option or traditional Medicare,
they can maintain their account and use it to pay qualified medical expenses. No additional
contributions can be made unless they chose an MSA plan again.
Issues. Medicare+Choice MSAs could be attractive to some beneficiaries. In
contrast to traditional Medicare, they could provide first dollar coverage for health
expenses, provided there were sufficient funds in the accounts. Enrollees would not have
to purchase Medigap policies to cover these expenses or obtain additional benefits. (To
prevent enrollees from reducing the deductible for their insured expenses, they would not
be allowed to purchase Medigap or other insurance anyway, with some exceptions.)
Enrollees in good health might be able to accumulate sufficient funds in their accounts that
they could use some for non-medical purposes. In contrast to health maintenance
organizations (HMOs) and some other managed care options, Medicare+Choice MSAs

5 The conference agreement adopted the House provision regarding the deductible. In the Senate
amendment, the deductible could not have been less than $1,500 nor more than $2,250, indexed for
inflation, and annual out-of-pocket expenses could not have exceeded $3,000.

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will not restrict choice of doctors or other providers. The MSAs might make enrollees
more prudent consumers, possibly reducing what they spend on health care.
However, MSA plans will shift more risk for paying typical health care expenses onto
the beneficiaries who choose them. If account balances were depleted, perhaps due to
hospitalization or chronic illness, enrollees may have greater out-of-pocket expenditures
than under traditional Medicare. Doctor charges may be higher since balance billing
limitations do not apply. Even considering savings on Medigap premiums, some enrollees
could be worse off financially. Because of these possibilities, MSA plans are likely to be
attractive mostly to people who are healthy, particularly if they have ample savings or are
willing to take a chance.
If MSA plans attract healthier people, the average cost of other Medicare plans might
rise. This divergence in costs, resulting from what is called adverse selection, could lead
to financing problems and diminished public support for those plans. In the view of some
people, the common insurance pool principle of Medicare could be diminished. However,
the extent to which adverse selection will actually occur and result in diverging costs is not
known.
6
One critical question is how large Medicare+Choice MSA contributions will be
relative to the insurance deductible. If they are relatively small (several hundred dollars,
for example), even healthy enrollees will face financial risk for a number of years until
substantial balances accumulate in their account. This would discourage enrollment in an
MSA option. If instead contributions are relatively large in relation to the deductible, it
is possible that federal payments for MSA plans exceed their true actuarial cost. (As
described above, federal payments for MSA plans will be based on capitation rates for
enrollees that vary with age, gender, and other factors. MSA contributions will equal the
difference between the capitation payment for the individual and the cost of the high
deductible insurance.) In this case, the Medicare program would be paying more for MSA
plan enrollees than it would pay for them in the traditional program. This would increase
overall Medicare costs to the federal government. Without reliable methods of adjusting
payments to reflect actuarial cost, it may be difficult to avoid one or the other of these
problems.
Whether enrollees ought to be able to withdraw Medicare+Choice MSA funds for
non-medical purposes has also been questioned. To some people, it is difficult to justify
using Medicare funds for anything but health care. But if non-qualified withdrawals
represent savings from more prudent health care use, it might be appropriate to allow
enrollees to spend them as they please. (Non-qualified withdrawals would be subject to
income taxes, unlike sums spent on health care.) Not allowing non-qualified withdrawals
may even create incentives for enrollees to increase health care spending. However,
limitations on non-qualified withdrawals would seem appropriate to the extent they
represent Medicare payments that exceed the MSA plans’ actuarial cost.

6 For a discussion of adverse selection and other issues raised by MSAs, see CRS Report 96-409,
Medical Savings Accounts: Background Issues, by Bob Lyke.

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Medical Savings Accounts Outside of Medicare
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) authorized
a limited number of tax-advantaged MSAs under a demonstration for employed individuals
who are not yet eligible for Medicare. These MSAs
7
are similar to the Medicare MSAs
described above in that account owners must have qualifying high deductible insurance
(and none other, with some exceptions) when contributions are made. However, HIPAA
demonstration MSAs differ with respect to eligibility, insurance requirements, contribution
sources and limitations, penalties for non-qualified withdrawals, and other matters.
HIPAA demonstration MSAs are tax-advantaged in that employer contributions are
excluded from gross income, individual contributions are deductible, and account earnings
are tax-exempt. Withdrawals are not taxed nor subject to penalties if used to pay
unreimbursed medical expenses deductible under the Internal Revenue Code.
Eligibility Restrictions. HIPAA included two broad restrictions on MSA eligibility.
First, eligibility is limited to individuals who are either self-employed or are covered by
small employer plans. (Small employers are generally defined as having an average of 50
or fewer employees, with some exceptions.) Second, eligibility will be restricted after the
earlier of (1) December 31, 2000, or (2) specified dates in the years 1997-1999 following
a determination that the number of taxpayers who have MSAs exceeds certain thresholds.
Once eligibility is restricted under the latter tests, tax-advantaged MSAs generally will be
limited to individuals who either were active participants (had contributions to their
accounts) prior to the cut-off date or become active participants through a participating
employer.
The thresholds were not exceeded in 1997. By April 30, 1997, only 9,720 taxpayers
had established MSAs, of which 7,383 were taken into account with respect to the
threshold of 350,000. (The others were not to be considered for purposes of the cut-off:
550 taxpayers had a spouse who also had established an MSA, and 1,787 had been
uninsured 6 months prior to obtaining coverage under a high deductible policy.) By June
30, 1997, only 22,051 taxpayers had established MSAs, of which 17,145 were taken into
account with respect to the threshold of 525,000. (Of the rest, 1,236 had a spouse with
an MSA and 3,670 had been uninsured.)8 For 1998, the thresholds are 600,000 and
750,000 (depending on different estimate procedures); while for 1999, the threshold is
750,000.
The MSA eligibility restrictions were controversial when HIPAA was enacted and
remain a matter of debate. In general, MSA proponents favor lifting the restrictions and
allowing MSAs to be established by employers and individuals generally. MSA opponents
prefer keeping the restrictions as long as any MSAs are authorized.
7 For a summary of the MSA provisions enacted in 1996, see CRS Report 96-805, The Health
Insurance Portability and Accountability Act of 1996: Guidance on Frequently Asked Questions,
by Beth C. Fuchs, Bob Lyke, Richard Price, and Madeleine Smith. p. 21-24. Several technical
amendments to the HIPAA provisions were made by section 1602(a) of the Taxpayer Relief Act
of 1997 (P.L. 105-34).
8 The MSA counts were announced in Internal Revenue Service announcements 97-79 (issued
August 15, 1997) and 97-96 (issued September 12, 1997), respectively.

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Legislation. In the 105 Congress, five bills have
th
been introduced that would amend
or otherwise eliminate the restrictions just discussed.
! H.R. 1068 (Representative Lipinski) would eliminate restrictions on the number of
MSAs that could be established, including the December 31, 2000 cut-off.
! H.R. 1490 (Representative Cooksey) would eliminate the restriction based on
employer size. In addition, it would delete a provision restricting contributions to
compensation from employment (though other contribution limits would remain).
The bill would also reduce the capital gains tax on individuals.
! H.R. 1582 (Representative Cooksey) would eliminate restrictions on the number
of MSAs that could be established, including the December 31, 2000 cut-off. It
would also eliminate the restriction based on employer size. In addition, it would
delete a provision restricting contributions to compensation from employment
(though other contribution limits would remain).
! H.R. 1743 (Representative Salmon) would eliminate restrictions on the number of
MSAs that could be established, including the December 31, 2000 cut-off. It would
also eliminate the restriction based on employer size.
! S. 572 (Senator Allard) would eliminate restrictions on the number of MSAs that
could be established, including the December 31, 2000 cut-off. It would also
eliminate the restriction based on employer size. In addition, it would delete a
provision restricting contributions to compensation from employment (though other
contribution limits would remain).9
In addition, three bills have been introduced in the 105 Congress that woul
th
d
authorize MSAs and qualifying high deductible insurance plans under the Federal
Employees Health Benefits Program (FEHBP):
! H.R. 1574 (Representative Salmon)
! H.R. 2465 (Representative Salmon)
! H.R. 3166 (Representative Burton)
H.R. 2100 (Representative Stearns) would require the Secretary of Defense to
conduct a two-year demonstration project in which certain military health care system
beneficiaries have the option to enroll in FEHBP; it would authorize a federal income tax
credit of 25% for demonstration participants for amounts paid for medical savings
accounts.
At this writing, none of the above bills has been reported by a committee.

9 During the June 25, 1997 Senate debate on S. 947 (the budget reconciliation legislation), Senator
Allard proposed and then withdrew an amendment to authorize families with uninsured children
to deposit money in an MSA.

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