Originally created 04/22/01

Medical savings offer tax protection



There is a history of cancer in my family, so I thought I'd get good insurance," said Jenny Hyman, 42.

Now she's glad she did. She was diagnosed with breast cancer in January, and she is under chemotherapy.

Hyman also made an unusual choice in insurance. She chose a "medical savings account" plan.

It's an experimental program that combines a high-deductible insurance policy with a tax-protected savings account. If sickness strikes, the patient first uses her medical savings account to pay the deductible, then the insurance kicks in.

If the patient stays healthy, the money grows tax free until retirement at age 65. In effect, it becomes an IRA.

The accounts are available only to the self-employed and companies with 50 or fewer workers. The medical savings plans have their benefits and drawbacks. They are complicated, and people considering them should make sure they understand them. But they might be a good option for healthy people looking to hold down insurance costs.

Hyman is a free-lance lighting designer, working mainly in theater. She'd had more traditional insurance plans before.

"It's very difficult if you're self-employed," she said. "It's really hard to get even semi-decent health insurance. The price is so restrictive."

Hyman last year bought a medical savings policy through Golden Rule Insurance Co. of Indianapolis, one of the few insurers actively pushing the plans.

According to Golden Rule, the cost of a high-deductible policy is $227 a month for a family of four, plus a contribution to the savings account. A traditional policy with a $500 deductible would cost $360 a month.

Here's how the medical saving account policies work:

- To sign up, you must be self-employed. A small-business owner can sign up his workers. But you can't take out a policy if you work for someone else, even if you are uninsured.

- The insurance policy can cover all expenses over the deductible or just part of them. But the maximum annual out-of-pocket expense can't be more than $3,000 for a single person or $5,500 for a family.

- The deductibles have to be high. For singles, at least $1,500 but no more than $4,250. For families, $3,000 to $4,500.

- Policyholders have to put money in a separate medical savings account, often held by the insurance company. The accounts earn interest. Golden Rule pays 5 percent.

- You can contribute an amount equaling 65 percent of your deductible to your savings account each year. If your deductible is $1,500, that's $975.

Here's what's good about medical savings account plans:

- Contributions to medical savings accounts are tax deductible.

- The money in the account isn't taxed until it's withdrawn, and it isn't taxed at all if used for medical care. The tax deferral means your savings can grow faster. At age 65, you can withdraw the money without penalty, but you'll pay taxes on it.

- You can pick your own doctor as long as you're spending your own money. No approvals are required. Once the insurance kicks in, you'll probably be in a pretty broad network of doctors and hospitals, as in a typical Preferred Provider Organization plan.

Here's what's bad about medical savings account plans:

- If you become chronically ill, you can get stuck paying a high deductible year after year long after your savings account is used up. Low-deductible policies are probably better for people in poor health.

- You'll be socked with taxes and a 15 percent penalty if you withdraw money before age 65 and don't use it for medical care.

- In a company health plan, contributions to the savings account can be made by either the employee, or the employer, but not both.

Hyman is rapidly going through the $3,000 in her medical savings account. So far, she's happy with her choice.

Her previous traditional policy had a $3,000 annual deductible and paid only 60 percent of her bills, she notes. It costs "a couple of hundred bucks" more than her medical savings account plan.

Hyman, who is single, had helped nurse both her parents through cancer. "I've found it's much easier to be one of the sick than one of those worrying about the sick," she said.

The chemotherapy has caused her hair to fall out and sometimes made her nauseous. But her form of breast cancer has a high cure rate.

"I got lucky. I got one of the ones they can actually do something about," she said. "It hasn't been frightening or horrifying for me."

Congress authorized medical savings accounts as an experiment in 1996. The experiment will expire late next year, although moves are afoot to make it permanent. People who have the plans can keep them even if the experiment ends.

It's that deadline that's keeping more insurance companies from offering medical savings account plans. They don't want to heavily market a program that may end.

As a result, only about 100,000 people have signed up across the nation.

And the program has its opponents - particularly the HMO industry.

One complaint is that medical savings accounts will attract healthy customers. That will leave other insurers stuck with sicker clients, and that means higher premiums for everyone else.

Another complaint is the cost in lost tax revenue. Medical savings accounts have to compete with all the other tax-cut plans.

Supporters say the lower premiums on medical savings plans bring in people who can't afford other policies. About 30 percent of medical savings plan customers had no insurance before, says the Small Business Survival Committee, a group lobbying for the plans.

Supporters say the plans can help hold the nation's health bill down by making consumers better shoppers for medical care. Patients are more likely to question the need for a test or an office visit if the money is coming from their own account, and they're likely to shop around for the best price.

To get a medical savings account, contact an insurance agent. Golden Rule's number is 800-444-8990. The Health Insurance Association of America lists these other insurance companies as offering plans:

American Community Mutual Insurance Company, 800991-2642; American Medical Security Insurance Company, 800232-5432; Central State Health & Life Company of Omaha, 800/582-7005; Medical Benefits Mutual Life Insurance Company, 800/423-3151; Time Insurance Company¨Fortis Benefits Insurance Company, 888/846-3672; Trustmark Insurance Company, 800/347-0889.

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