No. 7 August 12, 1998

In 1994, Congress resoundingly rejected President Clinton’s managed-competition health plan. That same plan, however, remains alive and well in California, which operates two state-mandated health-plan purchasing cooperatives — CalPERS (California Public Employees’ Retirement System) and HIPC (Health Insurance Plan of California). These state-run programs offer only managed-care options, limiting choice for California’s public and small-business employees.

CalPERS includes a health benefit program for both state and public employees in California and covers over a million individuals. HIPC covers over 100,000 small-business employees in California.

Managed care was supposed to hold down costs for employers, but recent trends show wild fluctuations in costs. This year, average HMO rates are expected to increase by about 8 percent. CalPERS and HIPC rates are now rising as well.

Medical Savings Accounts (MSAs), unlike managed care programs, help protect employers against potential cost increases, while offering greater health care options for Californians who participate in these programs. MSAs work in conjunction with high-deductible medical insurance policies and are, therefore, relatively inexpensive. The resulting savings from moving to a high-deductible policy is placed into an employee’s personal account, or MSA. The funds in the account are the employee’s own, to be spent at his discretion for routine medical expenses. Money not spent on medical care can grow in interest-bearing accounts tax-free. Funds in federally-approved MSAs are tax-deferred when not used for medical expenses.

Benefits to Employees. Because health care costs exceed $2,000 for only 11 percent of employees in any given year, most employees will collect money in their MSAs. Indeed, data indicate that up to 80 percent of employees can have funds remaining in their accounts at the end of the year. These savings can add up over time. (See Figure 1).

Figure 1

Employees, acting as consumers, will base their health-care decisions on quality and price and will avoid over-consumption of health-care services, a flaw of traditional plans that causes health-care prices to rise. Unlike managed care, no third parties ration their care. With MSAs, employees have greater freedom in choosing whichever doctor, hospital, clinic, or laboratory they wish and in controlling their medical care. This ensures quality of care, because physicians, other clinicians, and medical facilities know that they must provide high quality care in order to ensure that their patients return.

Benefits to Employers. Evidence shows that MSA plans can save money for employers, as well as employees. One study examined 27 Ohio-based employers that offered MSAs, comparing their costs to average health plan costs for Ohio public employers, and found that they saved 12 percent in insurance costs for single employees and 34 percent of costs for family coverage. (See Figure 2). Another study examined 400 firms that offer MSAs and found savings of $1,314 per family in the family plan. MSAs would benefit California employers and employees, as well.

Figure 2

The added competitive pressure by including MSA plans would help increase the quality of current managed care HIPC and CalPERS options at no additional cost to taxpayers. In fact, MSAs protect the state and employers against future increases in their health-plan costs. Most important, public and small-business employees will have the advantage of controlling their own medical care, while reaping the benefit of increasing their health care savings.

Assemblyman Steve Baldwin (R-La Mesa) has introduced a bill (AB 2246) that will mandate that HIPC offer a MSA plan. This is a promising start. One hopes that lawmakers will also consider allowing a MSA option for CalPERS as well. In this way, California can provide its public employees and small-business employees more health-care choice — at a lower cost to California taxpayers.

* Mark Schiller, MD, is a senior fellow in medical studies at the Pacific Research Institute and an assistant clinical professor at the University of California at San Francisco

For additional information, contact Naomi Lopez at (415) 989-0833.