affordable health care is elusive but possible
Capital Buzz / Philipp Harper
To the twin inevitabilities of death and taxes it's time to add a third: hassles with health care.
Certainly you feel that way if you're a self-employed entrepreneur or the owner of a small business. I know I do — not as a journalist, but as the proprietor of a one-man free-lance writing SOHO who is being forced to deal as never before with the U.S. health care establishment.
But while there's not much we can do about our mortality or about government's propensity to put its hand in our pockets, help with the health care dilemma may be on the way. Would you believe there's already something out there that, in addition to helping you pay for your medical needs, allows you to . . .
Shelter income from the tax man?
In some cases double the amount of tax-deferred earnings you're putting away for retirement?
It's called a medical savings account. More about it in a minute.
My own interest in the topic became more urgent when recently I celebrated my one-year anniversary among the self-employed. After nearly three decades of having employers pay my health care tab, I now find my COBRA (Consolidated Omnibus Budget Reconciliation Act) coverage — carried over from my last salaried position — about to run out.
The responsibility for finding replacement coverage falls squarely, exclusively and distressingly on my shoulders. And I'm not alone in my concern.
In its latest taking of small business' temperature, the National Federation of Independent Business found taxes and health care to be the issues of greatest concern to America's entrepreneurs. Taxes are always a top-of-mind concern, but it's been months since health care caused similar grief.
Probably because the health insurance industry is in the midst of a rate increase that is more leap frog than gentle nudge.
My monthly COBRA premium jumped $100 at the start of the year, an increase of better than 40%. Apply a similar hike to the typical tab for a family of four, and the monthly increase is between $400 and $500. Indications are there will be further double-digit premium increases in 2003.
Those within the industry are puzzled by the rate trend because there seems to be no good economic reason for it — no surge in claims activity, for instance. What may be going on is that insurers are making their money while they can, before they find themselve constrained by legislation.
Congress fiddles while businesses burn
Congress, with it unerring instinct for the non-essential, seems more concerned with giving citizens the right to litigate against health care providers than with easing access to those providers. So it is that a patient's bill of rights that trumps novel health care solutions in the political arena — especially in an election year.
Thankfully, the marketplace sees it differently. There, stirrings of innovation can be detected.
Especially noteworthy is the MSA. Though most people probably have heard of it, very few of those who are eligible have opted to take advantage.
Established as a five-year experiment by the Health Insurance Portability and Accountability Act of 1996 — and recently extended through 2002 by the Bush administration — MSAs allow qualifying individuals to squirrel away pre-tax dollars to pay medical expenses.
The idea was to enable people who couldn't otherwise afford health insurance to buy low-premium, high-deductible policies, while also allowing them to set aside pre-tax earning to cover those deductibles and other medical expenses.
The HPIAA authorized 750,000 such accounts, but the American Medical Association reports that by the end of 2000 only 62,000 MSA's had been set up. Why so little interest?
Simple. To qualify you not only have to be self-employed, or work for a small business with 50 or fewer employees, but you have to be something of a gambler. MSAs can be opened only in conjunction with health insurance policies that carry unusually high deductibles: ranging from $1,650 to $2,500 in the case of individuals; and from $3,300 to $4,950 for families. MSA investments are limited to 65% of the deductible for individuals, 75% for families.
At its simplest, the question you face is this: Can I build up my MSA to the level of the deductible before some medical disaster strikes, forcing me to spend money I don't have?
Remove this risk hurdle and the advantages of an MSA are compelling. Consider:
The money you set aside is pre-tax, meaning you lower your tax liability every year that you contribute to an MSA. As long as you spend your account dollars on medical needs, they never are taxed.
In addition to covering your deductible, you can use the MSA to pay for health needs that your insurance might not cover. And, again, you're using funds that have not been taxed.
Money not spent from year to year is rolled over and continues to earn interest, with most plans currently paying between 4% and 5% a year. It can be withdrawn from the account for non-medical purposes without penalty when your turn 65, though it will be taxed as regular income at that point. (Be advised that a 15% penalty applies to withdrawals made before the age of 65.)
MSA = IRA
If certain of these features ring a bell, they should. Once medical expenses have been taken care of, an MSA becomes very much like an IRA.
The similarities figure to become more striking as the marketplace evolves and products become more diverse. Already, major health insurers such as Blue Cross/ Blue Shield, and large HMOs, like CIGNA HealthCare, Aetna and WellPoint Health Networks, are offering MSA-health insurance packages.
Even more telling is the recent introduction of a fee-based MSA by Merrill Lynch, which is offering consumers a variety of investment options to maximize return. Merrill administers only the MSA account; the investor is responsible arranging the necessary qualified insurance plan.
Someone who is able to dodge the bullet of ill health throughout his working life, while contributing to a self-directed MSA, has the potential to effectively double his IRA contributions.
As one who is actively shopping for medical coverage, I find that possibility more than a little intriguing. At the same time, I find my self hung up on the issue of cash flow: At this stage in my business, do I have the cash on hand to both pay my insurance premium and fully fund an MSA? And what if something happens early on and I'm having to pay off a steep deductible, too?
As my business grows and prospers that won't be as much of a consideration. Nor will it if the Bush administration has its way.
To its credit, and in line with its pledge to make life easier for America's entrepreneurs, the White House is pushing for MSAs to be made permanent and more liberal. Under the proposal, minimum deductibles would be lowered to $1,000 for individuals and to $2,000 for families, while companies of any size would be able to offer the accounts to employees.
The hang-up, of course is Congress. Not only do Democrats continue to push for a more universalist health care solution — nationalized health, anyone? — but increasing the amount of tax-deferred income reduces tax revenue. And that means less for our legislators to spend.
Still, if Congress drags its heels on the issue of MSAs and other health care innovations, it will find itself in direct opposition to the marketplace. That will be a debate no entrepreneur can afford to ignore.