CRS REPORT SURVEYS MSA LEGISLATION.

                       CRS REPORT FOR CONGRESS

[2] MSAs can be established under current law and already are offered by some employers. However, legislation is required to provide tax advantages and authorize them under federal health care programs. Bills being considered this Congress have the following objectives: (1) changing how MSA contributions, earnings, and disbursements would be treated with respect to federal income and employment taxes; (2) authorizing MSAs as an option under Medicare; and (3) authorizing MSAs as an option under the Federal Employees Health Benefits Program (FEHBP). H.R. 3103 includes provisions reflecting the first objective.

[3] MSAs are personal savings accounts for unreimbursed medical expenses. Under proposed legislation, MSAs would usually be coupled with high deductible (or catastrophic) health insurance that pays expenses exceeding annual thresholds such as $1,500 for an individual or $3,000 for a family. Contributions to accounts would typically be made by employers or individuals (for employment-based plans), by individuals alone (for other private insurance plans), or by the government (for Medicare and FEHBP plans). MSAs would have new tax advantages: contributions generally would be excludable or deductible from taxes, and funds not used for 1 year could accumulate, typically tax-free, for future medical expenses, long- term care, or eventually other purposes.

[4] MSAs are intended to give consumers a greater financial stake in purchasing health care, which now is largely paid for by private insurance and government programs. By having the means to save for long-term care or other purposes, consumers would have an incentive to limit health care use and select lower cost providers. MSAs would also enable families to pay the initial medical expenses they incur each year, provided they have funds in their account. In addition, MSAs are compatible with fee-for-service arrangements with health care providers.

[5] It is not clear, however, whether MSAs can be funded without unduly increasing the risk of out-of-pocket payments for most people. If annual MSA contributions were limited to the difference in premiums for low deductible and high deductible insurance, they would not equal the increase in the deductible for several years, even assuming no health care use. Only people who were in good health, had other savings, or were willing to gamble might find this risk acceptable. Moreover, if MSAs attracted only people who were healthy, the cost of insurance for everyone else would increase.

[6] MSAs can he designed many ways, and it is the details that will determine their prospects. Many questions about design might he resolved by employers and insurance companies rather than through legislation.

                          TABLE OF CONTENTS

[7] This report provides an overview of medical savings account (MSA) legislation in the 104th Congress. It describes MSA provisions in H.R. 3103, the Health Coverage Availability and Affordability Act of 1996 and in the conference agreement on the reconciliation bill (the Balanced Budget Act of 1995, H.R. 2491) which the President vetoed on December 6, 1995. It also summarizes other MSA bills that have been introduced this Congress.

[8] MSAs can be established under current law and already are offered by some employers. However, legislation is required to provide tax advantages and authorize them under federal health care programs. Bills being considered this Congress have the following objectives: (1) changing how MSA contributions, earnings, and disbursements would be treated with respect to federal income and employment taxes; (2) authorizing MSAs as an option under Medicare; and (3) authorizing MSAs as an option under the Federal Employees Health Benefits Program (FEHBP). H.R. 3103 includes provisions reflecting the first objective. H.R. 2491 included provisions reflecting both the first and second objectives. The budget proposals the President released on December 7, 1995, and in March 1996, do not include any MSA provisions.

[9] MSAs are personal savings accounts for unreimbursed medical expenses. Under all legislative proposals but one, MSAs would be coupled with high deductible (or catastrophic) health insurance that pays expenses exceeding thresholds that are substantially higher than conventional insurance -- perhaps $1,500 a year for individuals or $3,000 a year for families. ¹ Contributions to accounts would typically be made by employers or individuals (for employment-based plans), by individuals alone (for other private insurance plans), or by the government (for Medicare and FEHBP plans). MSAs would have new tax advantages: contributions generally would be excludable or deductible from taxes, and funds not used 1 year could accumulate, typically tax-free, for future medical expenses, long-term care, or eventually other purposes.

[10] MSAs are premised on the argument that consumers ought to have a greater financial stake in purchasing health care, which now is largely paid for by private insurance and Government programs. By having a mechanism to save for future expenses, individuals and families would have an incentive to limit health care use and select lower cost providers. As long as they had funds in their account, they would have resources to pay the initial medical expenses they incur each year. In addition, MSAs are compatible with fee-for- service arrangements with health care providers that some consumers prefer to health maintenance organizations and other managed care options.

[11] However, it is not clear whether MSAs can be funded without unduly increasing the risk of out-of-pocket payments for most people. If annual MSA contributions were limited to the difference in premiums for low deductible and high deductible insurance (as would likely be the case for employer contributions), they would not equal the increase in the deductible for several years, even assuming no health care use. For example, going from a $200 deductible policy to a $1,500 deductible policy would reduce premiums by about $500, not $1,300. ² Only people who were in good health, had other savings, or were willing to gamble might find those odds attractive. Moreover, if MSAs attracted only people who were healthy, the cost of insurance for everyone else would increase due to adverse selection. There are concerns as well that some people, by saving too much or spending funds on other things, would delay seeing doctors and jeopardize their health.

[12] MSAs can be designed many ways, and it is the details that will determine their prospects. For example, the risk of out-of- pocket payments will vary significantly depending on whether insured individuals have periodic options to choose between low deductible and high deductible plans. Similarly, risk will vary according to whether plans include exceptions for accidents and other emergencies. Whether supplemental insurance could be purchased would also be a factor. Many questions about design may be resolved by employers and insurance companies rather than legislation.

[13] Additional information about MSAs and the issues they raise may be found in Health Insurance Cost and Coverage: Tax System Approaches, by Beth C. Fuchs (CRS Issue Brief No. 95026, updated regularly), Medical Savings Accounts, by Bob Lyke (CRS Report for Congress No. 94-597 EPW, July 21, 1994), and Medicare: the Restructuring Debate (CRS Issue Brief No. 95108, updated regularly).

H.R. 3103 (REPRESENTATIVE ARCHER)

[14] Health Coverage Availability and Affordability Act of 1996. In addition to other provisions, the bill authorizes tax- advantaged MSAs for individuals covered by a high deductible health plan (deductible of at least $1,500 for one person and at least $3,000 for more than one) and no other insurance with some exceptions. ³ Individuals' contributions to MSAs are deductible from gross income up to an annual limit of $2,000 ($4,000 if a spouse or dependent is covered) or the insurance deductible, whichever is less. Individuals cannot make contributions if their employer does or if their spouse's employer contributes to the latter's account. Employer contributions are excluded from income and employment taxes of the employee as well as from employment taxes of the employer. ⁴ Account earnings are not taxed. Distributions from MSAs are tax- exempt if used to pay for unreimbursed medical expenses deductible for income tax purposes, for long-term care insurance, for continuation coverage required under federal law (such as COBRA (Consolidated Budget Reconciliation Act)), ⁵ or for health plan insurance when the individual receives unemployment compensation. Non-qualified distributions are included in gross income and a 10% penalty is added except in cases of disability, death, or attaining age 59-1/2. Upon death, the MSA may be passed on to a surviving spouse without tax liability; otherwise, it is included in the gross income of the beneficiary or of the decedent on the latter's final return. No estate tax applies. The provisions just described were also included in the conference agreement on H.R. 2491, the Balanced Budget Act of 1995, which the President vetoed on December 6, 1995. The Joint Committee on Taxation has estimated that the MSA provisions of H.R. 3103 would cost $1.8 billion through fiscal year 2002. (Note that the provision becomes effective for taxable years beginning after December 31, 1996.)

[15] H.R. 3103 was introduced on March 18, 1996, and referred to the Committee on Ways and Means and, in addition, to the Committees on Economic and Educational Opportunities, Commerce, and the Judiciary. ⁶ On March 19, 1996, the House Committees on Ways and Means voted 25 to 11 to favorably report the bill as amended. (See H. Rept. 104-496, Part 1.) The provisions of H.R. 3103 as reported by the Ways and Means Committee were combined by the House Rules Committee with those of H.R. 3070 and title III of H.R. 995, along with malpractice provisions, and introduced by Representative Archer as H.R. 3160, also the Health Coverage Availability and Affordability Act of 1996. The rule for consideration of H.R. 3103 (H.Res. 392) provided for an amendment in the nature of a substitute consisting of the modified text of H.R. 3160. H.R. 3103, as amended by the text of H.R. 3160, passed the House on March 28th by a vote of 267 to 151.

BALANCED BUDGET ACT OF 1995 (H.R. 2491)

[16] The conference agreement on the Balanced Budget Act of 1995 (H.R. 2491) which the President vetoed on December 6, 1995, would have changed how MSA contributions, earnings, and disbursements are treated with respect to federal income and employment taxes. It also would have authorized MSAs as an option under Medicare.

TAX TREATMENT OF MSAs

[17] Title XI of the bill authorizes tax-advantaged MSAs for individuals covered by a high deductible health plan (deductible of at least $1,500 for one person and at least $3,000 for more than one) and no other insurance with some exceptions. ⁷ Individuals' contributions to MSAs are deductible from gross income up to an annual limit of $2,000 ($4,000 if a spouse or dependent is covered) or the insurance deductible, whichever is less. Individuals cannot make contributions if their employer does or if their spouse's employer contributes to the latter's account. Employer contributions are excluded from income and employment taxes of the employee as well as from employment taxes of the employer. ⁸ Account earnings are not taxed. Distributions from MSAs are tax-exempt if used to pay for unreimbursed medical expenses deductible for income tax purposes, for long-term care insurance, for continuation coverage required under federal law (such as COBRA (Consolidated Budget Reconciliation Act)), ⁹ or for health plan insurance when the individual receives unemployment compensation. Non-qualified distributions are included in gross income and a 10% penalty is added except in cases of disability, death, or attaining age 59-1/2. Upon death, the MSA may be passed on to a surviving spouse without tax liability; otherwise, it is included in the gross income of the beneficiary or of the decedent on the latter's final return. No estate tax applies.

MEDICARE MSAs

[18] Title VIII of H.R. 2491 establishes new MedicarePlus options that beneficiaries may elect instead of traditional Medicare. One option, a MedicarePlus medical savings account (MMSA), may be chosen by beneficiaries who are enrolled in a high deductible insurance plan. In addition to meeting general MedicarePlus requirements, these plans must have deductibles that cannot exceed $6,000 in 1997 (indexed for inflation thereafter) and must count towards the deductible at least those expenses that would have been payable by Medicare or by the enrollee had the latter elected traditional Medicare. ¹⁰ Medigap policies would not be allowed to pay any of the deductible. (Medigap policies are private insurance purchased to supplement traditional Medicare coverage.) After a deductible is met for a year, plans would have to reimburse the enrollee's providers certain specified amounts. ¹¹

[19] High deductible plans would first be available in January 1997, and could be selected during the MedicarePlus Health Fair in October, 1996. Thereafter, MedicarePlus eligible individuals could elect the high deductible/MMSA option during the annual coordinated election periods, which would occur each October for coverage beginning the following January. An individual generally would not be able to disenroll from a MMSA except during the annual coordinated open enrollment period. Special enrollment and disenrollment rules apply during the transition period which would end September 1997. ¹² High deductible plans may not be chosen by individuals enrolled in FEHBP until the Office of Personnel Management has adopted policies ensuring that they do not result in increased government expenditures under FEHBP.

[20] MMSA contributions are made monthly by the Secretary of Health and Human Services; aside from deposits of account earnings, none others are allowed. The Secretary's contribution equals the excess of the capitated payment amount for the beneficiary over the cost of the high deductible insurance. ¹³ Payments to an MMSA are excluded from gross income under the Internal Revenue Code. Account earnings are also excludable.

[21] Distributions from MMSAs are tax-exempt and penalty-free if used for qualified expenses, defined as unreimbursed medical expenses deductible for income tax purposes, long-term care insurance, health plan continuation coverage required under federal law, and health plan insurance when the individual receives unemployment compensation. Payments for other types of health insurance are not qualified expenses. Distributions for other than qualified medical expenses are includible in gross income, and an additional 50% tax applies to the extent they exceed the amount by which the value of the MMSA exceeds 60% of the deductible on January 1st of that year. The additional tax does not apply to distributions on account of disability or death. MMSAs are not subject to the estate tax, and they may be passed on to a surviving spouse without income tax liability.

[22] Title VIII also establishes Rebate MSAs. These are distinct accounts created solely to receive premium rebates the Secretary may give individuals who elect MedicarePlus options other than MMSAs. Account earnings are excludable from gross income under the Internal Revenue Code, as are distributions used for unreimbursed medical care of the beneficiary or the spouse. Since rebates go to beneficiaries who do not have high deductible insurance, Rebate MSAs are different from other types of MSAs.

LEGISLATIVE HISTORY

[23] H.R. 2491 (the Seven-Year Balanced Budget Act of 1995) was introduced on October 17, 1995, by Representative Kasich as an original measure of the Committee on the Budget. Included among its many titles were provisions changing how MSA contributions, earnings, and disbursements would be treated with respect to federal income and employment taxes (in Title XIII) and provisions authorizing MSAs as an option under Medicare (in Title XV). The MSA tax provisions were similar to those in H.R. 1818; the Medicare MSA provisions were similar to those in H.R. 2425. An amended version of H.R. 2491 passed the House on October 26th. On October 28, 1995, the Senate passed an amended version in lieu of S. 1357. On October 30, the House disagreed to the Senate amendment and requested a conference. The conference agreement was approved by the House on November 17 and by the Senate with an amendment on the same day. The House agreed to the Senate amendment on November 20. H.R. 2491 was vetoed by President Clinton on December 6, 1995.

[24] S. 1357 (the Balanced Budget Reconciliation Act of 1995) was introduced on October 23, 1995, by Senator Domenici from the Committee on the Budget. Included in its many titles were MSA tax provisions (in Title XII) and provisions authorizing MSAs under Medicare (in Title VII). The MSA tax provisions were similar to those in the House bill (i.e., H.R. 1818, which is summarized below) with these principal exceptions: (1) account earnings generally are not taxed; (2) accounts cease to be MSAs if within 2 years after inception the owner is no longer covered by high deductible insurance except due to separation from employment; (3) contributions are deductible up to the lesser of the health plan deductible or $2,000 for a single individual and $4,000 for additional coverage of a spouse or dependent; and (4) qualified distributions include payments for health plan continuation coverage required under federal law and health plan insurance when the individual receives unemployment compensation.

[25] During floor debate, the Medicare MSA provisions were deleted from S. 1537 pursuant to the Byrd rule. In the bill as introduced, the provisions were similar to those in the House bill with these principal exceptions: (1) optional health plans that beneficiaries could choose instead of traditional Medicare are called Medicare Choice plans; (2) high deductible plans must have a minimum deductible of $3,000 and limit the insured's maximum annual out-of- pocket expense to $6,000; (3) unqualified distributions are subject to a 10% penalty tax; and (4) high deductible plans may not be chosen by individuals enrolled in FEHBP until the Office of Personnel Management has adopted policies ensuring that they do not result in increased government expenditures under FEHBP. (See H.R. 2491 for further action.)

OTHER BILLS

[26] The bill summaries below generally cover the following points:

     o eligibility to have an MSA;

[28] MSAs would be taxed as grantor trusts unless the legislation excludes account earnings from taxation. Under grantor trust rules, the earnings are taxed to the person with power over the trust of its property, not the fiduciary.

HOUSE BILLS

H.R. 323 (REPRESENTATIVE McINTOSH/H.R. 354 (REPRESENTATIVE PORTER)

[29] Health Care Savings Plan Act of 1995. The bill authorizes tax-advantaged MSAs for individuals either not covered by an employer plan or covered by an employer catastrophic plan (deductible of $1,500 or more) and no other plan. Individuals' contributions to MSAs generally are deductible from gross income up to an annual limit of $4,800 (plus $600 for each dependent) minus the sum of employer payments for health care, individual payments for catastrophic coverage, and transfers from flexible spending accounts. Employer contributions are excluded from income and employment taxes of the employee as well as from employment taxes of the employer. ¹⁴ Account earnings are taxed to the owner to the extent they exceed $300. ¹⁵ Distributions from MSAs are tax-exempt if used to pay unreimbursed medical expenses deductible for income tax purposes (but not including costs of noncatastrophic health plans); ¹⁶ otherwise they are included in gross income and a 10% penalty is added. The latter penalty is waived if, after the distribution, the account (together with a spouse's account) still has $15,000; this threshold is reduced by $1,000 for each year the individual exceeds the social security retirement age. Both bills were introduced on January 4, 1995 and referred to the Committee on Ways and Means; H.R. 354 was also referred to the Committee on Commerce.

H.R. 720 (REPRESENTATIVE HOKE)

[30] Medisave Patient Empowerment Act of 1995. The bill authorizes tax-advantaged MSAs (called Medisave accounts) for individuals or families covered by a catastrophic health plan (deductible of $1,800 or more for an individual, $3,600 or more for a family). Individuals' contributions are deductible from gross income up to an annual limit of the lesser of the catastrophic plan's deductible or $2,500 ($5,000 for a family). Employer contributions are excluded from income and employment taxes of the employee as well as from employment taxes of the employer. Account earnings generally are not taxed. Distributions from accounts are tax-exempt if used to pay unreimbursed medical expenses deductible for income taxes (but not including costs for noncatastrophic health plans) or if used for long-term care; otherwise they are included in gross income and a 10% penalty is added. The latter penalty is increased to 50% if, after the distribution, the amount in the account is less than the insurance deductible. Introduced on January 27, 1995 and referred to the Committee on Ways and Means.

H.R. 1234 (REPRESENTATIVE THOMAS)

[31] Basic Health Care Reform Act of 1995. In addition to other provisions, the bill authorizes tax-advantaged MSAs for employees with high deductible insurance (the actuarial value of coverage is at least 20% but not more than 40% less than standard coverage as determined by the National Association of Insurance Commissioners). Not eligible are employees who receive Aid for Dependent Children (AFDC) or Supplemental Social Insurance (SSI) or who have adjusted gross income less than the official poverty line for their family size. Contributions of employers are excluded from income and employment taxes of the employee only to the extent of the difference in premiums for standard and high deductible insurance; they also are excluded to this extent from employment taxes of the employer. Account earnings are taxed to owner; in addition, capital losses are recognized only to extent of capital gains. Distributions from accounts are tax-exempt if used to pay unreimbursed medical expenses deductible for income taxes or if used for long-term care insurance; otherwise they are included in gross income and a 100% penalty is added. The latter penalty does not apply to distributions after the beneficiary turns 65. Introduced on March 14, 1995, and referred to the Committee on Ways and Means and, in addition, to the Committees on Commerce, Economic and Educational Opportunities, and the Judiciary.

H.R. 1424 (REPRESENTATIVE STEARNS)

[32] Consumer Choice Health Reform Act of 1995. In addition to other provisions, the bill authorizes tax-advantaged MSAs for individuals and families having a federally qualified health insurance plan (defined elsewhere in the bill in terms of minimum benefits and rating and underwriting practices). Not eligible are individuals receiving Medicare or Medicaid or participating in military, veterans, or Indian health programs. Contributions are made by individuals, who receive a tax credit equal to 25% of the amount contributed (the annual limit for amount taken into account is $3,000 plus $500 for each dependent. Under the bill, individuals would generally purchase insurance directly and receive tax credits based on their total health care costs and income. Most current law tax exclusions and deductions for health care for individuals would be repealed). Account earnings generally are not taxed. Distributions from accounts are tax-exempt if used to pay qualified medical expenses (defined elsewhere in the bill), including federally- qualified health insurance premiums and unreimbursed expenses; otherwise they are included in gross income and a 10% penalty is added. Introduced on April 6, 1995, and referred to the Committee on Ways and Means and, in addition, to the Committees on Commerce, the Judiciary, and Rules.

H.R. 1818 (REPRESENTATIVE ARCHER)

[33] Family Medical Savings and Investment Act of 1995. The bill authorizes tax-advantaged MSAs for individuals covered by a catastrophic health plan (deductible of at least $1,800 for one person and at least $3,600 for more than one) and no other insurance with some exceptions. Individuals' contributions to MSAs are deductible from gross income up to an annual limit of $2,500 (or $5,000 if a spouse or dependent is covered) or the insurance deductible, whichever is less. Individuals are not eligible to make deductible contributions if their employer makes contributions. Transfers from flexible spending accounts are permitted when MSAs are established. Employer contributions are excluded from income and employment taxes of the employee as well as from employment taxes of the employer. Account earnings are taxed to the owner; in addition, capital losses are recognized only to extent of capital gains. Distributions from MSAs are tax-exempt if used to pay for unreimbursed medical expenses deductible for income tax purposes (except for payments for non-catastrophic health plans) or for long- term care insurance; otherwise, distributions are included in gross income to the extent sums are not greater than the excess of excluded or deductible contributions over previous taxable distributions, and a 10% penalty is added. Introduced on June 13, 1995, and referred to the Committee on Ways and Means.

[34] On September 19, 1995, the Ways and Means Committee included provisions similar to H.R. 1818 in recommendations it made to the House Committee on the Budget for the reconciliation bill. The latter committee subsequently incorporated the provisions in H.R. 2491, the Seven-Year Balanced Budget Reconciliation Act of 1995. The conference agreement on H.R. 2491 (the Balanced Budget Act of 1995) included the MSA provisions with further amendments, as described above.

H.R. 2051 (REPRESENTATIVE BAKER OF LOUISIANA)

[35] Health Care Accessibility Expansion Act of 1993 [sic]. In addition to other provisions, the bill authorizes tax-advantaged MSAs for individuals either not covered by an employer plan or covered by an employer-provided catastrophic plan and no other. A catastrophic plan is defined as having a $3,000 deductible, 15% copayment for expenses between $3,000 and $9,000, and full reimbursement for expenses above $3,000. Individuals' contributions to MSAs generally are deductible from gross income up to an annual limit of $4,800 (plus $1,000 for each dependent) minus employer payments for health care and transfers from flexible spending accounts (FSAs). The latter transfers are allowed only if the FSA is available to 80% of employees. Transfers must vest with employees and may only be used for medical care. Account earnings generally are not taxed. Distributions from accounts are tax-exempt if used to pay unreimbursed medical expenses deductible from income taxes or for long-term care insurance that meets certain standards for coverage; otherwise, distributions are included in gross income and a 10% penalty is added. Creates a federal voucher program to assist qualified individuals pay for a portion of medical expenses that might otherwise be paid for out of withdrawals from their MSA. Provides a refundable tax credit to providers equal to the aggregate amount of vouchers received as payment for providing services for which individuals incur qualified medical expenses. Introduced on July 18, and referred to the Committee on Ways and Means and, in addition, to the Committees on Commerce and the Judiciary.

H.R. 2071 (REPRESENTATIVE PETERSON OF FL)

[36] Health Care Improvement Act of 1995. In addition to other provisions, the bill authorizes tax-advantaged MSAs for employees with high deductible insurance (the actuarial value of which is 80% of that for standard coverage, as described in the bill, determined for rating areas throughout the country by the Secretary of Health and Human Services in consultation with the National Association of Insurance Commissioners and the American Academy of Actuaries). The insurance must meet minimum benefit requirements and cover preventive services without applying the deductible. Not eligible are employees who receive Aid for Dependent Children (AFDC) or Supplemental Social Insurance (SSI) or who have adjusted gross income less than the official poverty line for their family size. Contributions of employers are excluded from income and employment taxes of the employee only to the extent of the difference in premiums for standard and high deductible insurance; they also are excluded to this extent from employment taxes of the employer. Account earnings are taxed to the owner; in addition, capital losses are recognized only to the extent of capital gains. Distributions from accounts are tax-exempt if used to pay for unreimbursed medical expenses deductible for income tax purposes (except for payments for insurance); otherwise, distributions are included in gross income to the extent sums are not greater than the excess of excluded contributions over previous taxable distributions, and a 100% penalty is added. Introduced on July 19, 1995, and referred to the Committee on Commerce, and, in addition, to the Committees on Ways and Means, Economic and Educational Opportunities, and the Judiciary.

H.R. 2220 (REPRESENTATIVE JACOBS)

[37] Health Insurance Portability and Guaranteed Renewability Act of 1995. This bill is identical to S. 715, which was introduced earlier by Senator Gramm and is summarized below. H.R. 2220 was introduced on August 4, 1995, and referred to the Committee on Ways and Means, and in addition, to the Committees on Commerce and on Economic and Educational Opportunities.

H.R. 2341 (REPRESENTATIVE SALMON)

[38] FEHBP-Medical Savings Account Promotion Act of 1995. The bill amends Title 5, chapter 89 of the U.S. Code (relating generally to the Federal Employees Health Benefits Program) to authorize government contributions to MSAs established or maintained for the benefit of employees or annuitants who are enrolled in catastrophic health plans. A catastrophic plan is a service benefit, indemnity, or employee organization plan with a deductible of at least $3,000. MSA contributions equal the excess of the maximum government FEHBP contribution for an employee or annuitant over its contribution for the catastrophic plan. The latter is limited to 100% (instead of 75) of the subscription charge. MSAs are defined by reference to Internal Revenue Code amendments made by H.R. 1818. Qualified medical expenses (for purposes of determining whether distributions from accounts are taxable) are amounts paid for unreimbursed medical expenses deductible for income taxes for the employee or annuitant, the spouse, or dependents. Qualified medical expenses also include long- term care insurance, but they exclude payments for health plans other than catastrophic plans. Introduced on September 14, 1995, and referred to the Committee on Government Reform and Oversight.

H.R. 2425 (REPRESENTATIVE ARCHER)

[39] Medicare Preservation Act of 1995. ¹⁷ In addition to other provisions, this bill establishes MSAs as an option for Medicare beneficiaries who elect to enroll in a newly established MedicarePlus program as an alternative to traditional fee-for-service Medicare. Those electing a MedicarePlus MSA (MMSA) would also be required to enroll in a high-deductible/medisave product. A high deductible/medisave product is one that provides reimbursement for at least part A and part B Medicare benefits but only after the enrollee incurs countable expenses equal to the annual deductible. ¹⁸ The deductible could not exceed $10,000 in contract year 1997 and is indexed for inflation thereafter. The bill also amends the Internal Revenue Code to exclude from gross income any payment to an individual's MMSA by the Secretary of Health and Human Services. Distributions from the MMSA are tax-exempt and penalty-free if used for unreimbursed medical expenses deductible for income tax purposes (and including payments for long-term care insurance). Other distributions are includible in gross income and an additional 50% tax applies to the extent they exceed the amount by which the value of the MMSA exceeds 60% of the deductible on January 1st of that year. The additional tax does not apply to distributions on account of disability or death. An MMSA is not subject to the estate tax, and it may be passed on to a surviving spouse without income tax liability. Introduced September 29, 1995 and referred to the Committee on Ways and Means, and in addition to the Committees on Commerce, the Judiciary, and Rules. On October 11, Committee on Ways and Means ordered to be reported by a vote of 22-14 (H.Rept. 104-276, Part I). On October 12, Committee on Commerce ordered to be reported by a vote of 27-22 (H. Rept. 104-276, Part II). Discharged by Committee on Judiciary on October 16. On October 19, passed House as amended by a vote of 231-201. For further action, see the summary of H.R. 2491 above.

H.R. 2476 (REPRESENTATIVE STUPAK)

[40] Common Sense Medicare Reform Act of 1995. In addition to other provisions, the bill authorizes the Secretary of Health and Human Services to establish a pilot program under which additional types of health plans, including high deductible plans with contributions to MSAs, may qualify under Medicare. A high deductible plan provides reimbursement for at least the items and services covered under Medicare but only after the enrollee incurs expenses beyond a deductible not exceeding $10,000. The pilot program would last from January 1, 1997 to December 31, 2001. Among other things, the Secretary is to study the extent to which enrollees in high deductible plans represent a cross-section of Medicare beneficiaries by age and income. Introduced on October 12, 1995, and referred to the Committee on Ways and Means and, in addition, to the Committees on Commerce and the Judiciary.

H.R. 2486 (REPRESENTATIVE PETERSON OF MN)

[41] Medicare Preservation Act of 1995. In addition to other provisions, this bill provides that the Secretary of HHS permit, on a demonstration basis, the offering of high deductible/medisave products for Medicare beneficiaries who have elected Medicare Choice as an alternative to the traditional Medicare fee-for-service program. Up to 10 demonstrations over a 7-year period would be permitted. Definitions and requirements for a high deductible/ medisave product are the same as in H.R. 2425 as described above. H.R. 2486 was introduced October 17, 1995 and referred to Committee on Ways and Means, and in addition to the Committees on Commerce, Judiciary, and Rules. See H.R. 2530.

H.R. 2530 (REPRESENTATIVE ORTON)

[42] Common Sense Balanced Budget Act of 1995. Title VIII of this bill is identical to H.R. 2486, which was introduced earlier by Representative Peterson of Minnesota and is summarized above. H.R. 2530 was introduced on October 25, 1995, and referred to the Committee on the Budget and 13 other committees. Rejected as an amendment in the nature of a substitute to H.R. 2491 on October 26, 1995.

H.R. 2692 (REPRESENTATIVE ROYCE)

[43] In addition to other provisions, the bill authorizes tax- advantaged medical finance accounts for individuals and families. Individuals' contributions are deductible from gross income up to an annual limit not exceeding the greater of $3,000 (or $5,000 if a spouse or dependent is covered), the deductible under their catastrophic health plan (if they are covered by one), or the excess of these limits over their allowable deductions for the immediate and four preceding tax years. Deductible limits are reduced by employer contributions excludable from gross income; such contributions are also excluded from employment taxes of the employee and the employer. Account earnings generally are not taxed. Distributions from accounts are tax-exempt if used to pay unreimbursed medical expenses deductible for income tax purposes or long-term care expenses of the individual (and the spouse and dependent, if covered) or any family member who is at least 65 years of age. Otherwise, distributions are included in gross income and a 10% penalty is added. Accounts are not subject to the estate tax. Introduced on November 30, 1995, and referred to the Committee on Ways and Means.

H.R. 3063 (ARCHER)

[44] Health Coverage Availability and Affordability Act of 1996. Introduced March 12, 1996, and referred to the Committee on Ways and Means and, in addition, to the Committees on Economic and Educational Opportunities, Commerce, and Judiciary. For further action, see H.R. 3103 (described above).

H.R. 3160 (ARCHER)

[45] Health Coverage Availability and Affordability Act of 1996. Introduced March 26, 1996, and referred to the Committee on Ways and Means and, in addition, to the Committees on Economic and Educational Opportunities, Commerce, and Judiciary. For further action, see H.R. 3103 (described above).

SENATE BILLS

S. 121 (SENATOR GRAMM)

[46] Family Health Care Preservation Act. In addition to other provisions, the bill authorizes tax-advantaged MSAs for individuals covered by a catastrophic health insurance plan (deductible of $3,000 or more). Not eligible are individuals 65 years or age or older unless their primary health plan is a catastrophic plan. Contributions are deductible from gross income to an annual limit of $3,000. Employer contributions are excluded from income and employment taxes of the employee as well as employment taxes of the employer. Account earnings generally are not taxed. Distributions from accounts are tax-exempt if used for expenses counted towards the insurance deductible (and not reimbursed) or if used for long-term care expenses (but only to the extent the remaining account balance exceeds the deductible); otherwise they are included in gross income and a 10% penalty is added. Introduced on January 4, 1995, and referred to the Committee on Finance.

S. 715 (SENATOR D'AMATO)

[47] Health Insurance Portability and Guaranteed Renewability Act of 1995. In addition to other provisions, the bill authorizes tax-advantaged MSAs (referred to as medical care savings accounts or medical IRAs) for employees with qualifying high deductible plans. (The latter have deductibles not exceeding $5,000 and medical care savings benefits funded with some or all of the difference in premiums between high deductible and other health plans, subject to certain limitations.) Contributions to MSAs are limited to medical savings benefits and flexible spending account balances that are unused at the end of each year; the total from these two sources may not exceed the deductible under the high deductible plan. Employer contributions are excluded from the income and employment taxes of the employee as well as employment taxes of the employer. Account earnings are taxed to the owner; capital losses are recognized only to the extent of capital gains. Distributions from accounts are not taxed if used to pay unreimbursed expenses deductible for income taxes or to pay long-term care services or insurance; otherwise they are included in gross income and a 10% penalty is added. The latter penalty is waived for distributions after age 59-1/2. Introduced on April 7, 1995, and referred to the Committee on Finance.

S. 1238 (SENATOR GREGG)

[48] Medicare Improvement and Choice Care Act Provision Act. The bill establishes a new Choice Care option within Medicare that allows beneficiaries to enroll in other health plans offered in their area, including indemnity, managed care, and high deductible/medical savings account plans. Annual deductibles for high deductible plans must be at least $1,500. Individuals elect their plan when they initially become eligible for Medicare or during an annual enrollment period. Individuals choosing high deductible/medical savings account plans must enroll for at least 2 years. Medicare pays set "value amounts" toward Choice Care plans' premiums based on modified average annual per capita cost (AAPCC) payments averaged by region and gradually adjusted toward a national mean in specified increments favoring lower cost areas. Separate payments are made for medical education. Value amounts in demonstration projects could be set by competitive bidding if at least three plans, including a national indemnity plan, participate and have aggregate capacity to serve all eligible individuals. Beneficiaries receive 75% of the savings if their value amount exceeds their premium; they pay the difference if their premium is higher. Savings returned to individuals choosing high deductible plans are put into their medical savings account. Introduced on September 13, 1995, and referred to Committee on Finance.

S. 1247 (SENATOR GRASSLEY)

[49] Family Medical Savings and Investment Act of 1995. This bill is similar to the version of H.R. 1818 that the House Committee on Ways and Means recommended be included in the House reconciliation bill (H.R. 2491) and that was subsequently contained in that legislation when it passed the House. In addition, it amends Title 5, Chapter 89 of the U.S. Code (relating generally to FEHBP) to authorize government contributions to MSAs established or maintained for the benefit of employees or annuitants who are enrolled in catastrophic health plans. A catastrophic plan is a service benefit, indemnity, or employee organization plan with a deductible of at least the level specified in the Internal Revenue Code. ¹⁹ Government MSA contributions equal the excess of the maximum government contribution for an employee or annuitant over its contribution to the catastrophic plan. Contributions are made on the same biweekly or other basis as government contributions to other health plans. The Office of Personnel Management shall prescribe regulations regarding these contributions. Catastrophic health plans are not taken into account in determining the level of government contributions to FEHBP plans. Introduced on September 15, 1995, and referred to the Committee on Finance.

S. 1249 (SENATOR FRIST)

[50] The bill authorizes tax-advantaged MSAs for individuals with catastrophic health plans. Such plans have annual out-of-pocket expense requirements of not less than $2,500 per covered individual, aggregate expense limits of not less than $5,000, initial coverage of at least 2 years, and at least 1 year advance notice for individuals switching to non-catastrophic plans. Individuals' contributions are deductible from gross income up to the lesser of $2,500 (or $5,000 if a spouse or dependent is covered) or the excess of the premium for the FEHBP plan with the highest enrollment over the premium for the catastrophic health plan. The deduction is phased-in until the year 2000. Contributions are not deductible when individuals, their spouse, or their dependents are eligible to participate in an employer-subsidized health plan or to receive an employer MSA contribution. Employers' contributions are excluded from income and employment taxes of the employee up to the deductible limits just described (but measured with the highest cost employer plan, if any, rather than FEHBP); they also are excluded to this extent from employment taxes of the employer. Account earnings are taxed to owner; in addition, capital losses are recognized only to extent of capital gains. Distributions from accounts are tax-exempt if used to pay unreimbursed medical expenses deductible for income taxes (but generally not insurance premiums) or qualified long-term care services (as defined in the bill). Otherwise, distributions are included in gross income to the extent sums are not greater than the excess of excluded or deductible contributions over previous taxable distributions, and a 10% penalty is added. Transfers of interests in MSAs to a spouse or former spouse incident to a divorce are tax- exempt. The bill preempts state and other federal laws that prohibit carriers from offering catastrophic health plans and MSAs. Introduced on September 15, 1995, and referred to the Committee on Finance.

S. 1357 (Senator Domenici)

[51] Balanced Budget Reconciliation Act of 1995. This is the Senate reconciliation bill. Highlights of its MSA provisions are discussed above after the summary of the Balanced Budget Act of 1995, H.R. 2491. S. 1357 was introduced and approved by the Committee on the Budget on October 23, 1995. After amendments, it was incorporated in H.R. 2491 as an amendment on October 28, 1995.

² American Academy of Actuaries. Medical Savings Accounts: Cost Implications and Design Issues. Washington, 1995. p. ii. Given differences in actual health care use, the report estimates that about two-thirds of employees would gain financially by changing to high deductible insurance while one-third would lose.

³ A plan would not fail to be considered high deductible merely because state law requires that there be no deductible for preventive care.

⁴ Employer contributions are not excluded from an employee's gross income if they are made through a cafeteria plan.

⁵ COBRA refers to health insurance continuation coverage required to be offered as an option by employer group health plans with 20 or more employees under P.L. 99-272.

⁶ On March 12, 1996, Representative Archer introduced an earlier version of the Health Coverage Availability and Affordability Act of 1996 as H.R. 3063. This bill became the basis for the text of H.R. 3103, as reported by the Ways and Means Committee. With each phase of the legislative process various changes were made to the bill language.

⁷ A plan would not fail to be considered high deductible merely because state law requires that there be no deductible for preventive care.

⁸ Employer contributions are not excluded from an employees gross income if they are made through a cafeteria plan.

⁹ COBRA refers to health insurance continuation coverage required to be offered as an option by employer group health plans with 20 or more employees under P.L. 99-272.

¹⁰ Countable expenses specifically include Medicare's deductibles and coinsurance amounts (e.g., 20% in the case of physician services) that a Medicare beneficiary would otherwise be responsible for paying. Under traditional Medicare, participating physicians agree to accept Medicare's payment in full. Physicians who do not participate in the Medicare program can bill beneficiaries only 15% above Medicare's recognized payment, an amount known as "balance billing." MedicarePlus high deductible plans are not subject to the 15% limit on balance billing (i.e., providers could charge amounts above the 15% limit) and they do not have to count toward the deductible any balance billing charges in excess of the limit. However, it is not clear whether balance billing amounts up to the 15% limit would have to he counted towards such deductibles.

¹¹ High deductible plans would have to reimburse at least for amounts that are the lesser of: (1) 100% of expenses exceeding the deductible, or (2) 100% of the amounts that would have been paid (without regard to any deductibles or coinsurance) under Medicare Parts A and B with respect to such expenses. The first situation would arise in the event that a provider charged less than Medicare's recognized amounts. In this case, once the enrollee reached the deductible, the high deductible plan would pay 100% of the provider's charges. The second situation would arise in the event that provider charges exceeded what Medicare would otherwise pay after the enrollee reached the deductible. In this instance, the high deductible plan would only have to reimburse for amounts equal to what Medicare would have paid (disregarding deductibles and coinsurance) if the individual were enrolled in Medicare Parts A and B. A high deductible plan would not have to pay any balancing billing amounts once the deductible had been met.

¹² For example, an individual who enrolled in the high deductible/MMSA option could change into another high deductible plan, but could not change into a non-high deductible plan unless the individual had been in a high deductible plan for 12 consecutive months.

¹³ The capitated payment is the amount paid by the government out of the Medicare trust finds to the MedicarePlus plan for each Medicare enrollee in the plan. The capitated payment amount would vary depending on where the enrollee lives, and such risk factors as the enrollee's age, gender, disability status, and institutional status.

¹⁴ In all the bills, employer contributions generally would be deductible with respect to the employer's income taxes, just as they are under current law.

¹⁵ Depending on the investment options allowed, MSAs could earn interest income and also generate capital gains (or losses) from the sale of investment assets.

¹⁶ Section 213 of the Internal Revenue Code allows a deduction for unreimbursed medical expenses paid during the year to the extent they exceed 7.5% of adjusted gross income, provided the taxpayer itemizes deductions. MSA bills (with the exception of S. 121) generally would allow qualified withdrawals for the same expenses regardless of the taxpayer's income or whether he itemizes.

¹⁷ The summary is based on the bill as passed by the House, not as it was introduced.

¹⁸ The legislation would make it unlawful to sell or issue a health insurance policy covering expenses which would otherwise be counted toward the annual deductible of a high deductible/medisave product.

¹⁹ Deductible levels in the Code would be set by the section of the bill that is similar to H.R. 1818.