October 14, 1997

A SICKLY START FOR MEDICAL SAVINGS ACCOUNTS

Edited by Fred Strasser

At their debut in January, medical savings accounts were promoted as a potential remedy to the country's ailing health insurance system. But despite the ads and news reports, these tax-free accounts have yet to catch on, according to a recent Internal Revenue Service report. As of June 30, consumers had purchased only 22,051 MSAs, far below the 525,000 limit Congress had set for the date as part of a four-year test program.

Insurance executives and congressional staffers contend, however, that the numbers are misleading because of a four- to six-week delay between the date when a policy is sold and when it is recorded by the IRS. They say a more accurate number is closer to 40,000 -- which they admit is still fewer than expected.

Says Daniel Perrin, director of MediSave America Council, an MSA advocacy group: "People in politics think we just passed this law and everything will be fine. But there's a whole other world of execution and infrastrucure, that once it gets going, we'll start to boost the numbers." David Lack, president of the Council for Affordable Health Insurance, agrees: "I'm not necessarily scared by the slow start. This is an educational period."

MSAs, which are available only to the self-employed and companies with 50 employees or less, combine a high-deductible catastophic insurance policy with a tax-free account used for routine medical expenses. Since premiums for the coverage are low, MSAs are attractive to healthy workers as well as those who cannot ordinarily afford coverage. Nearly 17% of MSA buyers were previously uninsured, according to the IRS survey.

The accounts, however, have yet to gain significant momentum among small businesses. MSA advocates offer a number of reasons for the accounts' limited popularity. First, insurers and financial services firms have found it difficult to educate consumers -- as well as their own sales forces -- about the complex accounts. "There is a learning curve, and that learning curve takes about four months for a company to develop a sales system," says Perrin. Second, many traditional insurers have avoided pushing the accounts because the low-premium policies eat into commissions. So far, only 56 insurers out of some 2,000 nationwide sell MSAs, according to Medisave America. Third, suggests an aide to MSA supporter Representative Bill Archer (R-Tex.), insurance and financial companies are wary of investing marketing dollars in a product that might expire after the four-year test.

A small group of companies, however, has found profits in offering MSAs. Officials at Golden Rule Insurance Co. -- which controls over half of the MSA market -- say its sales totals have met forecasts. And the company expects rapid growth over the next few months. Through September, Golden Rule sold just over 17,000 accounts, up from 12,076 at the end of June.

That's still far from the 555,000-account cap imposed by Congress as part of a compromise deal between Republicans and Democrats. And even further away from the 750,000 total MSAs that can be established by 2000. For MSAs to last beyond that four-year test period, small companies and the self-employed will first have to show that there's real demand.

By Dennis Berman in New York