Group Medical Expense Benefits, Managed Care Plans Issue - Limited Choice of Medical Providers

DIFFERENCES FROM TRADITIONAL PLANS
True managed care plan should have five main characteristics:

Controlled access to providers

Comprehensive case management

Preventive care

Risk sharing

High-quality care

The major characteristic of managed care plans that differentiates them from traditional medical expense plans is probably the limitations on the choice of medical care providers that may be used. The question arises as to whether these choice limitations lead to a different quality of care. Despite these apparent or perceived differences, more than three-quarters of the population is now in some type of managed care plan, and the majority seem reasonably satisfied with the arrangement. In the past few years, much of the growth in managed care has come from employers with fewer than 50 employees. Unlike larger employers, who usually give employees a choice between one or more managed care plans and a traditional indemnity plan, small employers are more likely to offer a single managed care plan rather than any options.

Despite the relatively high level of satisfaction, there has been some recent consumer backlash against managed care that has led to plan changes and legislation, particularly at the state level.

Limited Choice of Medical Providers
Managed care plans attempt to eliminate the unrestricted use of medical care providers by either requiring or encouraging participants to use preapproved providers. The earliest managed care plans, which were HMOs, usually provided no coverage for treatment outside the managed care network, discouraging enrollment because many Americans valued the choice that had traditionally been available when medical treatment was needed.

The concept of managed care received considerable attention in the late 1960s and early 1970s, culminating in the passage of the Health Maintenance Organization Act of 1973. The act resulted in modest growth of HMO plans, but the real growth that came later for managed care was encouraged by several developments that gave employees more choice in selecting providers of medical care. One of these changes was more flexibility under HMO plans. For example, many of the early HMOs assigned a primary physician to a new member. Gradually, new forms of HMOs developed, and existing HMOs were modified to allow members to select a primary care physician from a list of primary care providers.

At the same time, the traditional insurance industry was entering managed care, primarily through the marketing of PPO products, which allowed more flexibility than most HMOs with respect to selection of specialists. In addition, benefits were usually available for treatment received outside a managed care setting, though at a reduced payment level.

The popularity of PPO products with both employers and employees forced the HMOs to adopt even more flexibility. This they did through the establishment of POS plans, which covered nonnetwork treatment. The typical POS plan is more flexible than a typical HMO but more restrictive than a typical PPO product. However, the variations in all three types of plans today are so significant that it is sometimes difficult to determine exactly what is typical.

Survey statistics of the percentage of managed care participants in each type of plan vary, depending on who conducts the survey. However, results of these surveys are similar and indicate that about 40 percent of managed care participants are enrolled in PPOs, 35 percent are enrolled in traditional HMOs, and 25 percent are enrolled in POS plans. All of the surveys show that the percentage for PPOs has recently been increasing. While the percentages for both HMOs and POS plans have declined somewhat, each of these types of managed care plans have continued to have growth in absolute enrollment as more employees leave traditional insured plans and move to managed care.

MEDICAL SAVINGS ACCOUNTS : Contributions & Distributions

Contributions
Either the account holder of an MSA or the account holder's employer, but not both, may make a contribution to an MSA. If the employer makes a contribution, even one below the allowable limit, the account holder may not make a contribution. Contributions must be in the form of cash.

Contributions by an employer are tax deductible to the employer and are not included in an employee's gross income or subject to Social Security and other employment taxes. Employee contributions are deductible in computing adjusted gross income. As with IRAs, individuals' contributions must generally be made by April 15 of the year following the year for which the contributions are made.

The amount of the annual deductible contribution to an employee's account is limited to 65 percent of the deductible for the health coverage if the MSA is for an individual. The figure is 75 percent if an MSA covers a family. If each person in a married couple has an MSA and if one or both of the MSAs provide family coverage, the aggregate deductible contribution is equal to 75 percent of the deductible for the family coverage with the lowest deductible. The deductible contribution is split equally between the two persons in the couple unless they agree to a different division.

The actual MSA contribution that can be deducted is limited to 1/12 of the annual amount, as described in the previous paragraph, times the number of months that an individual is eligible for MSA participation. For example, assume that the deductible under an individual's health plan is $1,800. The maximum annual contribution to the MSA is then 65 percent of this amount, which is $1,170, and the monthly amount is $97.50. If the individual is covered under a high-deductible plan for only the first eight months of the year, then the annual deductible contribution is eight times $97.50, or $780. Note, however, that there are no requirements that contributions be made on a monthly basis or at any particular time. In this example, the full $1,170 could have been made early in the year. The excess over $780 would then be an excess contribution.

An excess contribution occurs to the extent that contributions to an MSA exceed the deductible limits or are made for an ineligible person. Any excess contribution made by the employer is included in the employee's gross income. In addition, account holders are subject to a 6 percent excise tax on excess contributions for each year these contributions are in an account. This excise tax can be avoided if the excess amount and any net income attributable to the excess amount are removed from the MSA prior to the last day prescribed by law, including extensions, for filing the account holder's income tax return. The net income attributable to the excess contributions is included in the account holder's gross income for the tax year in which the distribution is made.

An employer that makes contributions to MSAs is subject to a comparability rule that requires the employer to make comparable contributions for all employees who have MSAs. However, full-time employees and part-time employees (those working fewer than 30 hours per week) are treated separately. The comparability rule requires that the employer contribute either the same dollar amount for each employee or the same percentage of each employee's deductible under the health plan. Failure to comply with this rule subjects the employer to an excise tax equal to 35 percent of the aggregate amount contributed to MSAs during the period when the comparability rule was not satisfied.

Growth of MSA Accounts
Unused MSA balances carry over from year to year, and there is no prescribed period in which they must be withdrawn. Earnings on amounts in an MSA are not subject to taxation as they accrue.

Distributions
An individual can take distributions from an MSA at any time. The amount of the distribution can be any part or all of the account balance. Subject to some exceptions, distributions of both contributions and earnings are excludible from an account holder's gross income if used to pay medical expenses of the account holder and the account holder's family, as long as these expenses are not paid by other sources of insurance. For the most part, the eligible medical expenses are the same ones that would be deductible, ignoring the 7.5 percent of adjusted gross income limitation, if the account holder itemized his or her tax deductions. However, tax-free withdrawals are not permitted for the purchase of insurance other than long-term care insurance, COBRA continuation coverage, or health coverage while an individual receives unemployment compensation. In addition, in any year a contribution is made to an MSA, tax-free withdrawals can be made to pay the medical expenses of only those persons who were eligible for coverage under an MSA at the time the expenses were incurred. For example, MSA contributions cannot be withdrawn tax free to pay the unreimbursed medical expenses of an account holder's spouse who is covered under a health plan of his or her employer that is not a high-deductible plan.

Distributions for reasons other than paying eligible medical expenses are included in an account holder's gross income and are subject to a 15 percent penalty tax unless certain circumstances exist. The penalty tax is not levied if the distribution is made after the account holder turns 65 or because of the account holder's death or disability. In addition, the penalty tax does not apply to funds rolled over to a new MSA as long as the rollover is done within 60 days. Transfers of MSA accounts as a result of divorce are also tax free.

Estate Tax Treatment
Upon death, the remaining balance in an MSA is includable in the account holder's gross estate for estate tax purposes. If the beneficiary of the account is a surviving spouse, the MSA belongs to the spouse and he or she can deduct the account balance in determining the account holder's gross estate. The surviving spouse can then use the MSA for his or her medical expenses. If the beneficiary is anyone else, or if no beneficiary is named, the MSA ceases to exist.

MEDICAL SAVINGS ACCOUNTS : Overview & Eligibility

The concept of medical savings accounts (MSAs) is a method of reforming the nation's health care system. The use of MSAs has increased as a result of HIPAA. The act provides favorable tax treatment for MSAs established under a pilot project that began on January 1, 1997, as long as prescribed rules are satisfied. The project, which runs through the end of 2000, allows the establishment of up to approximately 750,000 MSAs. However, as of late 1999, fewer than 100,000 had been purchased. At the end of the four-year trial period, no more tax-favored MSAs can be established unless Congress expands the program, but existing MSAs can generally continue in force after that time under the current rules. During this four-year period, the act calls for two studies to assist Congress in making its decision regarding MSAs. First, the Treasury Department will assess MSA participation and its effect on tax revenue. Second, the General Accounting Office will assess the effect of MSAs on the small-group market by looking at such factors as the effect of MSAs on health care costs and the use of preventive care.

The following discussion is limited to MSAs that receive favorable tax treatment. It should be noted that many MSAs, which existed on a non—tax-favored basis prior to 1997, have been revised to meet the act's requirements and receive favorable tax status.

General Nature
An MSA is a personal savings account from which unreimbursed medical expenses, including deductibles and copayments, can be paid. Coverage can be limited to an individual or include dependents. The MSA must be in the form of a tax-exempt trust or custodial account established in conjunction with a high-deductible health (that is, medical expense) plan. An MSA is established with a qualified trustee or custodian in much the same way that an IRA is established. Any insurance company or bank (as well as certain other financial institutions) can be a trustee or custodian, as can any other person or entity already approved by the IRS as a trustee or custodian for IRAs. While there are some similarities between MSAs and IRAs, there are also differences. As a result, an IRA cannot be used as an MSA, and an IRA and MSA cannot be combined into a single account.

Even though employers can sponsor MSAs, these accounts are established for the benefit of individuals and are portable. If an employee changes employers or leaves the workforce, the MSA remains with the individual.

Eligibility for an MSA
Two types of individuals are eligible to establish MSAs:

1. An employee (or spouse) of a small employer that maintains an individual or family high-deductible health plan covering that individual. These persons will establish their MSAs under an employer-sponsored plan.

2. A self-employed person (or spouse) maintaining an individual or family high-deductible health plan covering that individual. These persons will need to seek out a custodian or trustee for their MSAs.

A small employer is defined as an employer who has an average of 50 or fewer employees (including employees of controlled-group members and predecessor employers) on business days during either of the two preceding calendar years. In the case of a new employer, the number of employees is based on an estimate of the reasonably expected employment for the current year. After the initial qualification as a small employer is satisfied, an employer can continue to make contributions to employees' MSAs, and employees can continue to establish MSAs until the first year following the year in which the employer has more than 200 employees. At that time, participating employees may take over contributions to their accounts, but no employer contributions can be made and nonparticipating employees may not start new accounts.

A high-deductible health plan, for purposes of MSA participation, is a plan that has the following deductibles and annual out-of-pocket limitations (These amounts are for 2000 and subject to inflation adjustments.):

In the case of individual coverage, the deductible must be at least $1,550 and cannot exceed $2,350. The maximum annual out-of-pocket expenses cannot exceed $3,100.

In the case of family coverage, the deductible must be at least $3,100 and cannot exceed $4,650. The maximum annual out-of-pocket expenses cannot exceed $5,700.

A high-deductible plan can be written by an insurance company or a managed care organization such as an HMO. Currently, the high-deductible plans are being written primarily by insurance companies in the form of traditional major medical products but possibly with the requirement that covered persons use preferred-provider networks. No HMOs have yet established high-deductible plans.

A high-deductible plan can be part of a cafeteria plan, but the MSA must be established outside the cafeteria plan.

With some exceptions, a person who is covered under a high-deductible health plan is denied eligibility for an MSA if he or she is covered under another health plan that does not meet the definition of a high-deductible plan but that provides any benefits that are covered under the high-deductible health plan. The exceptions include coverage for accident, disability, dental care, vision care, and long-term care as well as liability insurance, insurance for a specific disease or illness, and insurance paying a fixed amount per period of hospitalization.

COVERAGE FOR ALTERNATIVE MEDICINE

During the 1990s, the use of alternative medicine increased dramatically, with estimates that over half of the population has used one or more of these types of services. In addition, the majority of physicians have recommended alternative medical techniques, particularly for treatment of neck and back problems, anxiety, depression, and headaches. Examples of alternative medicine services include the following:

Acupuncture

Biofeedback

Chiropractic treatment

Herbal medicine

Homeopathy

Hypnosis

Massage therapy

Meditation

Relaxation

Therapeutic touch

Vitamin therapy

Yoga

The attractiveness of these programs has increased over the past few years for a number of reasons. Patients appreciate the rapport they develop with their alternative medicine practitioners, and this is indicated by a higher degree of satisfaction with these practitioners than with their physicians. Patients also like the fact that alternative medicine practitioners are more likely than traditional medical practitioners to actively involve patients in the development of treatment plans. As a result, patients are more likely to follow plans of alternative medicine than they are to follow conventional medical treatment plans. Finally, complications from treatment are less likely than from conventional medical treatment, possibly because of the less-invasive nature of alternative medicine.

Insurers and plan administrators have typically been leery of adding benefits for alternative medicine because they fear increases in claims costs. This will obviously occur if alternative medicine is used in addition to traditional medical treatment. However, it is often used as a replacement for traditional medical treatment. If successful, costs might decrease. There is also concern over the qualifications and training of many of the persons who provide alternative medicine.

Many insurance contracts and managed care plans provide limited benefits for chiropractic treatment, and a smaller number cover acupuncture, sometimes as a result of state mandates. However, benefits are often subject to limitations. Some providers of medical benefits will add other types of alternative medicine to their insurance contracts or managed care plans if the employer is willing to pay an increased premium. Employers may be willing to pay this cost as a response to employee interest or to differentiate their medical expense plan from those of other employers. Results of surveys vary, but it appears that over half of employers have benefit plans that cover chiropractic services, about 20 percent have plans that cover acupuncture, and about 10 percent have plans that cover some other forms of alternative medicine.

To control costs, coverage of alternative medicine is subject to a variety of controls. These include one or more of the following:

Annual or lifetime dollar limits

Limits on the number of annual visits

A requirement that treatment is for specified medical conditions

A requirement for a referral from a primary care physician