e-Texas e-Texassmaller smarter faster governmentDecember, 2000
Carole Keeton Rylander
Texas Comptroller of Public Accounts

Recommendations of the Texas Comptroller

Chapter 8: Health and Human Services

Encourage the Federal

Government to Expand the

Use of Medical Savings Accounts


Tax-free Medical Savings Accounts (MSAs) make health insurance policies affordable for those who are uninsured or underinsured. Expanded use of MSAs would allow such persons to purchase affordable health insurance policies with high deductible amounts, while setting aside tax-free money to pay for minor or routine medical care. The federal government should make it easier to qualify for and use these accounts.


Persons who are not covered by employer-financed health insurance generally have to purchase individual health insurance policies that can be very expensive. Unlike employer-sponsored health insurance, individual policies are not tax-deductible and do not benefit from the reduced prices large groups can receive. Those buying individual policies often opt for policies with relatively high deductibles, which have more affordable monthly payments.

MSAs are designed to allow their users to set up tax-deferred savings or investment accounts in conjunction with high-deductible catastrophic health insurance policies. The tax-deferred funds then are used to pay for most minor or routine medical care, while major health care expenses are covered with the high-deductible health insurance policy.[1] Money contributed to an MSA is exempt from taxable income in the same way as money contributed to an individual retirement account. A tax-free MSA gives people an incentive to be economical in their use of medical services, because people with employment-based insurance often are insulated from the true cost of their health care.

Preliminary research indicates that MSAs could help reduce the nation’s number of uninsured. When Congress authorized an MSA demonstration project in 1996, it found that about 40 percent of the people buying MSA plans were previously uninsured.[1] As of September 2000, however, only 100,000 accounts had been established under the pilot project, even though its cap is 750,000 accounts.[1]

At least one observer has attributed this low response to overregulation by the federal government.[2] The demonstration program included many restrictions that made it confusing to everyone involved, including potential applicants, insurance companies, and employers. MSAs are restricted to individuals who work for a company with 50 or fewer employees, or are self-employed.

Other problems that inhibit the growth of MSAs are the law’s inflexible requirements for deductibles. Workers who already had basic insurance plans with different deductibles, either higher or lower, could not get medical savings accounts.

Another confusing part of the law was not permitting contributions by both employers and employees. Most benefit plans involve employers and workers sharing the cost.

Federal law could encourage the expansion of the MSA program by allowing a wider range of deductibles, eliminating limits on contributions and allowing greater participation. Other changes that could make the program more appealing to consumers and insurance companies include permitting large corporations to offer such programs and eliminating financial limits in the program that discourage coverage of mental health services and prescription drugs.

Some lawmakers would like to see the federal MSA pilot program go beyond its current end date of December 31, 2000, and become permanent. They also would like to lower the minimum deductible for accompanying catastrophic health plans to $1,000 for an individual and $2,000 for families.

Opponents to MSAs counter that their widespread use would primarily attract healthy people and pull them out of the regular insurance market. They contend that, under the present insurance system, this group subsidizes coverage for people who incur higher medical costs; their departure could drive up health care costs for others. Comments from some users of MSAs, however, indicate that this notion may be oversimplified at best. Bret Schundler, Mayor of Jersey City, New Jersey, has said that some city employees with health problems were attracted to MSAs when the city began offering them because the program gave them greater flexibility in accessing health care.[3]

MSAs, moreover, may be combined with high-deductible individual policies to offer an alternative for employers who could not afford to offer conventional health insurance.


A state resolution encouraging the US Congress to extend the Medical Savings Account (MSA) option and remove barriers in current legislation to allow greater use of MSAs should be enacted.

Fiscal Impact

Savings to state and local governments cannot be estimated. To the extent that businesses offer this benefit to their employees, federal government tax revenue could decline as a result of this recommendation, but the amount cannot be determined at this time.

[1] John C. Goodman and Gerald L. Musgrave, “Controlling Health Care Costs with Medical Savings Accounts,” National Center for Policy Analysis Report No. 168 (January 1992) (http://www.ncpa.org/studies/s168/s168.html). (Internet document.)

[2] Merrill Matthews, Jr. and Jack Strayer, “Making Medical Savings Accounts Better,” National Center for Policy Analysis Report No. 295 (June 11, 1999) (http://www.ncpa.org/ba/ba295.html). (Internet document.)

[1 ] “Medical Savings Plan Misses Its Potential,” New York Times (September 17, 2000).

[2 ] National Center for Policy Analysis President John Goodman in “Will Medical Savings Accounts Stay or Go?” Medical Industry Today (May 11, 2000), p. 45.

[3] Telephone interview with Bret Schundler, Mayor of Jersey City, New Jersey, October 27, 1999.

e-Texas is an initiative of Carole Keeton Rylander, Texas Comptroller of Public Accounts
Post Office Box 13528, Capitol Station
Austin, Texas

Privacy Policy