BUYERS EAGERLY SIGN UP FOR NEW MEDICAL SAVINGS : PILOT PLAN GIVES TAX ADVANTAGE ON ACCOUNTS.

Byline: Deborah Adamson Daily News Staff Writer

When it comes to health plans, Nick Hale is a risk taker.

He jumped at the chance to switch to medical savings accounts for his company, Axo Sport of Valencia, even if it is a new health insurance program.

In fact, the general manager of the motorcycle apparel maker wanted his company to be the first in California to offer medical savings accounts to employees.

``It's a brilliant idea if it works as well as it looks on paper,'' Hale said.

He figures it will lower his company's health care costs while giving his workers complete choice of their own doctors.

``The managers know about it, and they're excited,'' he said.

Medical savings accounts have been taking the country by storm. Supporters tout them as an answer to escalating medical costs and restrictions on choice of doctors, while detractors say it will ruin the health care system in the long run.

Last August, the federal Health Insurance Portability and Accountability Act of 1996 authorized authorized tax advantages for medical savings accounts as a four-year pilot program. The act took effect Jan. 1.

Self-employed workers, uninsured workers and employees of businesses with 50 or fewer on the payroll qualify for the program. There is a theoretical limit of 750,000 accounts, but industry experts say anyone with an MSA will get to keep it if it is opened by Sept. 1.

What are MSAs? They are savings or investment accounts into which the worker or an employer deposits a limited amount of money per year.

The money can be withdrawn to pay for medical expenses to meet a deductible or co-payment of a health-insurance policy. Patients can see any doctor they want and even pay for treatment not normally covered by their policy but allowed under the IRS code, such as dental care and vision care.

The government requires that MSAs be established in conjunction with high-deductible health insurance policies.

The idea is for smaller medical expenditures to be paid out of the MSA while larger expenses, as for surgery, are covered by catastrophic insurance.

High-deductible insurance is defined by law as having deductibles ranging from $1,500 to $3,000 for an individual and $2,250 to $4,500 for a family.

Individuals can put in a maximum of 65 percent of their deductible into the MSA each year, while families can contribute up to 75 percent.

Either the patient or employer funds the account each year. A combination of payments from both sources is not allowed within the same year.

While employers aren't required to fund the account - leaving employees to cough up the first few thousand themselves - many companies opt to do so.

``Under virtually every plan I know, the employer makes the contribution,'' said Merrill Matthews, vice president of domestic policy at the National Center for Policy Analysis, a Dallas think tank.

But if an employer doesn't offer MSAs, an employee who wants one is out of luck without a side business that makes enough to fund one.

In addition, under the federal MSA program, out-of-pocket expenses are capped at $3,000 for individuals and $5,500 for families.

Enthusiasts point out how an MSA works - for example, for an individual with deductibles of $1,500 and a catastrophic insurance policy requiring the patient to kick in 20 percent of expenses up to $10,000. That means the individual normally would be liable for meeting the $1,500 in deductibles and at most $2,000 more. So total out-of-pocket expenses would be $3,500. But if an individual is participating in the MSA, federal guidelines say the patient won't have to pay more than $3,000.

Unused MSA funds are kept in the patient's account.

The money is rolled over to the following year, tax-deductible and tax-deferred, similar to an IRA.

That means contributions to an MSA can be deducted against current taxes.

The MSA also is free of federal and California taxes until the money is withdrawn when the account holder is 65. There is a 15 percent penalty, plus the applicable taxes, for early withdrawals - with two exceptions. Withdrawals for medical purposes are free of taxes and penalties. So are withdrawals by one who becomes disabled. But taking the money out for other uses will incur taxes and penalties.

So if Jane Smith has a deductible of $2,000, she or her employer can put a maximum of $1,300 per year into the MSA. She can use that money to go to her favorite doctor and even pay for acupuncture treatments. Whatever she does not use for the year is rolled over to the following year.

Once Smith reaches her $2,000 deductible - counting only expenses covered under her policy - the catastrophic insurance coverage kicks in.

Smith accumulates money in the account and, at 65, she is able to withdraw that money for any purpose without penalties. Taxes will apply at that time.

Proponents say that since patients get to keep whatever they don't use in their MSA accounts, they become better shoppers of medical treatment. Instead of checking into the nearest hospital because it is convenient and the insurance company would pay for it, they would be motivated to shop around.

Insurers may offer a high-deductible policy and also handle the policy holder's MSA account. But if an insurer does not handle medical savings accounts, the individual can choose another institution to the MSA. Mellon Bank and Merrill Lynch are thinking of offering the service, Matthews said.

Insurance agents and brokers can give information on opening MSAs.

A few dozen companies are offering MSAs nationwide. They include Medical Savings Insurance, Time Insurance Co. of Milwaukee, Wis., MediSmart of Newport Beach and Blue Shield of California in San Francisco.

Medical Savings can handle both MSA and insurance coverage. It charges a monthly administrative fee of $8.75. It pays no interest on the MSA for this year, but will pay competitive money market rates starting next year.

Time Insurance also offers both services. It doesn't charge a fee and pays 4.5 percent when the balance reaches $750. The rate may change in the second year.

MediSmart only administers the MSA and doesn't offer insurance coverage. The fee is 4.5 percent of the insurance premium and the MSA balance. No interest is paid in the first year. In subsequent years, the account may pay around 5 percent.

Blue Shield offers high-deductible insurance coverage, but has not yet designated a company to take care of its MSAs. A decision is expected soon.

A lot of hope is riding on medical savings accounts.

Doctors see them as a viable option to managed care. Patients get to choose their own doctors, and there is no third-party gatekeeper involved in selections of type of care.

``We've been strongly in favor (of the MSA concept) for over 10 years now,'' said Mark Schiller, president of the California Association of American Physicians and Surgeons in San Francisco. ``We are concerned about patients' having freedom of choice in their care, and we're tremendously excited by the increasing interest in it.''

Supporters hope MSAs will reduce health care costs as patients exercise more discretion in spending because they get to keep whatever they don't spend. The approach could lower employer expenses, too - high-deductible insurance has smaller premiums.

But consumer groups don't like it because they fear it will hurt the sickly poor if money flows out of the insurance premium pool into MSAs. The pool balances the risks of covering both sick and healthy people.

``We have very deep concerns about the effect on the health care system,'' said Jamie Court, director of Consumers For Quality Care in Santa Monica.

``Well people are allowed to pull money out of the risk pool designed to pay claims when people get sick,'' he said. MSAs ``benefit healthy people with a lot of money. It's the sick people without much money who won't do well.''

There are practical drawbacks as well.

Some high-deductible policies don't offer coverage for mundane medical costs, such as maternity care, said Jeanne Finberg, head of the health group at Consumers Union, publisher of Consumer Reports in San Francisco.

Medical Savings Insurance doesn't. Time Insurance Co. covers maternity care, but starting no sooner than nine months after the policy is purchased. However, Blue Shield of California covers maternity expenses.

The key is to ``read the fine print,'' Finberg said.

Despite its drawbacks, some believe the MSA is a promising step forward in solving the health care crisis and restoring some patient liberties.

``It's terrific,'' said Greg Scandlen, publisher of The Patient Power Report in Frederick, Md. ``It puts the patient in charge of his health care.''

Maximum Annual MSA Contribution

Individual Coverage

$1,500 to $2,250 deductible $975 to $1,462.50

Family Coverage

$3,000 to $4,500 deductible $2,250 to $3,375

?13SOURCE: Daily News Research

FOR MORE INFORMATION

Council for Affordable Health Insurance

For a summary of the MSA law and a list of companies that offer the accounts, send $10, your name, address and phone number to the council at 112 Southwest St., Alexandria, VA 22314. Make the check payable to the council.

Cato Institute 

The public policy think tank sells copies of the ``Patient Power'' booklet. To order, call [phone]. The cost is $4.95. You may also send a check and your name and address to the Cato Institute, 938 Howard St. Suite 202, San Francisco, CA 94103.

National Center for Policy Analysis

A two-page analysis of the MSA law, list of companies that offer these accounts and other background material is available for free. Send a self-addressed letter envelope with 55 cents in postage to 12655 North Central Expressway, Suite 720, Dallas, TX 75243. You also may download other MSA reports from its Web site at http://www.ncpa.org.

AmTerican Medical Association

Free brochure. Send a self-addressed envelope (to fit the 7-inch by 11-inch brochure) with 78 cents in postage to AMA, Health Policy Research, 515 N. State St., Chicago, IL 60610. Address it to Gabriela Gonzalez.

California Association of American Physicians and Surgeons

For free information, call [phone].

Daily News Research

CAPTION(S):

Photo, 2 Boxes

Photo: (color) Nick Hale, manager of Axo Sport of Valencia, was ready to buy when medical savings account plans became available.

John Lazar/Special to the Daily News

Box: (1) Maximum Annual MSA Contribution (see text)

(2) FOR YOUR INFORMATION (see text)