MEDICAL SAVINGS ACCOUNTS BECOME TAXING ISSUE.

Byline: Paul Heldman Bloomberg Business News

Penny Blubaugh swears by medical savings accounts for reasons that worry the managed-care industry.

``We don't have to go to any certain doctors. We have a choice,'' said the 46-year-old secretary, voicing an often-heard complaint about managed-care systems that limit choices.

Now, the Republican-led Congress is trying to expand the use of medical savings accounts or MSAs by giving them the tax advantages that go with other forms of health insurance.

The tax-free medical accounts that Congress has in mind would work much like Penny Blubaugh's in the Danville, Ohio, school system where she works. The system replaced its traditional health insurance with these savings accounts more than two years ago in response to the rising cost of coverage.

Her employer now deposits money into the savings account for her to pay routine medical bills and then buys her high-deductible health insurance to pay catastrophic health expenses.

She and fellow employees say the combination of medical savings accounts and catastrophic health coverage written by Golden Rule Insurance Co. guarantees that their out-of-pocket costs will be limited, and they have freedom to choose medical services not available in many managed-care plans.

In Congress, the House has attached tax-free medical savings accounts to a popular bill passed by both chambers of Congress earlier this spring to expand access to health coverage.

Under the legislation, money deposited into an MSA by an employer wouldn't be taxable for the employee under the bill. The money would be taxed only if the employee used it for purposes other than health care.

President Clinton has threatened to veto the legislation if it contains MSAs, arguing that they would draw healthy and wealthy Americans while driving up the cost of coverage for everyone else.

It is clear tax-free medical savings accounts would create a competitive threat to managed-care health plans, although health experts are mixed about how formidable the threat would be.

Ira Loss, a Washington health-care industry analyst, sees the savings accounts profiting from a backlash to the cost-containment practices of HMOs, including the limitations placed on choice of doctors.

``It's a gigantic threat'' to HMOs, Loss said.

Ironically, medical savings accounts threaten to do to health maintenance organizations what HMOs have done to traditional fee-for-service insurers over the last 10 years, Loss said: ``take away the better (healthy) risks and therefore the profits.''

That has HMOs such as U.S. Healthcare Inc. and PacifiCare Health Systems Inc. pointing out flaws in medical savings accounts.

They argue that these savings accounts discourage people from seeking preventive care because they get to keep any savings not used to pay medical bills as regular income.

``The person joining an MSA has to choose whether they want to go in and get that mammogram and get that immunization and pay for it with money they could otherwise save or spend on food or entertainment,'' said Dr. Roger Taylor, chief medical officer at Cypress, Calif.-based PacifiCare.

In addition, Taylor agrees with Clinton that tax-deductible MSAs would ``pull healthier and richer patients out of the system and leave the insurance system with the sicker population,'' he said.

Medical savings accounts have come to define the differences between Republicans and Democrats on how best to make health coverage more available and affordable.

They also have become a rallying cry for provider groups and doctors who argue that the growth of managed-care plans has weakened the control of patients and physicians over medical care.

``Some proponents of MSAs wake up in the morning and what they really hate is managed care,'' said Len Nichols, a former health adviser in Clinton's budget office and now a senior research associate at the Urban Institute, a Washington research group.

The issue is central to the fate of health-insurance legislation passed by the House and Senate, now negotiating a final version.

The core legislation has broad congressional support and Clinton's endorsement. It would make it harder for insurers to deny someone coverage on the basis of his or her medical condition.

The House bill contains the tax-free medical savings accounts opposed by Clinton.

While Clinton has promised to veto legislation containing MSAs, he has left open the possibility of supporting a pilot program. A compromise along those lines seems to be in the works. Republicans see medical savings accounts as providing the choice of doctors and services that Americans are losing with the rise of managed-care health plans that control access to the health-care system.