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The Honolulu Advertiser

Posted on: Monday, October 27, 2003

State weighs medical savings accounts

By Bruce Dunford
Associated Press

The Lingle administration is exploring a possible remedy to soaring medical health coverage costs in Hawai'i — tax-exempt medical savings accounts, which give tax breaks to those who set aside money to pay for their own healthcare.

The plans would inject competition into a health insurance market dominated by two major players — the Hawaii Medical Services Association and Kaiser Permanente.

But state auditor Marion Higa says the proposal raises several legal, social and financial questions and likely would have little impact on healthcare costs.

If approved, Hawai'i residents would be able to establish savings accounts that would be used for routine medical costs, and would back up health-insurance policies with higher deductibles to cover catastrophic medical expenses.

Under a proposed state plan, and a federal model supported by President Bush and the Republican majority in Congress, the money put into the savings account is tax deductible and the interest tax-exempt if it is used for medical purposes.

In a recent report to the Legislature, Higa said that if Hawai'i's experience is similar to that of other states, "medical savings accounts should have little or no impact on healthcare costs or practices because of relatively low usage."

"We also found that, given the limited interest in medical savings accounts nationwide, and very likely in Hawai'i, the potential for any negative social and financial impacts ... appears to be minimal," she said.

However, proposed federal legislation that would broaden the scope and application of medical savings accounts (MSAs) "may result in substantial tax revenue loss to Hawai'i," Higa said.

Based on a federal projection, Hawai'i could lose $900,000 in tax revenue in 2004, with projected revenue losses rising to $5.5 million in 2005, $9.9 million in 2006, or a total of $208 million by 2013, her report said.

The state Senate earlier this year approved a bill that would allow private health insurers, mutual benefit societies and health maintenance organizations to offer the high-deductible policies in conjunction with MSAs already recognized in the state tax code but nowhere else in state law. That measure remains pending before the House.

Higa said the legislation allowing MSAs may face legal conflicts with the U.S. Employee Retirement Income Security Act because it may be considered as establishing employee benefit plans and therefore be superseded by the federal law.

Under the state's 1974 Hawai'i Prepaid Health Care Act, which guarantees employer-paid healthcare to employees who work 20 hours or more a week for four consecutive weeks, the MSAs may not meet the requirements for approval by the state's Department of Labor and Industrial Relations, Higa said.

"If passed, enabling legislation only begins the process by which medical savings account health care packages become a reality," Higa said. "These packages require scrutiny by and approval from the insurance commissioner and the Department of Labor and Industrial Relations, including review by the Prepaid Health Care Advisory Council."

The largely discretionary approval process may raise even more uncertainties, she said.

In response to Higa's findings, Mark Recktenwald, director of the Department of Commerce and Consumer Affairs, disagreed that there would be negative impacts.

"The availability of MSAs would increase the options consumers have in financing their healthcare expenditures," he said. "Currently, consumers are limited in their options with one large preferred provider organization and a major health maintenance organization dominating the market."