If we purchase a Medical Savings Account, what happens if, in the first year, one of us becomes ill with a catastrophic illness, like cancer or something requiring long-term care?

B.K.

The Medical Savings Account (MSA) is one of the best health insurance ideas around. With an MSA, the policyholder chooses his or her own physician, which medical services to have, and which hospital to visit. In effect, the MSA puts the consumer in charge, rather than an insurance company or health maintenance organization. An MSA allows the patient to make the important health care decisions.
An MSA program combines a high-deductible health plan with a savings vehicle. The money in the MSA is used to pay for out-of-pocket health care costs, such as the amount applied to the insurance deductible, co-insurance, or medical services not covered by insurance. The insurance coverage is normally an indemnity (fee-for-service) plan that does not restrict access to physicians, specialists or facilities. An indemnity plan basically pays the claims incurred by the policyholder (in excess of deductibles and co-insurance) without making coverage decisions. In other words, an indemnity plan pays for medical care chosen by the policyholder, within policy specifications. Because an MSA program normally involves a high-deductible health insurance plan, the policyholder pays a lower premium and saves money.

Federal laws and laws in several states allow some people to make tax-free contributions to the MSA. In other words, the money deposited into the MSA reduces a person's gross income, creating a significant tax savings. Money spent from the MSA for qualified medical expenses is also tax-free. It is not difficult to see that this is a great way to save money and take charge of health care.

Many of the health insurance plans used in conjunction with an MSA are very simple. There is a deductible that must be satisfied by the policyholder, and then the plan plays for all covered expenses in excess of the deductible. This means that if the deductible is $2,000 for a single person covered under the plan, the maximum out-of-pocket expense is $2,000. It doesn't matter if the person has a catastrophic illness. Once the out-of-pocket maximum is satisfied, the insurance plan pays for the rest of qualified expenses.

So the prospect of catastrophic financial loss under an MSA is no greater than under other insurance, and can be less. For example, a person with a $1,000 deductible may also be liable for co-insurance payments beyond the deductible, such as 20 percent of the next $5,000 in expenses, or an additional $1,000. That's a total of $2,000, the same as a person with an MSA plan with a $2,000 deductible and no co-insurance. Factor in the tax savings, and the MSA policyholder pays less out of pocket.

The important issue here is the total out-of-pocket liability, not whether you have an MSA. The maximum out-of-pocket expense under an MSA allowed by law is $3,100 for an individual and $5,700 for a family. Most people with an MSA have a much lower out-of-pocket maximum.

Long-term care is not covered by major medical insurance, except where a convalescent period in a skilled nursing facility might be necessary. Separate long-term care insurance is readily available in the insurance market.