Simulating the impact of medical savings accounts on small business

To simulate whether allowing small businesses to offer employer-funded medical savings accounts (MSAs) would change the amount or type of insurance coverage.

Economic policy evaluation using a national probability sample of nonelderly non-institutionalized Americans from the 1993 Current Population Survey (CPS).

We used a behavioral simulation model to predict the effect of MSAs on the insurance choices of employees of small businesses (and their families). The model predicts spending by each family in a FFS plan, an HMO plan, an MSA, and no insurance. These predictions allow us to compute community-rated premiums for each plan, but with firm-specific load fees. Within each firm, employees then evaluate each option, and the firm decides whether to offer insurance-and what type-based on these evaluations. If firms offer insurance, we consider two scenarios: (1) all workers elect coverage; and (2) workers can decline the coverage in return for a wage increase.

In the long run, under simulated conditions, tax-advantaged MSAs could attract 56 percent of all employees offered a plan by small businesses. However, the fraction of small-business employees offered insurance increases only from 41 percent to 43 percent when MSAs become an option. Many employees now signing up for a FFS plan would switch to MSAs if they were universally available.

Our simulations suggest that MSAs will provide a limited impetus to businesses that do not currently cover insurance. However, MSAs could be desirable to workers in firms that already offer HMOs or standard FFS plans. As a result, expanding MSA availability could make it a major form of insurance for covered workers in small businesses. Overall welfare would increase slightly.