Health insurance is one of those necessary evils that everyone wants, but nobody wants to use. We'd rather be healthy, but don't want to go to the poorhouse if we're not. But even with health insurance, you'll be a lot poorer after you pay the premiums, deductibles, co-pays, and all the items that insurance doesn't cover. A relatively new type of insurance, called a Medical Savings Account (MSA), changes all that.

Paul Mazie, 57, was tired of paying ever-increasing insurance premiums for nothing. Mazie is an independent owner-operator out of Sparta, Mich. Since he's self-employed, he qualified for the MSA. "I was tired of paying the insurance company $480 per month, and I'd still end up paying 20% of some bills, and the co-pays," says Mazie.

That changed one day as he was going down the road. He heard a radio ad for a local agent, Greg Westcott, who was selling MSAs. The deep discounts on health insurance premiums caught Mazie's attention. "Westcott quoted me $173 for the MSA. That did it," Mazie says.

Mazie signed up for the MSA in mid-2000. With the new insurance, he paid $173 per month to Golden Rule Insurance Co. and could go to any doctor or hospital he chose. His premiums are low because the new policy has a $4,650 deductible. He says that wasn't a high risk because he and his wife are rarely ill.

The MSA has two parts. The first part is the traditional health insurance policy (or for some policies, an HMO or Preferred Provider Organization) which is basically for catastrophic coverage (major illness or injury). But Mazie was more excited about the second part of the plan. Called the "Medical Savings Account," this second part is a tax-free savings account to be used for smaller medical expenses. The MSA gave him the most freedom in accessing health care and saving taxes.

For the MSA, the insured makes deposits to an account in a qualified bank or brokerage company. MSA deposits are tax-deductible. Withdrawals from the account are tax-free as long as they're used to pay medical expenses. Individuals can deposit up to 65% of the deductible annually ($1,072 to $1,560); families can deposit 75% ($2,400 to $3,600).

Unlike some cafeteria plans, the insured person owns the MSA and can keep what isn't spent. The money in the MSA account then accumulates until retirement age, when it can be taken out for general expenses. For people who don't withdraw much for regular medical costs, the MSA becomes another retirement savings vehicle. "Instead of paying the insurance company, I put the MSA money into mutual funds," says Mazie.

The MSA is much more flexible than traditional health insurance. It covers procedures that other insurance does not, including prescriptions, vision, dental, chiropractic and even acupuncture and massage therapy. And, all small expenses are paid with the pre-tax dollars from the Medical Savings Account.

MSAs have some drawbacks. Some people are uncomfortable with self-funding the high deductible. Others don't like the additional paperwork. Also, fewer insurance agents sell MSAs (commissions are lower because of the lower premiums). MSAs are also restricted for use by the self-employed or employees of companies with fewer than 50 workers.

Owners of small trucking companies can take advantage of the lower premiums with an MSA employee group plan. While the lower cost makes it attractive for the employer, employees are asked to take on more responsibility than with a traditional low-deductible plan.

Currently, either the employer or the employee can contribute to the savings account portion of the insurance, but not both. Therefore, a new compensation arrangement usually has to be negotiated. As a result, some employers encourage their employees to set up individual plans.

The employer then provides a compensation bonus to cover the cost of the insurance. Congress is considering a change to this rule so both employers and employees can contribute, thus removing the need for a different compensation arrangement.

How To Set Up an MSA

Step One: First, the insured needs to decide whether to sponsor an employer plan or an individually written plan. Mazie didn't face this question since he's self-employed.

Then you need to decide whether to choose a national health plan or if a local HMO or Preferred Provider Organization (PPO) will do. Since the small medical expenses paid out of the MSA can be used at any doctor, clinic or hospital in the country, you can usually choose the lower-cost HMO or PPO for the catastrophic insurance plan.

Step Two: Pick an insurance firm or managed care company, such as an HMO or PPO, for MSA-qualified insurance. Ask your insurance agent or an agent who specializes in MSAs to help. The National Association of Independent Truckers (NAIT) works with an outside agency, MSAver, to provide MSAs to members.

According to David King, NAIT director, the organization tries to offer a variety of benefits to members, including major medical, supplemental policies and now the MSA.

"The majority of our members, over 90%, are self-employed. It's very difficult for independent owner-operators to get access to quality plans," King explains. "With the MSA, the trucker gets legitimate benefits of health insurance that cost less, plus the tax savings that come with the MSA. Since the MSA belongs to the account holder, whatever stays in the account is like found money."

Westcott, who specializes in MSAs, helped Mazie decide what coverage he needed. It included family coverage for himself and his 64-year-old wife, but no special needs. They chose the Golden Rule Co. policy because it gives them the most flexibility while still reducing the lowest monthly premium. "I just don't get sick," says Mazie. "Even with the co-pays and 80/20 sharing on some costs with our old insurance, I'll bet we didn't spend $50 a year on out-of-pocket medical costs."

Westcott noted that not everyone can get the MSA. "Since these policies are individually underwritten, people with medical conditions may not pass underwriting," he says. "I work almost exclusively with the MSAs now, and I would say about 10% who apply through me end up not passing."

Step Three: Choose the level of the deductible. Federal law dictates a minimum and maximum deductible. In 2001, an individual could choose a deductible ranging between $1,650 and $2,400; for a family, the range was between $3,200 and $4,800. The higher the deductible, the lower the premium. Mazie chose the maximum deductible he could get in order to obtain the lowest possible premium payment and greatest possible contributions to the MSA.

Step Four: Choose a Medical Savings Account. Mazie followed Westcott's advice and established his MSA at State Bank of Howard's Grove. The funds earn interest while in the account, and MSA holders have the freedom to put their money into mutual funds at any time. And, MSA assets can be rolled over like an IRA if a better choice comes on the market.

Paying a doctor or hospital from the MSA is easy. Most plans provide a checkbook or a debit card, or both. State Bank of Howard's Grove gave Mazie both options.

While the MSA covers a wider range of medical expenses than traditional insurance, it's up to the insured to keep track of expenses that qualify for the deductible. Dental expenses, for instance, are qualified for the tax-free withdrawals, but aren't covered by many insurance plans.

This means more paperwork. Two documents help the process. The list of qualified expenses is in IRS Publication 502, which can be downloaded at www.irs.ustreas.gov. The second one is the insurance policy that lists the expenses that qualify the deductible.

Step Five: Manage the MSA wisely. This means spending funds wisely, as well as keeping detailed records. The MSA is an interest-bearing account,whose assets can grow into hundreds of thousands of dollars at retirement time. After age 65 you can spend the assets in the account however you want.

People who can pay for medical services on the spot from an MSA have a lot of power. They also have a financial incentive to be smart consumers of medical care and to keep the assets in the savings account growing. It's just like building equity in a home with the monthly payments. At the end, the insured is richer, not the insurance company.

To learn more about MSAs before consulting an agent, see www.msaadvantage.com, www.msanews.com, and www.cahi.org. The Web site www.naabc.com has a searchable database of agents in each state that specialize in MSAs. More information about the NAIT program is on its site at www.naitusa.com.

Editor's note: Shortly before this issue went to press, the fleet Mazie contracted with began a health plan for which he was eligible. He joined, but can resume the MSA if he leaves, and funds in the account can continue to grow.

The author, a freelance writer based in Los Angeles, opened her MSA in 1999.

Savings for the Self-Employed
	Low-Deductible No MSA	High-Deductible MSA
Health insurance premiums	$5,656	$3,213
MSA contribution	$0	$3,450
Out-of-pocket expenses*	$1,450	$0**
Total cash spent on healthcare	$7,096	$6,663
Less: Tax savings	-$632	-$1,506
Net cash spent on healthcare	$6,464	$5,157
Increase in spendable income	($6,464-$5,157)	$1,307
Cash still in MSA	($3,450-$1,450)	$2,000
Total Saved	($1,307+$2,000)	$3,307
* Out-of-pocket expenses include deductibles, co-insurance and other qualified medical expenses. ** Out-of-pocket expenses are paid from MSA.