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Is managed care the only way to control health care costs and ensure quality? No, says J. Patrick Rooney.

Mr. Rooney, who led Golden Rule Insurance Co. for nearly two decades before becoming chairman emeritus last year, has another idea: medical savings accounts linked to high-deductible health insurance policies.

Since the early 1990s, Mr. Rooney has been pushing MSAs, one of the few new ideas to emerge on financing health care since the advent of managed health care.

The concept of MSAs is straightforward: set a very high deductible. Then, the employer contributes some of the premium savings to a special account. Employees can withdraw money from the account to pay uncovered health expenses or keep the funds for their own use.

With that financial incentive, employees are more likely to use health care services carefully, while still retaining the ability to choose their own health providers, Mr. Rooney said. With such a system, employees will be happier and more productive, he adds.

For Mr. Rooney, MSAs are more than a theoretical concept. Golden Rule, which was founded in Lawrenceville, Ill., by Mr. Rooney's father and today has its major operations in Indianapolis, adopted MSAs for its own employees in 1993. And the company lobbied Congress to gain tax-favored status for MSAs, which paid off in 1996 when Congress passed legislation giving MSAs established by small employers new tax breaks under a pilot program.

Mr. Rooney, 69, today has started a new insurance company, Medical Savings Insurance in Long Beach, Calif., which sells MSAs. He recently discussed MSAs and other health care issues with Editor-at-Large Jerry Geisel.

You have been one of the most ardent supporters of medical savings accounts. How and when did your interest in MSAs begin?

I was in Washington and heard a speech at a program given by the National Federation of Independent Business Foundation. There was a professor there who discussed a rudimentary idea. It didn't have a name. At that time it was not called medical savings accounts. But he said: "Why don't employers buy insurance for the big bills of employees and give them the savings, which could go into an account for employees and could accumulate?" You cut out the insurance company entirely on these small bills. That would give employees a financial interest -- at least in the small bills -- because if they spent more wisely there would be money that would accumulate in their own account.

When was that?

That was in November 1990. I had the advantage that I had resource people that could work on the idea. We went back and developed it in the spring of 1991.

What was the reaction of the market when you unveiled it?

It wasn't unveiled at first to perspective customers. I went to Rep. Andy Jacobs (D-Ind.), with the idea. I said to him that the problem with this idea is that if people buy insurance, it is tax-deductible. The money they put into the savings account under tax law would have to be taxable income to the employees.

I said to Rep. Jacobs that we ought to change the tax code so that the decision would be neutral from a tax standpoint. He immediately said that is a wonderful idea.

The first place we offered it to was employees of Golden Rule. I said if it is such a wonderful idea, why don't we offer it to ourselves. And we did. We took a lot of precautions to make sure no one felt strong-armed.

We had a lower level management person hold meetings to explain the idea. Employees were each given pads in which they could personally calculate their medical care costs and whether or not it was going to be advantageous to them.

We gave them a choice. We proposed to them giving them a catastrophic plan that would begin after $3,000. After that, it would pay at the rate of 100%. We would put $2,000 into the savings account. We explained to employees that there was a drawback.

We told them that we would have to go to the payroll department and tell them we are putting this money into your account and they will withhold from your paycheck the taxes on the $2,000 we are putting in.

More than 80% of employees chose to do it right off the bat. It is up to 93% today.

How do you measure the performance of the plan compared with what you had before?

We don't have any good measure of the performance except in terms of employee satisfaction. There is no question that employee satisfaction is much higher. I never have had a situation before in my life that employees have stopped me and told me how much they liked our health plan. Since we put this in -- at least in the beginning -- I've had employees who stopped me in the hallway or elevator to tell me how much they liked it.

For employees, there are at least two obvious advantages. The medical savings plan provides first-dollar benefits. If you are an employee who doesn't manage your money well and you have a sick child, you don't have to worry about a deductible. If you take your child to the doctor, you have first-dollar benefits.

In addition, employees can use the account for other kinds of medical care that the insurance does not normally cover. For example, our employee plan never has covered dental and vision care. If you discover your daughter needs orthodontia, you can pay for it out of your medical savings plan. The employees like that very much.

We have had several separate surveys of employees. Those surveys have shown high employee satisfaction connected with the fact that I can get my eyeglasses paid for and I can get my dental work paid for, and if there is money left over, it is my money.

The underlying theory of an MSA is that I will have an incentive to use medical care services more carefully because I get the money in the account and because I have a big deductible.

But does the individual really have the knowledge and the clout to deal with providers to get the best deal?

Two answers to that. Yes. I believe they do.

Secondly, there is a learning effect. Today, I being the consumer -- I being illustrative only -- don't have the knowledge or I am timid and don't want to ask ahead of time, the doctor might bark at me. There is a learning effect. You learn from your co-workers.

Some critics of MSAs say they are great for young, healthy people, but that the older, less well employees will -- if there is a choice -- stay in the traditional indemnity plan or the HMO. The net effect would be that the employer's health care costs really haven't changed very much.

It may. It doesn't have to. My argument is that an enlightened employer will want employees happy and satisfied with the health care plan. If employees are happier and more satisfied, that has utility to me as the employer. The first issue is, do the employees like it better? Incidentally, it may save money.

So, saving money is incidental? What is paramount is that employees have choice and can save money if they use services carefully?


If MSAs are appealing to employees, why haven't more large employers established them?

My opinion is that the people making the decisions within the corporations believe that the employee is not capable of making the decisions. There is a lack of intellectual confidence in the employees. They think the way to control things is to create financial incentives so that the doctors that run the HMOs or whoever is answering the telephone will exercise better oversight of the employees. I'm positive on the ability of human beings to learn either immediately or to learn eventually.

It seems smaller firms are more receptive to MSAs. Why?

You have more of the entrepreneurial personality (at smaller firms). "Oh, I understand." That is kind of the classic response. Or, "It makes sense to me." I'm talking about a boss or owner, very likely someone who built the business.

Golden Rule was very aggressive, i.e., lobbying and advertising, to get Congress to change the tax law -- and ultimately it has -- albeit in a limited way, as it applies to MSAs. Why were you so passionate about this?

I think that is reflective of Pat Rooney's personality. I am a missionary. My fundamental statement on this subject is that we have to do something that is more rational to control health care costs. I do not believe that our society can afford the continuing escalation of health care costs. But rather than denying people medical care, let us create options for the public.

My company offers a PPO. When I go to a PPO doctor, the price is set and it usually is much lower than the doctor's normal charge. Doesn't that seem to be a more effective way to control costs rather than have individuals try to negotiate prices?

I would change the word more. I'm not sure it is the only effective way. I have asked what I would want for my family. I would want protection for my family for big medical bills. But I would want to throw the insurance company out of the small bills.

Last year, Congress gave MSAs tax-effective status, but limited the number of accounts that could be established to 750,000. After four years, Congress will decide whether or not to continue the program. Is that long enough or big enough to prove how well MSAs do or do not work?

I don't think that had much to do with the decision. I think it was a political decision between the Democrats and the Republicans. But granted the current state of the public knowledge and the public understanding of medical savings accounts, it may well take a couple of years before the 750,000 cap is reached.

Let me give you an example. I met with a very prominent Republican from Orange County, Calif. He is devoting his career to managing politics for the Republicans. He leaned back and said he was sorry that he had to admit this, but he said, 'You are going to have to tell me what medical savings accounts are.' Business writers ask me the same thing. The problem with medical savings accounts is that the public doesn't know about them or understand them. Indeed, Dr. Paul Ellwood told me the same was true for HMOs in the beginning.

Do you see that 750,000 cap being lifted one day, and if so, why?

Sure. Any idea like this that gets this much conversation is going to happen.

Does it grate you that you promoted it, yet your own company employees -- because of Golden Rule's size -- can't offer tax-favored MSAs to employees?

I would like it better if I could say to employees: "Now you have the tax savings." But, it is an imperfect world. I'm mature enough about politics to know there is going to be some give and some take.

Are there some companies that shouldn't have MSAs?

I don't know of any reason why any firm should not have them. I would give it to employees as an option. I would not ram it down their throats.

The program has to be designed very carefully. If the employer puts too much in the MSA, the employer can end up spending more than before. Isn't that so?

I'd suggest that the benchmark for the expenditure is the amount of money that now is being spent on the existing health plan.

Some employers, when they go to the medical savings plan, cut back on the expenditure. They put in less money in the account than I would have them do.

My opinion is that if you create increased employee satisfaction, that already is a big deal. Employers are not so benevolent that they would provide this if it wasn't a matter of employee satisfaction. There are employers who, when they go to the medical savings plan, cut back on the expenditure. I think that is a mistake.

I would choose to put the same money into the medical savings plan and the high-deductible plan -- the two would add up together to be the money that is already being spent. If I put more money in the savings account than I thought was really necessary, then I'd say, 'Oh, that is a gain in employee satisfaction.'

So, what should motivate the employer to set up MSAs?

It should be happier employees. I'll treat employees as adults. Let them make decisions for themselves. Out of this, Mr. Employer, the employees will know you treated them with dignity and they will have the opportunity to pay you back.

What do you see as the future of medical savings accounts?

They will be seen as a rational alternative. Rational, well-informed people will prefer to have this as an option. They will have a much more significant share of the market.