Financial institutions and the money management industry could benefit from any breakthrough in the stalled budget talks between President Clinton and Republican lawmakers.
A proposal in the Republican budget package vetoed by the president last month would give some employees a leg up in saving for retirement through special tax-favored accounts, called medical savings accounts, while helping employers hold the line on health-care costs.
MSAs could allow employers, employees and the self-employed to deduct as much as $1.2 billion over the rest of the decade, ostensibly to pay for medical costs.
Only a fraction of this amount would accumulate for more than a few months at a time, however, as most of the money would be used to pay for medical expenses.
Still, that fraction would need to be invested.
Although the proposal is primarily intended to help employers and their employees cut health care expenses, the special accounts could, in fact, double as individual retirement accounts for wage-earners who incur no medical expenses or choose to pay for out-of-pocket health care bills from their paychecks, letting the money in the accounts grow tax-free.
"Is this an IRA? In some ways it's better than an IRA," noted Randolph H. Hardock, partner at Davis & Harman, a Washington law firm, and a former benefits tax counsel at the Treasury Department.
"In an IRA currently you can only take out the money without a penalty at age 591/2. Here, if you take it out before 591/2 for medical expenses, there's no tax, no penalty," he said.
But with wrangling over the federal budget headed into its third month, members of the financial industry are waiting before drawing up plans to market such medical savings accounts or medical IRAs.
The Clinton administration isn't enthused about the proposal, but at the same time, the president hasn't publicly opposed the idea, either. But because the Republican proposal would cost more than $1.2 billion over the remainder of the decade, some Washington observers say the idea could die on the negotiating table.
"It's still something that's pretty preliminary. We need to watch (the proposal) a little bit longer and then see where it goes," said Janet Tosi, a spokeswoman for Putnam Investments, Boston.
The American Bankers Association, a Washington trade group, supports the proposal but is also waiting to see the direction of the budget negotiations, said Virginia Stafford, a spokeswoman.
"We have been supporting accounts that give tax advantages, that would (motivate) people, and banks would want a piece of this business for sure," she said.
Merrill Lynch & Co., the giant securities firm that does extensive research on retirement saving accounts, also hasn't studied the prospects for the accounts, said Dana Cogswell, an associate in the policy planning group in Princeton, N.J.
The mutual fund industry has largely ignored the proposal because of the relatively small amounts people might have left after paying medical bills, and because many mutual fund companies have steep minimums they impose for writing checks.
"The mutual fund industry will gladly accept any money, but we don't think the amount will be very much," said John Collins, a spokesman for the Investment Company Institute, a Washington trade association.
Under the proposal, employees who buy their own health insurance or whose employers pay for conventional health insurance plans would trade the current plans for coverage that picks up the tab for catastrophic illnesses or injuries but pays nothing for the first $1,500 to $3,000 or so in medical bills.
Since catastrophic plans are much cheaper than conventional health insurance plans, the amount saved could be tucked into special medical savings accounts. Contributions would not be subject to taxation and, like IRAs, the assets could be invested in bank accounts or mutual funds.
The Republican plan limits contributions to about the same as IRAs - the deductible on the catastrophic health plan or no more than $2,000. For families, the contribution would be capped at $4,000 or the deductible.
Like IRAs too, investment income in the medical accounts would grow tax-free.
Withdrawals for medical expenses would be tax-free, but a 10% penalty would be imposed on top of income taxes, for other withdrawals.
After age 591/2, Americans could roll over the assets into IRAs or 401(k) plans without paying any penalty. But they would still have to pay taxes on the buildup, just like taking a distribution from an IRA.
Although most workers would presumably draw money from these accounts to pay out-of-pocket medical expenses, supporters of the proposal say some people might prefer to use the accounts to save for retirement.
"If you have got the extra money, it would make much more sense to use your after-tax money and keep this money accumulating than to liquidate it to pay medical bills," said Sylvester J. Schieber, director of research at Watson Wyatt Worldwide, Washington, an employee benefits consulting firm.
But the proposal could pit young, healthy top-earners against older, sicker and lower-paid workers.
For one thing, workers with large medical bills would be unlikely to give up the safety net of employer-provided comprehensive health care coverage for the high-deductible catastrophic plans. Also, the medical accounts would not appeal to rank-and-file workers who are not so well off and who could not afford to set aside a few thousand dollars in such accounts.
Under current tax law, about 2.9 million American families considered "self-employed" - entrepreneurs, part-time employees and small business owners as well as partners in law firms, accounting firms, securities firms and other professional partnerships -can deduct only 30% of their health insurance premiums. Because the Republican proposal would allow medical account contributions to be fully deductible, these people would get a much bigger tax break.
"For the self-employed this is just great, and there are some very strong tax reasons to move into MSAs," Mr. Hardock said.
But big corporations, whose employees are used to rich health care plans, might be slow to adopt medical savings accounts. In most cases companies would fund the MSAs with savings from the cheaper premiums on the catastrophic plans.
The accounts also would appeal to well-paid professionals who can't make tax-deductible contributions to IRAs because they are already covered by company pension plans. "You can have a medical savings account without regard to a pension plan, so you don't have the same restriction as an IRA," said Gerald L. Uslander, principal in the Washington office of William M. Mercer Inc., the employee benefits consulting firm.
But estimates of just how many people would use such accounts or how much money they would tuck away vary wildly. Supporters say 8 million to 16 million working Americans could create the accounts within three years of passage of the legislation and would have $500 to $1,000 left over after paying their medical bills in the first year.
On the other hand, detractors say few people would give up the safety of conventional health insurance plans for the risk of becoming gravely ill and paying out thousands of dollars from their own pockets before the comprehensive insurance kicks in.
Because young, healthy workers would tend to gravitate toward MSAs while older workers would opt for comprehensive health-care plans - a phenomenon known as "adverse selection" - employers would end up paying higher insurance premiums to provide conventional health care coverage. Consequently, they might make far smaller contributions toward MSAs for their healthy workers, making such accounts less attractive.
"Employers would also realize how much they are spending on sicker employees, so they might want to cut back on the comprehensive coverage, and in fact there might be some friction between healthy employees who want MSAs and those who want to stay in a comprehensive plan," said an economist who did not wish to be identified.
Finally, employers who do not buy health insurance but pay employee medical claims above the stipulated deductible as they occur, might actually lose money by contributing money into medical savings accounts for their employees, according to some experts.
"They sound really good when you first look at them, but when you look at the numbers, people tend not to like them," the economist said.