Medicare Medical Savings Account (MSA) Plans are self-directed medical spending accounts similar to Health Savings Account (HSA) plans. With MSA plans, you choose your doctor and pay from your MSA account.

Medicare covers many of your healthcare costs after you turn 65 years old, but it doesn’t cover everything. You may be eligible for a high-deductible Medicare plan called a Medicare medical savings account (MSA). These health plans use a flexible spending account that’s funded each year by the government.

For some Medicare users, these plans are a way to stretch their money further by covering the cost of their deductibles and copays.

Medicare savings accounts aren’t as widely used as you might think — probably because there’s a lot of confusion about who’s eligible and how they work. This article will cover the basics of Medicare savings accounts, including the pros and cons of having one.

Like employer-supported health savings accounts (HSAs), Medicare MSAs are an option for people with high-deductible, private health insurance plans. The major difference is that MSAs are a type of Medicare Advantage plan, also known as Medicare Part C. MSAs are sold by private insurance companies that contract with banks to create savings accounts.

If you have an MSA, Medicare seeds that account with a certain amount of money at the beginning of each year. The money that’s deposited in your MSA is tax-exempt. As long as you use the money in your MSA for eligible healthcare costs, it’s tax-free to withdraw.

Once you have reached your annual deductible using the MSA, the rest of your Medicare-eligible healthcare costs are covered through the end of the year.

Vision plans, hearing aids, and dental coverage are offered if you decide to pay an additional premium, and you can use the MSA for associated costs.

Prescription drug coverage, Medicare Part D, isn’t automatically covered under an MSA. You can purchase Medicare Part D coverage separately, and the money you spend on prescription drugs can still come out of your Medicare MSA. However, copays on drugs won’t count toward your deductible. They’ll count toward the Medicare Part D’s out-of-pocket spending limit.

A Medicare savings account is required to cover anything that would be covered by Original Medicare, including Medicare Part A (hospital care) and Medicare Part B (outpatient health care).

Since Medicare savings account plans are Medicare Advantage plans (Part C), the network of doctors and healthcare coverage may be more comprehensive than Original Medicare.

A Medicare MSA doesn’t automatically cover vision, dental, prescription drugs, or hearing aids. You can add these types of coverage to your plan, but they’ll require an additional monthly premium.

If you have an MSA, contact your State Health Insurance Assistance Program (SHIP) to see which extra insurance plans are available in your area.

A Medicare MSA does not cover cosmetic and elective procedures. Services that have not been designated as medically necessary by a doctor — such as holistic healthcare procedures, alternative medicine, and nutritional supplements — aren’t covered either. Physical therapy, diagnostic tests, and chiropractic care may be covered on a case-by-case basis.

If you have a Medicare MSA plan, you’ll still need to pay your Medicare Part B monthly premium.

You must also pay a premium to enroll in Medicare Part D separately since Medicare savings accounts don’t cover prescription drugs, and you’re legally required to have that coverage.

Once you get your initial deposit, you may move the money from your Medicare MSA to a savings account provided by a different financial institution. If you choose to move the funds, you may be subject to the new bank’s rules about minimum balances, transfer fees, or interest rates.

There are also penalties and fees for withdrawing money for anything other than approved health expenses.

Some people who are eligible for Medicare don’t qualify for a Medicare savings account. You’re not eligible for an MSA if:

  • you’re eligible for Medicaid
  • you’re in hospice care
  • you have end stage renal disease
  • you already have health coverage that would cover all or part of your annual deductible
  • you live outside of the United States for half the year or more

You can enroll in a Medicare savings account during the annual election period between October 15 and December 7 each year. You can also enroll in the program when you first sign up for Medicare Part B.

Before you enroll in an MSA, there are two key questions you need to ask:

  • What will the deductible be? Plans with MSAs typically have a very high deductible.
  • What will the annual deposit from Medicare be? Subtract the annual deposit from the deductible amount, and you can see how much of the deductible you’ll be responsible for before Medicare covers your care.

For example, if the deductible is $4,000 and Medicare is contributing $1,000 to your MSA, you’ll be responsible for the remaining $3,000 out of pocket before your care is covered.

A Medicare savings account could make sense if you spend a lot on high premiums and would prefer to allocate those resources toward a deductible. Even though a high deductible may give you sticker shock at first, these plans cap your spending for the year, so you have a clear idea of the maximum amount you might have to pay.

In other words, an MSA could stabilize your annual healthcare spending.

Medicare savings accounts are meant to help people with out-of-pocket healthcare costs and give them more control over how much they spend on healthcare. The deductibles on these plans are much higher than comparable plans. However, MSAs guarantee a significant, tax-free deposit toward your deductible every year.

If you’re considering a Medicare savings account, you may want to speak to a financial planner or call Medicare directly at (800-633-4227) to see if an MSA is right for you.