Medical Savings Account: Benefits and How It Works in India

Costs involved in healthcare have a habit of sneaking up on us. It takes just one hospitalization, a surgery or even a long treatment process to deplete our savings, which have taken years to accumulate.

This is where the concept of having a designated medical savings account, i.e., an account meant exclusively for healthcare costs, comes into play. It helps financial advisors as well as individuals keep their health and finances secure at the same time.

But then again, what exactly is a medical savings account? What role does it play in India? And is it the same as health insurance? All your questions will be answered here in detail, without adding any complexity.

What is a Medical Savings Account?

A Medical Savings Account (MSA) refers to an account that can be used exclusively for making payments in case of medical emergencies or regular check-ups and treatments. The main idea behind MSA is to develop a separate financial shield that works as an add-on to the existing health insurance plans, covering any other expenses apart from the ones paid by insurance companies.

In nations such as the United States, MSAs are defined products with tax benefits embedded within them under relevant statutes. In India, there is no such separate category of product called MSA; rather, a set of instruments put together in concert serves to achieve the very same objective. That objective is to construct and maintain a dedicated corpus for health care purposes.

The purpose of any Medical Savings Account anywhere around the world is one and the same: to guarantee that whenever the need for healthcare arises, you are not left rummaging for money in a state of desperation, raiding your emergency fund, or borrowing money from wherever you can get it.

Why a Separate Medical Savings Account?

Everyone thinks that just buying health insurance will be enough. It certainly is essential, but there are some gaps which even comprehensive health insurance won't take care of. These include:

• OPD consultations: Doctors' consultations, specialists' fees, follow-up visits
• Diagnostic tests: Blood tests, x-rays, MRI scans for cases where hospitalization isn't required
• Dental and vision care services: Except where an add-on rider is purchased specifically for it
• Medicines prescribed for the treatment of chronic conditions: Such as diabetes, high blood pressure, thyroid, and so forth
• Prescription medications for chronic conditions: Like diabetes, hypertension, thyroid, etc.
• Costs related to pregnancy: Particularly the waiting period of a fresh health insurance policy.
• Waiting periods associated with pre-existing conditions: Cost incurred during the first exclusion period.
• Deductibles and co-payment portions of claims even after taking health insurance.

Such costs are common and expected. For a family coping with one or more chronic illnesses, the amount spent annually in these categories alone could easily be anywhere between ₹50,000 and ₹1,00,000. The medical savings account fulfills this precise purpose.

Working of Medical Savings Account in India

India doesn't have a legislative MSA product like the US. Instead, people create their medical savings fund using a blend of various financial products available in the market. Let us see how they fit into the scheme of things.

1. Health Insurance with OPD Coverage

A few health insurance providers already offer OPD coverage in their insurance plan where they cover the cost of consultation with doctors, pharmacies, and diagnostics despite there being no need for hospitalization. Even though technically insurance and not savings, they behave very much like MSAs.

Plans like those offered by:

• Niva Bupa
• Aditya Birla Health Insurance
• Star Health

consider OPD expenses. It is worthwhile to look at such plans before setting aside money separately for OPD expenses.

2. Benefits from Employer and Flexi Benefit Plans

Employers, especially large corporations and multinationals, offer flexible benefit plans (FBP) or medical reimbursements as part of their payroll structures. Employees have an option to deduct certain amounts from their total cost-to-company (CTC) and get reimbursed for any incurred medical bills.

• Prior to the Union Budget of 2018, there was tax exemption on medical reimbursement up to ₹15,000 per annum for salaried employees.
• Later on, it was clubbed under the standard deduction of ₹50,000 per annum.
• But still, some employers keep a provision of medical benefits as a part of the payroll system to maximize the take-home salary.

3. Section 80D: The Closest India Gets to an MSA Tax Benefit

Under Section 80D of the Income Tax Act, individuals can claim deductions for health insurance premiums paid. The limits are:

• ₹25,000 per year for self, spouse, and dependent children (₹50,000 if any of them are senior citizens)
• An additional ₹25,000 for parents' health insurance premium (₹50,000 if parents are senior citizens)
• In cases where senior citizen parents do not have health insurance, up to ₹50,000 spent on their medical treatment is deductible

The maximum possible deduction under Section 80D is ₹1,00,000 (when both the individual's family and senior citizen parents are covered).

This deduction is available under the old tax regime. Under the new tax regime, Section 80D deductions are not applicable, a consideration worth factoring in when choosing your tax filing option.

While Section 80D covers insurance premiums rather than savings account contributions, it creates a tax-advantaged framework for managing medical costs, which is the functional equivalent of an MSA benefit.

4. Medical Savings in Liquid Investments

A portion of the medical expenses that are not covered by insurance plans or employer’s plan needs to be set aside separately as medical savings. Some financial advisors suggest saving medical expenses in liquid instruments. The following investments are popular:

• Liquid Mutual Funds: Liquid mutual funds are invested in debt instruments that pay returns slightly better than a savings account with T+1 day redeemable nature. These are very practical for building medical savings since they will be easily available and won't restrict your money.
• High Yield Savings Account: High yield savings account earns better interest on bigger balance than normal saving account. Having a specific savings account dedicated to build medical corpus will help in building the habit of saving money.
• Short Duration Debt Fund: If a medical corpus needs to be built for a relatively long term medical purpose like planned surgery, etc., then short duration debt funds may prove beneficial compared to savings accounts with relatively low risks.
• Fixed Deposits: Fixed deposits provide good returns, but if one chooses to make FD linked sweep-in fixed deposit to your savings account, it will enable better returns while earning money. The deposits can be withdrawn at any point in time without much hassle of redemption.

Discipline in maintaining this savings separately without dipping into it for vacation, emergency reasons other than medical or other impulsive decisions is key to making it a medical savings account.

How Much Money Should You Have in Your Medical Savings Account?

The answer to this question is not always set in stone. But, the following approach recommended by financial planners could provide you with an estimate:

Step 1

First, estimate your out-of-pocket medical expenditure for the year. Calculate all OPD bills, medication costs, diagnostics, dentist charges, and co-payment amounts spent by you last year.

Step 2

Next, take into account any unanticipated medical expenditure. Medical expenditure can sometimes go beyond expectations. It is suggested that the safety buffer be 1.5 to 2 times the average annual amount.

Step 3

Consider the composition of your family as well as health conditions. A couple with young kids is expected to incur more medical expenses compared to a healthy couple.

Step 4

Take note of the details about your insurance plan. Find out the deductible, co-payments, and sub-limits. This information would determine how much money you will have to pay in case of hospitalisation.

A good estimate provided by financial planners would be 3 to 6 months of your expected annual medical expenditure. In the case of a middle-class urban household, the money would range from ₹50,000 to ₹2,00,000.

Medical Savings Account versus Health Insurance: What Are They?

Both concepts work on very different principles and one cannot replace the other under any circumstances.

While health insurance will provide cover against large unexpected medical expenses like hospitalization, surgeries, treatment in ICU units, etc., a proper family floater plan with a sum assured ranging from ₹10 lakhs to ₹25 lakhs can prevent a health crisis from turning into a financial disaster.

A medical savings account caters to regular but predictable expenses that would be out-of-pocket expenses for which claiming insurance would either not be feasible or would be disadvantageous for you in the long run. Claiming insurance for a simple ₹500 doctor visitation makes neither sense nor is advised as it may impact your claim bonus and increase your premiums in the coming years.

What needs to be done is both, insurance for larger medical expenses and savings account for smaller health-related expenses.

Medical Savings Account for the Unemployed

Employees get some sort of employer assistance regarding:

• Health insurance
• CTC
• Medical reimbursements

Freelancers or gig economy people or self-employed individuals have to take care of everything themselves.

That is why medical savings accounts become even more important for such people since:

• Employer-sponsored group insurance plans are not available as safety nets
• Inflows might be sporadic, making unexpected expenses even more burdensome
• Health insurance policies that aren't subsidized by employers have higher premiums

The self-employed person can enjoy a full exemption from the premium payment made toward individual and family health insurance policy costs under section 80D of the earlier income tax law system, which compensates partly for individual plan costs.

Apart from insurance, setting aside money for a self-medical corpus through investment in liquid mutual funds and savings accounts is key to any freelance budget plan.

Tips for Building and Managing Your Medical Corpus

1. Make it an automatic process

Transfer a fixed amount to the dedicated medical savings every month automatically through a direct bank transfer. Automation ensures that you do not miss the contribution even when finances are lean.

2. Maintain a dedicated fund

Don't put your health funds into your contingency fund or holiday corpus. Dedicated funds ensure mental separation.

3. Annual assessment

If you experience significant changes in your family structure, a baby born, older parents or newly diagnosed health conditions, reassess the corpus amount each year.

4. Track out-of-pocket spending

Maintaining a simple log of annual medical expenses gives you data to refine your corpus target over time. Most families are surprised when they add it all up.

5. Do not over-invest in illiquid products

Medical emergencies do not wait. Avoid locking your medical savings into fixed deposits with long lock-ins, PPF, or equity mutual funds that can be volatile in the short term.

Key Takeaways

• A medical savings account is a dedicated financial reserve for health-related expenses, covering costs that insurance does not.
• In India, it is built using a combination of health insurance, Section 80D tax deductions, employer medical benefits, and personal savings in liquid instruments.
• It is not a replacement for health insurance, it is a complement that covers OPD, diagnostics, medicines, and out-of-pocket costs.
• The right corpus size depends on your family's health history, insurance coverage gaps, and annual out-of-pocket spend.
• Keeping the fund separate, automating contributions, and reviewing annually are the habits that make it work over time.

A medical savings account will not make you immune to health expenses, nothing does. But it ensures that when those expenses arrive, your financial plan does not unravel along with your health.