At worst, private health care costs too much while public health care delivers too little. Medical savings accounts might blunt the disadvantages of both systems.
How would you prefer to suffer? Waiting vainly for treatment in an overstretched public medical system, or paying an extremely high price for coverage in a private one?
Although the contrast is hyped, the point is that health care as we know it appears to be unsustainable. Thanks to aging populations (see May 2005 issue), demand keeps climbing while the ability to pay-as-we-go out of earnings keeps falling. The result: restricted services, unfair cost burdens for healthy people in work, or lashes of both. It is no wonder that throughout the developed world there is frequent talk of 'health care in crisis'.
Will MSAs get more people in the (health-insurance) pool?
Enter medical savings accounts (MSAs), recently renamed in America as health savings accounts. Although they are not a cure-all, experience suggests they can cut costs, increase competition and reduce frivolous public spending (see table). They also encourage people previously not covered to join the health insurance pool.
MSAs have an appealing political pedigree. They have a rainbow coalition of supporters, including South Africa's Nelson Mandela, former President Bill Clinton and current President George W Bush. They have been introduced successfully in two countries that approach health care from completely opposite directions: Singapore, which previously had a UK-style national health system; and the US, where medicine is mainly private.
Insure yourself, partially
A form of self insurance
MSAs are a form of self-insurance, designed to cover minor illness and non-essential treatment. Funds paid in earn interest, and they are income-tax-exempt as long as they go only towards medical care. Similar to retirement accounts (e.g. IRAs in the US, ISAs in the UK), unused MSA funds are inheritable at normal tax rates, and they may be tapped for other purposes only after paying a tax penalty.
To own a MSA, the owner must also simultaneously buy third-party-insurance that has an unusually high co-payment threshold; for instance in the US, an individual MSA could pay medical bills up to a legal maximum of $5,100 per year and a family MSA up to $10,200, before the third-party-insurance kicks in. Lower thresholds are possible, depending on the premium, but in any case, an owner may not contribute to his MSA in quantities above his co-payment threshold.
So for the 80% of the non-retired population that at any given time is generally healthy, a MSA covers the bills. For the remaining 20% (which is mostly a different set of people each year), a MSA offers a tax-advantaged route to settling a much higher co-payment in exchange for a much lower insurance premium. If illness turns out to be lengthy or severe, third-party-insurance bears most of the medical costs.
First, do no harm
So far, MSAs have been launched in four countries. In Singapore they are mandatory since 1984, in South Africa they are optional since 1994, and eligibility for the US scheme - which started on a limited scale in 1997 - was expanded in late 2003 to allow most residents the possibility of joining. China has tried MSAs since 1998, but the programme reportedly has bogged down in bureaucratic red-tape.
Because Singapore's MSA system is obligatory, it is hard to compare to what could have been. However, in South Africa and the US the contrast is visible, and results so far are promising.
To contain costs, public health care in South Africa is rationed, which has led increasing numbers of people to buy supplemental, private insurance. Until MSAs launched in 1994, observes Jonas Schreyögg, a researcher affiliated with the Berlin's Technical University and Brussels' European Observatory on Health Systems and Policies, annual premiums were rising at a 20% clip. Today MSAs are chosen by half of private insurance buyers (now about 20% of the population), which has dramatically slowed premium hikes.
A hidden saving here, note Professors Michael Bond and Deborah Knapp of America's Cleveland State University, is in administrative costs. Payment by insurance adds an overhead charge that on average is 15% of a medical bill, say Bond and Knapp, while the overhead for a MSA payment is typically 2%. The potential discount is even greater for people covered by small-company group health policies, where insurance overheads can run as high as 30%.
Schreyögg: MSAs reduce 'moral hazard'
Another, more obvious saving is widely noted by numerous researchers. This is the reduction of so-called 'moral hazard', which Schreyögg defines as "a diminution of welfare due to a lack of pareto-optimal allocation." In plainer English, that means if offered a subsidised good or service, people will tend to take more than they need, which ends up costing the subsidisers more money. "Substantial evidence," say Bond and Knapp, "suggests that low-deductible insurance has raised the demand for medical services."
It has yet to be proven conclusively that MSAs reduce frivolous overuse of doctors. Still, some economic simulations in the US suggest they cut such spending by up to 15%.
MSAs, compared to 'pure' public health and private insurance systems
| Pros |
Cons |
Cheaper, because of:
- lower administration costs, and
- reduced frivolous spending (also known as 'moral hazard') |
'Adverse selection', i.e. premiums on sicker people could rise unfairly |
| More choice for patients, hence more competition among care-providers |
Less-concentrated buyer leverage, hence reduced competition among care-providers |
| 'Positive selection', i.e. people previously uninsured join the health insurance pool |
|
Another MSA-driven economy may come from increased supplier competition. If patients were given more choice in health care purchasing (which tends to be forbidden in public systems and without incentive in private ones), medical providers might vie harder for their business. On the other hand, MSAs may discourage competition, analysts note, because they shift ordinary buying decisions from expert, powerful purchasers at insurance companies to non-expert, dispersed individuals.
Solidarity versus solidarity
The main criticism of MSAs is known to economists as 'adverse selection', or as UK health economists Alan Maynard and Anna Dixon put it, a "lack of solidarity". Maynard, Dixon and others contend that MSAs lump unhealthier people into high-risk pools, pushing their premiums up as much as 3-4 fold. MSA proponents counter that both Singapore and the US avoid this, the former through a mandatory system and the latter through rules that strictly limit exclusions.
Researchers Bond and Knapp go one step further to turn the lack-of-solidarity argument on its head. According to their analysis of US data, 20% of MSA purchasers (who are simultaneously obliged to buy a high co-payment health policy) previously were simply uninsured. Bond and Knapp reckon these are 'healthier' people, who prefer to carry their own risk for minor sickness rather than pay conventional insurance premiums, but still want coverage in the event of a catastrophic illness.
The net effect of this healthier 20% becoming insured is lower premiums - for everybody. No doubt the healthier group is buying MSAs out of self interest, but by simultaneously adding to the pool of insured, they spread treatment costs of the less-healthy over a larger base. In contrast to 'adverse selection', Bond and Knapp label this 'positive selection'. In plainer English, it might just be called increased solidarity.
