MSAs: South Africa Leads the Way

Commentary by John C Goodman

Under a pilot program passed by Congress three years ago, tax free Medical Savings Accounts are available in the United States to the self-employed and firms with 50 or fewer employees. The act explicitly excludes large companies that have been on the cutting edge of change in health plan design.

Yet some big business employees have found a way to have tax free MSAs anyway. These include employees of such corporate giants as Chrysler, Coca Cola, Dell, Gillette, Hewlitt Packard, McDonalds, Microsoft, Pfizer, Nike and Reebok. How do they do it? By living in South Africa.

Since 1993, a remarkable experiment has been underway in this southern most African country. Partly due to liberal insurance regulations and partly due to a favorable ruling from the South African equivalent of the IRS, virtually all major forms of insurance are competing on a level playing field. HMOs. PPOs. POSs. MSAs. You name it. Anyone with an idea on how to design a better health insurance plan has been free to try it out.

The results have been stunning. While 75 percent of U.S. employees have been herded into HMOs, in South Africa HMOs have barely made a dent. This despite a major effort by United HealthCare to offer aggressive, American style managed care to South African employers. And some of the very same U.S. companies that have opted for managed care at home are opting for MSAs abroad.

Although most of South Africa's 44 million people take advantage of a free, but understaffed and under-funded public system, about 7 _ million people have private insurance, usually obtained through an employer. And under pressure to both contain costs and supply first-world quality of care, the market is undergoing radical change. Within the last six years MSA plans have soared from nowhere to capture roughly 50 percent of the market. And that trend is likely to continue. Surveys show that more than 75 percent of employers already offer MSA plans to their employees or intend to do so.

Making MSAs Work

In stark contrast, America's experiment with MSAs has been a disappointment. Although the law allows 750,000 families to have a tax-free MSA, only about 54,000 have actually obtained one.

So why are MSAs so much more popular in South Africa than in the US? In America, MSAs are designed to meet the preferences of members of Congress including such MSA opponents as Sen. Edward Kennedy. In South Africa, MSAs are designed to meet the needs of the people who actually use them.

For example, a tax free MSA for an American family must have a $3,000 deductible which applies to all services - drugs, physician care, hospital care, etc. South African MSAs are more flexible. The typical plan has first-dollar insurance coverage for most hospital procedures - on the theory that within hospitals patients don't have much opportunity to exercise choices anyway. On the other hand, a high deductible, (about $1,200), applies to "discretionary expenses," including most services delivered in doctors' offices.

South Africa's more flexible approach also allows more sensible drug coverage. While the high deductible applies to most drugs for ordinary patients, a typical plan pays from the first dollar for drugs for diabetes, asthma and other chronic conditions. The theory: It's not smart to encourage patients to skimp on drugs that prevent more-expensive-to-treat conditions from developing.

Chronic patients also benefit from other arrangements not allowed under U.S. law. Discovery Health (one of the largest sellers of MSA plans) allows its diabetic patients the opportunity to enroll in a special diabetes management program. Under the deal, Discovery pays the program about $75 per month, while patients pay another $25 from their MSA accounts.

Proving The Critics Wrong

During the debate over MSA policy in the U.S., critics charged that MSAs would appeal only to the young and the healthy and would be avoided by the old and the sick.

The South African experience confirms MSAs do indeed appeal to the healthy, especially those who want tax-free growth. But the sick also gain from MSA coverage. The reason? Under the typical MSA plan, high-cost patients have less out-of-pocket exposure than under a traditional non-MSA plan. After adjusting for age, it appears that MSA plans are attracting about the same healthy/sick mix as other insurance plans.

Do MSA plans help control costs? One study showed that MSA enrollees spend 50 percent less for "discretionary" expenses to which the high deductible applies, compared to enrollees in conventional plans with no deductible. But for hospital expenses there is no difference in spending among enrollees in the two types of plans.

Do MSA holders skimp on preventive care and generate more expenses as undetected illness becomes more acute? The South African experience seems to refute this criticism as well. On balance, people appear to be reasonably good stewards of their own health care money.

What about the argument that individuals are incapable of making wise choices in a complex medical marketplace? Discovery Health operates a toll-free hotline to assist patients. Discovery has also negotiated price discounts for its MSA holders. But as is often true in the U.S., individuals on their own frequently get better deals that large insurance companies.

Legal restrictions have produced a climate in the U.S. where MSAs are often no more than a savings account bolted onto catastrophic insurance. In South Africa, MSAs have become part of an integrated approach to health care - one that assigns decision-making responsibility to the party best suited to make decisions.

The Future

When Nelson Mandela took the reigns of power, the prevailing sentiment in the African National Congress (ANC) was to nationalize every industry. Health care was no exception. But more sober thinking quickly set in; and there was significantly more privatization and deregulation under Mandela than under the previous government.

Socialist sentiments have not vanished, however. Under a law that will take effect next year, insurers will face a requirement to accept all applicants regardless of health status and charge a uniform premium (community rating). But there are enough loopholes to allow the market to survive.

Anti-MSA sentiments are also reflected in the reforms. There will be limits on the amount that can be deposited in an MSA and on the amount that can accumulate tax-free. But here's the good news: MSAs survived health care reform. They have become a permanent feature of South Africa's health care system.