MSA's Can Be a Windfall for All

Policy Backgrounders | Health

No. 157
Friday, November 02, 2001
by Greg Scandlen


Do MSAs Change Patient Behavior?

Another reason why high deductibles lower costs is that they lead to a change in behavior on the part of the insured.

Some critics have suggested that health care is a unique consumption good.27 They argue there is no "personal benefit" from consuming excess health care services, unlike the excessive consumption of food, which is a "personal choice." Yet there is plenty of empirical evidence that over-consumption always occurs when health care is a free good.

Moral Hazard.

"When health care is free, people tend to over-consume it."

The concept that people who are insured tend to engage in riskier behavior is known as "moral hazard." People with low-deductible auto policies are likely to drive less carefully than people with higher deductibles. Similarly, an owner of a run-down warehouse that is insured is far more likely to see it burn down than a warehouse owner who does not carry fire insurance.

In health care, moral hazard blends with another concept - "induced demand." People who have low-deductible health insurance coverage are far more likely to consume a wide range of services, many of them of questionable value. Having a higher deductible encourages people to think twice before consuming services because a greater portion of the cost is borne by them.

The RAND Experiment.

For example, the well-known RAND Health Insurance Experiment randomly assigned several thousand families to different plans with different cost-sharing provisions over an eight-year period.28 One plan had free care, another had 25 percent coinsurance, another had 50 percent coinsurance and another 95 percent coinsurance. In each of the cost-sharing plans, the total out-of-pocket expense was capped at $1,000 (this study was conducted in the late 1970s, so the $1,000 deductible adjusted for today's prices would be closer to $2,500). The results were profound, if unsurprising. Project director and Harvard University professor Joseph Newhouse writes, "Use of medical services responds unequivocally to changes in the amount paid out of pocket.... Per capita expenses on the free plan are 45 percent higher than those on the plan with a 95 percent coinsurance rate...."29 He adds, "The more families had to pay out of pocket, the fewer medical services they used."30 Importantly, the lower use of services did not have a negative effect on health outcomes.

MSAs vs. Managed Care.

Managed care, too, is a response to the willingness of people to consume excessive health care services when they can. Unlike the RAND Experiment and MSAs, managed care tries to control the use of services from the supply side. Managed care sets up obstacles to acquiring the care the patient demands by the use of "gatekeepers," utilization controls, benefit limitations, provider limitations and provider incentives to undertreat. In general, patients can't get care because it isn't available, not because they have chosen to avoid it. It is small wonder patients are unhappy. The whole purpose of a managed care organization is to keep patients from the care they desire.

"When people spend from their MSA they are spending their own money rather than someone else's money."

By contrast, Medical Savings Accounts control expenses from the demand side. MSAs encourage people to think twice about the care they want, because they know there is a price to be paid for wasteful consumption. It is up to the patient in consultation with his or her family and physician to make the value judgments about whether a particular service is worth the cost. These judgments and decisions are not imposed from the outside, but reflect the values and priorities of the individual.


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