Medical Savings Accounts and Prescription Drugs: Evidence from South Africa
Table of Contents
Flexible Medical Savings Accounts
In the United States, the design of tax-free MSA plans allowed under a special pilot program is rigidly defined in the tax code. In South Africa, insurers have been free to innovate and experiment. The result is a far more interesting product - one better designed to meet customer needs.
"Deductibles vary - giving patents economic inventives where incentives make sense."
Whereas a U.S.-type MSA plan has an across-the-board deductible covering all medical services, South African MSA plans typically have varying deductibles. For example, a representative plan has no deductible for hospital care on the theory that patients exercise little discretion within hospitals, but an $1,100 deductible for annual outpatient care on the theory that patients have far more discretion in that setting. The high deductible also applies to prescription drugs. However, for chronic conditions, for which skimping on medication could lead to more expensive care later on, the deductible drops back to zero.1 [See Table I.]
"Below the deductible, patients are spending their own money; above the deductible, they are spending insurance company money."
Controlling the Cost of Discretionary Spending. Table II shows the results of a study based on 61,760 South African families enrolled in conventional insurance plans and MSA plans. The results are striking. On the average, discretionary expenditure (primarily outpatient spending) was 47 percent lower for those enrolled in Medical Savings Accounts plans, with even higher reductions among older enrollees. No evidence suggested that members of MSA plans were shifting costs to a hospital setting where the insurer would foot the whole bill.
The coverage MSAs offer consumers and their ability to control employers' costs make them popular. In what follows, we investigate in more detail the ways in which the MSA encourages healthy behavior from health plan members, while keeping the costs of medical care under control.
"Afters MSA patients reached their deductible, their monthly spending on drugs increased by 27.6 percent."
Controlling the Cost of Prescribed Medication. Drug spending forms a large and constantly growing part of the cost of medical care. In the South African private sector, more than 25 percent of all health spending is on drugs, with an increase in real terms of 21 percent from 1997 to 2000.2 In the United States, 8.2 percent of spending is on prescription drugs, with nominal increases of 13.4 percent and 16.9 percent in 1998 and 1999 respectively.3 Although prescription drugs may help lower the cost of alternative therapies (e.g., doctor therapy and hospital therapy), the high and rising cost of drugs contributes to medical inflation and, in turn, to increases in health insurance premiums. Keeping drug costs under control while continuing to provide quality care is the challenge faced by all in the health sector.
"Patients are often more effective and efficient monitors of drug therapy than third-party payers."
The experience of Discovery Health in South Africa provides convincing evidence that MSAs - when designed and used in the right way - can be an exceptionally useful tool in this battle. In 2000, of the 202,595 Discovery members who were active for the whole year, 76,072 (or 37.5 percent) reached their deductible for outpatient spending. Before reaching the deductible, claims for prescribed drugs (not including drugs for specified chronic conditions) were paid out of the member's MSA. Any money remaining in the MSA at the end of the year belongs to the member and can be used to cover costs in the following year. Members are essentially spending their own money below the deductible and therefore have an incentive to spend wisely. Once the member's costs reach the deductible, the insurer pays the entire cost of any claims.
This plan design enables investigation of the effects of MSAs on the cost of medication. Examining only the members who actually hit their deductibles in 2000, we find that:
- The average cost of a prescription for members before they hit their deductible was R85.10 (US$12.25). For exactly the same members, the average cost after hitting the deductible was R91.18 (US$13.13), an increase of 7.1 percent.
- More dramatically, the average number of prescriptions filled per month grew from 2.97 below the deductible to 3.54 after hitting the threshold, an increase of 19.1 percent.
- The overall growth in per-member-per-month costs after members crossed the threshold was 27.6 percent.
Considering that annual U.S. drug spending is more than $100 billion, the South African results are a powerful indicator of the potential value of MSAs in managing drug expenditures in the United States.
"Discretionary spending was 47 percent lower under MSA plans."
Controlling the Use of Discretionary Services. Certain medical and drug expenses clearly rely more on discretion than others. Physical therapy, dermatology and homeopathy are some of the clearer examples of relatively discretionary services. It is here that MSAs have some of their most powerful and most useful affects. If MSAs are performing their intended function, members should spend less on these optional treatments when they are below their deductibles (and hence spending their own money) than when they are above (and hence spending insurance company money).
Looking again only at the members who hit their thresholds in 2000, we find distinct differences in discretionary spending, as shown in Table III:
- Once the deductible had been reached, spending per person per month increased by 26.2 percent for dermatologists, 41.5 percent for dieticians, 31.3 percent for homeopathy and a massive 66.1 percent for physical therapists.
- Overall, claims increased by 33.3 percent per member per month after the deductible was reached.
These figures show conclusively that when members have the right incentives to spend their money wisely, they are likely to spend substantially less on discretionary services.
