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Controlling Health Care Costs With Medical Savings Accounts
By John C. Goodman
Gerald L. Musgrave
Fortunately, there is a better way - one which has already been adopted
in Singapore.
Under the current tax law, third-party insurance is subsidized and self-insurance
is penalized. Every dollar an employer pays for third-party insurance is
excluded from employee income. Every dollar an employee tries to save is
taxed - at rates as high as 50 percent. To correct this distortion, we should
give just as much tax incentive to deposits to Medisave accounts as we give
to third-party health insurance premiums.
For individuals and families shopping for health insurance, high-deductible
policies are often a much better buy even without the opportunity to establish
a Medisave account:
If most medical expenses were paid by people using their own Medisave funds,
patients would have a financial self-interest in eliminating waste and reducing
costs in the medical marketplace. Patients would acquire greater control
over how their health care dollars were spent. Third-party payers would
interfere in the doctor/patient relationship far less. And health insurance
companies could specialize in what they do best: managing risks for rare,
expensive, catastrophic medical events.
If all U.S. citizens had catastrophic health insurance for large medical
bills and Medisave accounts for small medical bills, administrative costs
and wasteful health care spending would be reduced significantly.
We do not have to follow Singapore's precedent of requiring the use
of Medisave accounts. We should give people the opportunity to do
so, however.
Health care costs are rising in the United States for the same reason they
are rising in every developed country: most of the time when we consume
medical services we are spending someone else's money. Currently:
When health care is virtually "free," there is almost no limit
to how much we can spend on it - even if we are not sick. In recognition
of this fact, other countries have limited access to technology and forced
hospitals and doctors to ration health care. In the United States, we are
moving in the same direction, as third-party payers attempt to limit physician
choice and hospital access, and increasingly dictate the practice of medicine
and interfere in other ways with the doctor-patient relationship. Yet experience
shows that no country has succeeded in controlling health care costs from
the top down without severely reducing the quality of patient care.
In substituting self-insurance for wasteful third-party insurance, people
should have the opportunity to choose higher deductibles and to place the
premium savings in individual medical savings accounts. Medisave accounts
would grow tax free and could be used only to pay medical expenses. During
retirement, Medisave balances could either be used to pay medical expenses
not paid by Medicare or rolled over into an individual's pension plan.
Although the premium savings from higher deductibles tend to be smaller
for group insurance, they are still substantial. Most companies could cut
health insurance premiums by one-third by moving to a $2,500 deductible
- even if employees' medical care consumption did not change.
Self-insurance for medical bills is not a new idea. Singapore has built
an entire health care system around the concept by requiring workers (and
their employers) to deposit 6 percent of annual salary into Medisave accounts.
Only recently has Singapore introduced third-party insurance for catastrophic
medical expenses. Most of the time, people in Singapore are spending their
own money rather than someone else's money when they enter the medical marketplace.
And Singapore's decision to privatize its public hospitals will encourage
a competitive market for medical services.