HOME / DONATE / ONE LEVEL UP / ABOUT NCPA / CONTACT
Controlling Health Care Costs With Medical Savings Accounts
Allowing People to Self-Insure Through Medical Savings Accounts
To help eliminate the perverse incentives in the current system, we should
allow individuals to make tax free deposits each year to individual Medisave
accounts. These accounts would serve as self-insurance and as an alternative
to the wasteful use of third-party insurers for small medical bills. Funds
in the accounts would grow tax free, and withdrawals would be permitted
only for legitimate medical expenses. Funds not spent during a person's
working years could be spent on postretirement health care or rolled over
into a pension fund.
Medisave accounts would be the private property of the account holder and
become part of an individual's estate at the time of death. If created by
an employer, they would be personal and portable for the employee. Medisave
contributions should receive at least as much tax encouragement as payments
for conventional health insurance. 13
Medisave Accounts With a $1,000 Deductible. Most people have no medical
expenses in any given year, and it is not uncommon for people to go for
several years without incurring medical costs. Figure VII shows how Medisave
balances would grow if not spent in the case of an individual who switches
from $250 deductible to a $1,000 deductible, with $400 in premium savings
each year. Let's compare benefits of the two alternatives:
Currently, many large employers maintain flexible spending accounts (FSAs)
for their employees under Section 125 of the Internal Revenue Code. Under
this arrangement, employees can reduce their salaries and make contributions
to an individual FSAs with pretax dollars. The funds are then used to purchase
medical expenses at the employee's discretion. The only difference between
an FSA and a Medisave account is that FSA funds are governed by a "use
it or lose it" requirement. If employees fail to spend the entire amount
in their FSAs in one year, they forfeit the balance. 18 Thus, FSAs create
the opposite incentives of Medisave accounts - employees are penalized for
not spending FSA funds. A small change in the tax law could change this
perverse incentive into a positive incentive: "use it or keep it."
Extending Medisave Accounts to Others: A Non-Revenue Neutral Proposal.
Although the federal government grants generous tax subsidies to employer-provided
health insurance, only a 25 percent deduction is given to self-employed
people who purchase their own health insurance. No deduction is given for
the purchase of health insurance by the unemployed, employees of firms which
do not provide health insurance or employees who must pay for health insurance
coverage for their dependents with aftertax dollars.
Most of the 33 million Americans who lack health insurance have no tax encouragement
to obtain it. One of the most effective ways to increase the number of people
with health insurance would be to grant a tax deduction (or tax credit)
to individuals who purchase health insurance with aftertax dollars. Since
the choice to purchase health insurance would remain voluntary, this would
create far fewer distortions in the labor market than would employer mandates. 19
At the same time we extend tax encouragement for third-party insurance to
all Americans, we should also establish tax incentives to self-insure for
small medical bills. 20
Creating Medisave Accounts in Public Programs. Under the current
system, the political pressures governing Medicare (for the elderly) and
Medicaid (for the poor) are to expand benefits and refuse to pay for them.
One consequence is that most doctors won't see a pregnant woman on Medicaid
and there is increasing evidence of health care rationing for other Medicaid
services. There is also increasing evidence of rationing under Medicare.
Medisave accounts could solve problems in both programs. For example, pregnant
Medicaid women might have an account to draw on which they could freely
spend in the medical marketplace. This would empower patients and expand
the number of providers to whom they have access. Similarly, the elderly
could choose higher Medicare deductibles and make deposits to their own
Medisave accounts.
Medisave Accounts in Singapore. Medisave accounts have been in existence
in Singapore since 1984. Unlike the proposals made here, in Singapore contributions
to Medisave accounts are mandatory - part of the government's program of
insisting that people save to meet needs that might otherwise have to be
met by the state. Not only are the accounts mandatory, they are the principal
form of health insurance in a country that only recently encouraged third-party
insurance for catastrophic medical expenses. A more extensive discussion
of the Singapore system is contained in Appendix B.
Medisave Accounts With a $2,500 Family Deductible. As noted above,
a family in a city with average health care costs can expect to save about
$1,749 in insurance premiums if they choose a $2,500 rather than a $250
deductible. Figure VIII shows how Medisave account balances would grow over
time if none of the money were spent. Let's compare this Medisave option
with a conventional health insurance policy:
Encouraging Self-Insurance: A Revenue Neutral Proposal. One way to
encourage Medisave accounts without any loss of revenue to the federal government
is to allow employers and employees to choose higher-deductible policies
and place the untaxed premium savings in Medisave accounts. 17 For employees,
there would be no change in the amount reserved for health care benefits
or in the total tax subsidy for employee benefits. Yet the change would
encourage prudence, eliminate waste and give employees greater control over
their health care dollars.
