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Controlling Health Care Costs With Medical Savings Accounts
Using Medisave Accounts to Lower the Administrative Costs of Health Insurance
Health insurance not only creates perverse incentives but its overuse also
leads to high and unnecessary administrative costs. For example, the cost
of marketing and administering private health insurance averages between
11 and 12 percent of premiums. 21 Dealing with private and public third-party
payers also creates administrative burdens for physicians. A study by the
American Medical Association estimates that a physician spends an average
of six minutes on each claim and the physician's staff spends an average
of one hour. Those physicians who contract with outside billing services
pay about $8 per claim. 22
Medisave accounts offer a way of cutting these costs dramatically while
at the same time maintaining - and even improving - the quality of care.
Health Care Debit Cards. A general system of Medisave accounts would lead
naturally to the use of health care debit cards. Patients could, for example,
pay for physician visits by using their cards just as people now pay for
merchandise at retail stores. Several health care debit card companies already
exist, including Pulse Card, headquartered in Kansas City, Kansas and Security
Plus, headquartered in Newport Beach, California. 23
With an increase in volume and with increased competition, the administrative
costs of using health care debit cards would be quite low, relative to the
cost of using third-party payers. Currently, the overhead cost for credit
card companies is as low as 1.29 percent. Moreover, for most transactions
between patients and physicians, this would be the only administrative cost
other than paperwork deemed necessary for purely medical reasons. Private
and public insurers would not need additional paperwork except when total
costs exceeded high patient deductibles.
Health Care Debit Cards and Medical Records. Health care debit cards
could be combined with another technological innovation to reduce other
costs and improve the quality of care. Several companies are experimenting
with technology that would put a patient's entire medical record on a credit
card. 24 This would allow physicians immediate access to each patient's complete
medical history. Putting medical records on a credit card could be costly.
But it might be less costly than the current system under which physicians
treat patients about one-third of the time without access to their records. 25
The Benefits of the Canadian System Without the Costs. Advocates
of the Canadian system of national health insurance cite two principal benefits:
(1) patients entering the health care system need produce only a national
health insurance card in order to receive care, and (2) the administrative
costs of the system are lower because the paperwork is reduced and other
costs - such as marketing - are eliminated.
Against these advantages, there are severe disadvantages. Because patients
are spending other people's money at the time they consume "free"
health care, the potential demand is unlimited and Canadian provincial governments
control costs by limiting technology and forcing physicians and hospitals
to ration health care. As Canadian waiting lists grow longer, there are
increasing reports of unnecessary patient deaths and increasing numbers
of Canadians crossing the border for U.S. medical care. In addition, because
of the perverse incentives the system creates for providers, physicians
often over-provide some services while hospital managers try to avoid the
costs of acute care by housing chronic patients who use the hospitals as
expensive nursing homes. 26
A system of Medisave accounts plus health care debit cards could produce
the benefits of the Canadian system without the adverse side effects. A
valid health care debit card would be proof that a patient could pay small
medical bills and had third-party insurance to pay large ones. Unlike the
Canadian system, however, patients using debit cards would have strong incentives
to purchase care prudently because they would be spending their own money.
We believe the estimates of potential savings from reduced administrative
costs are much too high for three reasons. First, government accounting
practices always lead to underestimates of the real cost of government provisions
of goods and services. Second, these estimates completely ignore all indirect
costs (e.g., the costs of rationing and of physician and hospital responses
to perverse incentives) caused by Canada's method of paying for health care.
Third, many of the administrative activities in the U.S. health care system
are not designed merely to control spending; they also are designed to prevent
inappropriate medical care and maintain quality. The United States is not
likely to follow the Canadian practice of giving hospitals global budgets
and forcing physicians to ration health care with few questions asked. 28
Nonetheless, Table VI is interesting for a different reason. What the GAO
calculates as the rock-bottom cost of administering a health care system
is probably on the high side when compared to a system of Medisave accounts
and health care debit cards. We used the GAO method to estimate the potential
reduction in administrative costs under a system of Medisave accounts and
health care debit cards, and the Rand Corporation's method to estimate the
likely reduction in health care spending if people had high-deductible health
insurance. Table VII shows the probable effects of a generalized system
under which everyone (including Medicaid and Medicare patients) has third-party
catastrophic insurance and uses health care debit cards, drawing on individual
Medisave accounts to pay small medical bills. As the table shows:
Health care costs in the United States could be reduced substantially if
people relied on third-party insurance for catastrophic expenses only and
paid small medical bills with health care debit cards, drawing on individual
savings accounts. No one should be forced to self-insure for small medical
bills. But Congress should create the opportunity for people to do so by
giving just as much tax encouragement for deposits to individual medical
savings as it currently grants to employer payments for third-party insurance.
NOTE: Nothing written here should be construed as necessarily reflecting
the views of the National Center for Policy Analysis or as an attempt to
aid or hinder the passage of any bill before Congress.
Economic Effects of Medisave Accounts
A number of studies have compared administrative costs of health insurance
in the United States with those of Canada's national health insurance. For
example, Table VI shows three estimates of the administrative savings that
could be realized by adopting the Canadian system as well as an estimate
of the costs of eliminating out-of-pocket charges. The potential savings
in administrative costs range from a Lewin/ICF estimate of $34 billion to
a General Accounting Office (GAO) estimate of $67 billion. 27 However, the
effect of eliminating all deductibles and copayments swamps these savings
and leads to a net increase in costs.
Primarily because of U.S. tax law, most Americans are overinsured. People
use health insurance to pay for non-risky medical episodes, including diagnostic
tests and routine checkups. They also use health insurance to pay small
medical bills they could pay more economically from personal funds. As a
consequence, the administrative costs of the U.S. health care system are
much too high and patients and physicians are often wasteful.
