Around the World in 80 Ideas   

17: Saving your health
The potential of medical savings accounts

The problem: the costs of insurance

When medical care is free, there is nothing to stop people demanding more and more of it. State-funded insurance systems, like the National Health Service in Britain, find themselves under severe pressure as they attempt to keep access free and open for everyone, but find themselves overwhelmed by demand for (often trivial and unnecessary) treatment. Private insurers too face the same problems: once people have paid their premiums, they demand the best treatment they can get, because it will be the insurer who is paying for it.

Private insurers can choke off unnecessary demand by introducing co-payments or deductibles, so that patients share some of the cost of meeting their demands. State-run health schemes are less willing to charge, however, fearing that poorer people may not receive the care they need.

So is there a way to make sure that everyone has access to medical care, but does not have an incentive to overburden its providers?

The idea: combine insurance with savings

The Medical Savings Account idea may provide a model; and the idea is spreading.

Examples: health savings worldwide

The greater part of private medical insurance in the United States is provided through tax-privileged employer schemes. A key factor in the annual wage-negotiation rounds, this has tended to become more and comprehensive in scope - which in turn makes it disproportionately more expensive, since small claims are very costly to administer.

Employers are now finding that they can provide better healthcare protection more cheaply by setting up Medical Savings Accounts (MSAs) for their employees. Thus the employer scales back the insurance cover to catastrophic event insurance only (which is very much cheaper), and remits all or part of the savings back to employees as annual contributions into their MSAs.

Employees like this system because they are free to spend their MSA balance on any medical service they choose, including items which may have been excluded under the old group comprehensive insurance policy. Equally, though, there is an incentive for them not to demand services unnecessarily, because they can keep any unspent balances. And in the event that they need very costly medical treatment, they still have the workplace catastrophic event insurance to rely on, so there is a safety net for everyone.

Only very limited forms of MSA presently qualify for tax-assisted status, but nonetheless, the system is spreading. Evidence from American companies now shows that MSAs do indeed promote more prudent health spending, without risking employees' health, and can reduce health care costs by up to 20 percent.

A very different - but equally popular and successful - form of Medical Savings Account has operated since 1984 as part of Singapore's compulsory, funded, social-insurance system. Residents pay 6%-8% of income into these Medisave accounts (up to a maximum of about 2000 a year), which provide savings for hospital treatment. If a person's account grows to about 8000, however, additional contributions are diverted into retirement savings. At age 55, a minimum of about 5500 must be left in the account to pay medical bills during retirement, but any excess may be withdrawn.

Medisave funds can be used for hospital treatment, including psychiatric care, renal dialysis and chemotherapy - but not outpatient care, doctors' fees, or long-term care. If money runs short, family members can pool their Medisave balances to pay a hospital bill.

Nevertheless, most accounts are not large enough to cover the costs of catastrophic illness, so in 1990 the government created the Medishield programme of insurance for catastrophic events. This is neither needs-based nor income-based, and premiums vary with age, but nearly 90% of those eligible opt for it. In addition, the government has established a Medifund endowment to help provide medical care for those with insufficient means.

South Africa also has a version of the Medical Savings Account concept. After deregulation in 1994, virtually every type of health plan could be sold, and after a favourable ruling from the tax authorities, employer deposits to MSAs received the same favourable tax treatment as employer payment of third-party insurance premiums.

Thus in South Africa, MSA plans have competed against other forms of provision (including preferred-provider organizations, health maintenance organizations, and straightforward insurance) on a level playing field. The result has been remarkable. In a few short years, MSA plans have become increasingly popular, more so than US-style managed care organizations, and they already represent about half the market.

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 a $1,200 deductible for outpatient care (on the theory that patients have a lot of discretion in that setting).

The high deductible also applies to medicines; but for chronic conditions, for which skimping on medicines could lead to more expensive care later, the deductible drops back to zero. There is no evidence that MSA holders skimp on primary care in a way that leads to higher inpatient costs.

Among the more interesting MSA product innovations are screening programmes, with prizes and bonuses to encourage participation, a health information hotline, and electronic verification of MSA balances.

Assessment: a solution for state systems?

In principle, the MSA concept could bring benefits to state-insured healthcare systems, just as it does to America's privately-insured one. Thus the state would fund only the larger-scale treatments, with the budget savings being remitted back each year to taxpayers as Medical Savings Accounts, from which they could purchase their own smaller-scale services. The incentive to purchase carefully might come from allowing people to roll up any unused MSA balances into their own personal retirement fund. There would, of course, have to be special arrangements to help people with chronic conditions.

The Medical Savings Account concept works because it divides the funding of medical care rationally between savings and insurance. Insurance is good for protecting people against the crippling costs of larger-scale medical treatments. It is not good for smaller items, however: the administrative cost is high, and people are more likely to demand unnecessary smaller items (a course of antibiotics for a minor viral infection, say) if they know that someone else is paying.

MSAs enable the insurers to concentrate on funding the big-ticket items, and give people an incentive to use general services more carefully, while still ensuring that everyone who needs care can get it.

For further information:
  • For the UK, see the publications section at; for Singapore, see the National Center for Policy Analysis at and for South Africa see
  • Blandford, Robert (1998) 'An approach to National Health Care...', available from
  • Ramsay, Cynthia (1998) Medical Savings Accounts: Fraser Institute (Vancouver).
  • Moon, Marilyn et al (March 1996) Medical Savings Accounts: A Policy Analysis, Urban Institute (Washington DC)
  • Nichols, Len et al (April 1996) Tax-Preferred Medical Savings Accounts and Catastrophic Health Insurance Plans, Washington DC: Urban Institute.
  • Goodman, John and Musgrave, Gerald (1992) Patient Power: Cato Institute (Washington DC)
  • Butler, Eamonn (2002) Why Not a Medical ISA? Adam Smith Institute (London)

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