Medical Savings Accounts

Could medical savings accounts provide the escape from runaway healthcare costs?

Many countries with private health insurance schemes — the US, Singapore, even South Africa — have developed the medical savings account idea as an escape from runaway healthcare costs. The idea is to allow insurance, public or private, to concentrate on providing against the big, unpredictable and costly healthcare needs, but to ensure that everyone has access to savings that can be used to provide for the smaller, routine, more everyday healthcare costs.

Thus instead of US employers covering their workers for every conceivable healthcare need — a very expensive proposition — they instead provide only catastrophic health insurance, and give their workers back some or all of the savings as a ‘medical savings account’ which they can use on healthcare costs as they please. Workers like it because they decide how to spend their account, instead of having the manager of a health management organization (HMO) tell them what they can and cannot like. Employers like it because it is cheaper. And insurers like it because they are not bogged down in the administration of very small medical claims.

In Singapore, a compulsory provident scheme covers people for their big-ticket medical costs. But they are also obliged to save into a medical savings account. They have to keep this topped up to a level that would cover the average person’s annual medical bills.

The idea of medical savings accounts is that insurance remains focused on the big risks, while the small items are dealt with out of savings. This is efficient, because it means insurers are not chasing paper on very small insurance claims like dressings, minor pharmaceuticals, or the cost of GP visits – those can be met in cash by the individual from funds in his or her medical savings account.

Another source of efficiency is that the medical savings account idea is also a disincentive against overdemand. People may not willingly volunteer for large-scale interventions like transplants or dialysis, but when minor medical services are free, people demand more than they really need – calling out the doctor to deal with minor ailments, for example – adding to the insurers’ costs and creating queues and delays for those who are in urgent need. Where patients see the cost of their care, however, they are less likely to demand more than they believe essential. This is particularly true if unspent balances in a medical savings account can be taken in cash at year-end, or rolled up towards other items, such as a retirement pension, college fees, or house purchase.

In principle, medical savings accounts should work just as well in a state-insurance system.Today’s NHS, for example, is overburdened by the demand for (and administration of) minor services, including GP visits, minor pharmaceuticals, and relatively cheap medical treatments. Too often, though, there are long queues to see a GP (or consultation times are stripped down to a few minutes), and long waits to receive even minor medical attention.

Could medical savings accounts help curb this overdemand? Instead of all services being free, should the NHS concentrate on providing only the big-ticket items for free, and charge for minor items such as GP visits? The money saved — perhaps half the NHS budget — could be remitted back to UK citizens as medical savings accounts, which would ensure that everyone had funds to pay directly for the small-scale care they needed — as well as the free service to fall back on in the case of a major medical problem. Knowing how much health services cost would prompt us to shop around for the best value, making the supply of healthcare services more competitive and efficient, and with the right incentive structure it would induce people not to overdemand minor services while equally making sure that everyone did go to get the treatment they really needed.