Addressing Deficiencies in Private Health Insurance Schemes: The Role of Medical Savings Accounts

Introduction

The recent global economic crisis has been an impetus for legislators to expeditiously implement policies that increase access and quality of health care.

Healthcare systems in many developed nations have evolved such that they can no longer be classified into homogenous models.  Policy makers are reexamining private health insurance and its ability to increase consumer choice and insurer competition, as well as improve health system efficiency.  A market-oriented private health insurance system remains at the forefront of reform debates in the United States13.  Conversely, in Europe, where Beveridge and Bismarck models have historically been the dominant form of healthcare financing, Germany and the Netherlands have introduced private health insurance schemes to promote choice and competition12.  However, many economists and policy makers have consternation about the stability of unregulated private health insurance schemes.  Some contend that medical savings accounts (MSAs) are a viable alternative to financing healthcare that can substantially diminish costs.

Yet, others believe that MSAs exacerbate inequities and inefficiencies that occur in private health insurance schemes.  This paper examines the extent to which MSAs address deficiencies of private health insurance schemes, and whether MSAs can improve choice, equity and efficiency in a healthcare system.  The following sections evaluate the effects of various forms market failure within private health insurance schemes, assess the ability of MSAs to improve upon limitations in private health insurance schemes, and discuss future implications.

Private Health Insurance:  Challenges of maximizing choice, equity and efficiency
Proponents of private health insurance schemes argue that consumer choice can increase equity and efficiency within health systems.  First, consumers with sufficient financial resources have the opportunity to enroll in private insurance plans.  If consumers are also required to pay into public schemes, allocative efficiency is optimized because government can distribute public resources among poorer, unhealthier individuals who cannot afford private health insurance3.  This also facilitates increased equity of finance and access because richer individuals pay a larger proportion of their income to public funds, while poorer populations remain the primary users of publicly financed health resources.  Next, consumer choice increases competition between insurers because these firms are incentivized to implement cost reducing strategies in order to maximize profits.  However, equity and efficiency gains of private health insurance schemes are dependent on how well their objectives are aligned with those of other financing schemes within a health system9.  Inevitably, incongruencies between objectives can foster a health system that fails to optimize resource allocation.

The inability of private health insurance to increase equity and efficiency often results from informational asymmetries between insurers and the consumers.  The actuarial model of private health insurance intrinsically minimizes equity because premiums are determined according risk, not income.  Consequently, insurance firms are disadvantaged when costing health risks for the insured because consumers have more information regarding their health status than do insurers.  Adverse selection occurs when consumers conceal information regarding their health status, effectively leading to high-risk consumers being assessed a premium that is lower than their reflected risk.  Perpetuation of this cycle can prompt low-risk individuals to voluntarily depart high-premium schemes for alternate, low premium plans that correspond to their risk.  Thus, the benefits of risk pooling are lost in high-premium schemes that have maintained substantial numbers of high-risk consumers.  Many high-risk individuals are no longer able to afford private health insurance, and the segmentation of consumers in relation to their associated risks prevents health resources from being allocated efficiently.

Another form of information asymmetry is moral hazard.  After purchasing private health insurance, some consumers are inclined to use health services without constraint, or take greater risks than they would if they did not have insurance.

Clinicians are also aware that insurers incur the cost of patient care at the point of service and provide treatment beyond the point at which consumers receive additional benefits.  This over-utilization of healthcare precipitates higher premiums for consumers and amplifies disparities within private health insurance schemes.  Poorer, unhealthier consumers are less likely to access private health insurance at higher costs because premiums consume a larger proportion of their incomes.  Ultimately, moral hazard minimizes allocative efficiency because the cost of providing health care exceeds the benefit of the care being provided.

In addition to informational asymmetries, limitations in consumer choice impede optimization of equity and efficiency.  For example, private health insurance in the United States is most often employer-based.  Therefore, choice of private health insurance scheme is dependent on the number of insurers that have contracted with one’s employer10.  Conversely, in European countries such as Germany and the Netherlands (prior to 1986), choice is dependent on income and only the highest-income earners can opt-out of publicly financed schemes and into private health insurance plans16.  In addition, consumers’ ability to evaluate and compare features of benefits packages is essential to maximizing choice and competition.  Without regulation that obliges insurers to offer a standard homogenous product, competition will be substantially diminished because of consumer uncertainty10.  More importantly, choice is limited by financial resources because those who cannot afford to pay for private insurance will either remain uninsured or utilize a publicly financed scheme.  Thus, extent of choice is related to employment and income level.  Inevitably, disparities in choice between high and low-income earners reflect inequities in access to care, as well as inefficient allocation of resources.

In summary, equity and efficiency gains of private health insurance schemes are often not realized.  Accurately assessing consumer disease risk is difficult, with some paying less for coverage than is reflected by their risk, while others over-utilize care.  As a result, insurers frequently employ mechanisms to cover only the lowest-risk consumers.  The combination of these activities ultimately increases consumer segmentation according to their risks, and reduces efficient allocation of resources within the healthcare system.

Medical Savings Accounts: A consumer-driven approach to financing healthcare
As a consequence of market failures associated with private health insurance schemes, consumer-driven alternatives which promote choice and cost-containment have garnered much attention.  MSAs have been compulsory for Singaporean citizens since 1984, and have also been introduced into US, South African and Chinese health systems as an adjunct form of financing care5.  Analogous to a bank account, MSAs allow individuals to contribute monthly premiums into a tax-exempt fund that is earmarked for health expenditures.

Along with purchasing a high-deductible catastrophic insurance plan, consumers use funds from their MSA to purchase routine and preventive care14.  Therefore, consumers can save excess funds when they are young and demand fewer health services, then use surplus capital from MSAs to pay for health needs as they age.  Hence, MSAs transfer the cost burden from insurer to consumer, enabling consumers to be judicious purchasers of healthcare while forcing providers to deliver affordable service.  For this reason, many contend that MSAs can adequately mend deficiencies of private health insurance schemes.

First, MSAs may overcome many challenges presented by informational asymmetry within private health insurance schemes.  MSAs employ a demand-side approach to containing costs and can diminish the effects of adverse selection6.  Whereas premiums in private health insurance schemes are linked to consumer risk, contributions to MSAs are independent of risk.  Even more, account holders have no incentive to hide aspects of their health status because they do not share costs of care with insurers.  Thus, consumers are the stewards of their respective MSAs, efficiently allocating financial resources to their most pertinent health concerns.

Additionally, MSAs may effectively diminish the moral hazard phenomenon.  In private health insurance schemes, consumers are passive participants in financing their health because a third-party administrator manages their health fund, allocating fund reserves to providers.  Therefore, insured consumers have a greater incentive to over-utilize care without controlling costs15.  Conversely, those with MSAs are incentivized to conserve healthcare consumption to avoid depleting available funds for future healthcare needs.  Being that account holders will seek the best-value-for-services provided, the healthcare system may achieve optimal efficiency.

Unlike private health insurance schemes, choice of MSA enrollment is independent of employment or income.  MSAs improve choice because they are portable and provide consumers with coverage during times when they may change jobs or have brief employment lapses 15.  Furthermore, MSAs do not include restricted provider lists such as those in HMO and PPO private health plans.  Being that are no exorbitant administrative costs associated with MSAs, consumer funds can be exclusively allocated to healthcare services.

Consequently, MSAs may expand the total number of insured and increase equity of access to care.

However, literature about the cost-effectiveness of medical savings accounts remains inconclusive.  Many policy makers are critical of the proposed efficiency and equity gains of MSAs because potential for adverse selection and risk segmentation remains prominent.  Younger, healthier consumers with minimal health expenditures are more likely to opt for MSAs and catastrophic coverage11.

Concomitantly, high-risk consumers maintain private health insurance, threatening insolvency of health plans and diminishing equity of access17.  MSAs may also increase provider-induced moral hazard.  For example, providers in Singapore compete on quality and not price, employing many renowned clinicians, costly technologies and demanding higher remuneration for services8.  Accordingly, consumers are unable to optimally allocate their savings because they spend larger proportions of their MSA reserves for care.

Additionally, many consumers may neither have the disposable income to contribute to a MSA nor be able to afford high-deductibles associated with catastrophic insurance 14.  Finally, the amount of choice associated with MSAs has been questioned.  When faced with choices that pertain to healthcare, studies indicate that gender, age and socioeconomic disparities significantly affect consumer choice2.

In conclusion, MSAs do not appear to resolve deficiencies of private health insurance schemes.  Adverse selection and risk segmentation diminish equity of access.  Supplier-induced moral hazard undermines efficiency gains from competition and consumer choice.  Next, consumers may neither have the discretionary income to invest in MSAs, nor the income to maximize tax benefits of MSAs7.  Moreover, consumer choice may be weakened by socioeconomic variables.  Nevertheless, MSAs promote self-reliance and empower consumers to be proprietors of their health expenditures.

Conclusion and Implications

This paper has examined MSAs as an alternative to private health insurance schemes.  The effects of adverse selection, moral hazard and choice were evaluated in the context of equity and efficiency gains within a healthcare system.

Although the data is inconclusive, MSAs do not appear to adequately address shortcomings of private health insurance schemes.  First, informational asymmetries such as adverse selection can facilitate risk segmentation and diminish equity of access to care in private health insurance schemes.  Not to mention, moral hazard prevents optimal allocation of resources in a healthcare system.  Inevitably, those who are unemployed or do not meet a certain income threshold have limited choice, and compromised choice in private health insurance schemes reduces access to care for high-risk consumers who are in greatest need.

Alternatively, MSAs incur similar equity and efficiency challenges.  Adverse selection and risk segmentation can occur if younger, healthier consumers choose MSAs over private health insurance schemes.  Moreover, supplier-induced demand and moral hazard can facilitate exponential increases in healthcare costs, increasing economic constraints and diminishing consumer choice.  Therefore, MSAs may be best utilized by the self-employed, or those without employer-based private health insurance who have adequate resources to contribute to an account.

The optimal role of MSAs has yet to be defined.  Singapore is the only high-income nation that uses MSAs as their primary mode of financing healthcare1.  However, MSAs may have the greatest impact in rapidly developing countries with younger, healthier individuals, and high savings rates.  Unlike the US, for instance, citizens of Singapore save upwards of 40% of their gross income on average4.   Yet, declining economic growth and an aging population now threaten the viability and solvency of many MSAs in Singapore.  Ultimately, neither private health insurance schemes nor MSAs can serve as a sole financing mechanism in any healthcare system.  Still, as nations around the globe continue to increase their public healthcare expenditures, policy makers will be compelled to align the aims of MSAs and private health insurance schemes with that of the entire healthcare system.

References

1.  Asher M. and Nandy A. (2006).  Health financing in Singapore: a case for systemic
reforms.  International Social Security Review; 59(1): 75-92.

2.  Burge P., Devlin N., Appleby J., Rohr C., Grant J. (2005).  London Patient Choice
    Project Evaluation: A model of patients’ choices of hospital from stated and
revealed preference choice data.  Rand Europe Technical Report; London.

3.  Chollet D. and Lewis M. (1997).  Private insurance: principles and practice.  Innovations in
health care financing: proceedings of a World Bank conference, March 10-11, 1997, World Bank Discussion Paper No 365; G. J. Schieber. Washington D C, World Bank.

4.  DeVol R. and Bedroussian A. (2007).  An Unhealthy America: The Economic Burden
 of Chronic Disease -- Charting a New Course to Save Lives and Increase
Productivity and Economic Growth.  Milken Institute Research Report; Los
Angeles, CA, USA.

5.  Dixon A. (2002).  Are medical savings accounts a viable option for funding health
care?  Croatian Medical Journal; 43(4): 408-16.

6.  Ferrara P. (1996).  The Establishment Strikes Back: Medical Savings Accounts and
Adverse Selection.  Cato Institute, Health Policy Briefing Paper No. 26; April 4, Washington, DC.

7.  Glied S. and Remler D. (2005).  The Effect of Health Savings Accounts on Health
    Insurance Markets.  Commonwealth Fund Task Force on the Future of Health
     Insurance Issue; Washington, DC.

8.  Hsiao W. (2001).  Behind the ideology and theory: what is the empirical evidence for
medical savings accounts?  Journal of Health Politics, Policy and Law; 26(4): 733-737.

9.  Kutzin J. (2000).  Towards Universal Health Care Coverage: A Goal-oriented
 Framework for Policy Analysis.  Health, Nutrition and Population, World Bank
Discussion Paper; Washington, DC, International Bank for Reconstruction and
Development.

10.  Maynard A. and Dixon A. (2002).  Voluntary health insurance and medical savings
accounts: theory and experience, in Funding health care: options for Europe. E. Mossialos, A. Dixon, J. Figueras and J. Kutzin (eds). Buckingham, Open University Press.

11.  Moon M., Nichols L., Wall S. (1996).  Medical Savings Accounts: A Policy
Analysis.  Urban Institute; Washington, DC.

12.  Schoen C., Helms D., Folsom A. (2009).  Harnessing Health Care Markets for
Public Interest: Insights for US Health Reform from the German and Dutch Multipayer Systems.  Commonwealth Fund and Academy Health.

13.  Stevens R. (2008).  History and Health Policy in the United States: The Making of a
    Health Care Industry, 1948-2008.  Social History of Medicine; 21(3): 461-483.

14.  Scheffler R. and Yu W. (1998).  Medical savings accounts: a worthy experiment.
    European Journal of Public Health; 8(4): 274-5.

15.  Tanner M. (1995).  Medical Savings Accounts: Answering the Critics.  Cato
Institute Health Policy Analysis Paper No. 228; May 25, Washington, DC.

16.  Thomson S. and Massialos, E. (2006).  Choice of public or private health insurance:
learning from the experience of Germany and the Netherlands.  Journal of European Social Policy; 16(4): 215-327.

17.  United States Congressional Budget Office (1994).  An analysis of Congressman
Michel's health proposal; 29 August, Washington, DC.

About the Author

Jabali Wells, MD is a Senior Partner at Forde Group Health, LLC, a boutique consulting firm that offers advisory and health communication services to public and private businesses, healthcare entities, and government agencies across the globe.  Forde Group Health, LLC specializes in delivering measurable healthcare outcomes by providing cost-effective strategies to reduce preventable diseases, create patient and employee health education tools, develop metrics for evaluating outcomes and reporting, and reducing health disparities.

Jabali has an expertise in international health policy, health system performance and strengthening, pharmacoeconomics, pharmaceutical regulation and policy, health information technology, and healthcare finance.  Prior to his position at Forde Group Health, LLC, he founded CURE Solutions, LLC, a healthcare consulting firm providing a broad range of strategic and management services to healthcare providers.

Jabali is a member of the Royal Institute of International Affairs (Chatham House), Asia Society, International Health Economics Association, American Medical Association, and a Fellow in the Royal Society of Medicine.  Jabali received his undergraduate training at UCLA, medical training at the Emory University, and training in health policy and finance at the London School of Economics.