A number of proposals for Medical Savings Accounts (MSAs) have been put forward in recent years in Canada. ^[58]  MSAs are health care accounts, similar to bank accounts, set up to pay for the health care expenses of an individual (or family).  They are often established in conjunction with high-deductible (or catastrophic) health care insurance.  Money contributed to an MSA belongs to, and is controlled by, the account holder, accumulates on a tax-free basis and is not taxed if used for health care purposes.

MSAs usually involve three levels of payment.  First, money in the account is used for normal medical expenses.  Next, if the account is exhausted and the deductible has not been reached, the expenses are paid out of pocket.  Third, the insurance policy covers expenses beyond the deductible.

The general theory is that consumers would make more judicious and cost-effective decisions if they were spending their own money, rather than relying on the public purse.  There are several different ways of structuring these accounts.  MSA systems have been operating in a few countries.  This chapter briefly examines the operation of MSAs in Singapore, South Africa and the United States and reviews the proposal for MSAs put forward in Hong Kong. ^[59]

 

7.1     MSAs in Singapore

The Singapore government’s philosophy of health care delivery can be summed up in the following words – individual responsibility coexisting with government subsidies to keep health care affordable.  An overview of the Singapore health care system describes the system this way:

Patients are expected to pay part of the cost of medical services which they use, and pay more when they demand a higher level of services. The principle of co-payment applies even to the most heavily subsidized wards to avoid the pitfalls of providing "free" medical services. ^[60]

Therefore, health care financing in Singapore is a combination of public and private sources encompassing general tax revenue, employer/employee contributions, compulsory savings, private insurance and out-of-pocket payments. [61]  Because individual responsibility for health care expenses is one of the tenets of the Singapore health care system, the government has made saving money for health care expenses compulsory.  There are currently three government programs that operate to assist individuals in this regard:

·        Medisave is a compulsory savings program for certain health care expenses.  Under this program, which was established in 1984, every employee is required to contribute a certain percentage of his/her income, with a matching contribution from the employer.  These contributions are collected in a central fund managed by the national government.  There is an upper limit on the total contributions to Medisave.  According to the Ministry of Health of Singapore, the limit is imposed “to prevent an excessive build-up of Medisave balance which could result in unnecessary use of medical services.” [62]  Medisave accounts can be used to pay for hospital and certain other medical expenses for the individual account holder and his or her family.  Withdrawals from Medisave are subject to limits that require some cash co-payment from patients, particularly those who choose private hospitals or more expensive ward accommodation in public hospitals.  Medisave also covers certain expensive outpatient treatments such as, radiotherapy, chemotherapy, renal dialysis and HIV anti-retroviral drugs.  Subject to a requirement to maintain a balance, account holders are permitted to withdraw their Medisave accounts at age 55.  In addition, any remaining Medisave balance can be transferred as part of the account holder’s estate on death.

·        MediShield is a non-compulsory, low-cost catastrophic illness insurance scheme designed to cover medical expenses from major and prolonged illnesses.  It was introduced in 1990 as a supplement to Medisave.  Medisave account holders under 75 years of age are eligible to participate in the MediShield scheme.  MediShield premiums are paid from Medisave contributions. Premiums vary depending on age.  MediShield covers most hospital expenses including intensive care, surgical operations and implants.  It also covers outpatient kidney dialysis, outpatient chemotherapy, radiotherapy for cancer treatment and certain drugs for transplant patients and pre-dialysis and dialysis patients.  Patients are required to pay user charges under MediShield, subject to an annual threshold. ^[63]

·        Medifund is a government endowment fund that operates as a safety net to help the poor and needy pay for hospital care.  At the time the fund was created, the government made an initial capital injection which has then been followed by other capital injections.  The interest income (but not capital) from the fund is distributed on a case-by-case basis to public sector hospitals.

A 1996 study prepared for the American-based National Center for Policy Analysis on the Singapore experience with MSAs stated that the Singapore program provides incentives “to reduce consumption and offer protection against extraordinary events and free-rider abuses.” ^[64]  Because individuals must start saving at an early age, savings accumulate to cover costs later in life when medical care needs will be greater.  The study concluded that Medisave and MediShield have worked well as part of a system that balances personal savings for medical care and government management of the health care system that has kept overall costs relatively low. ^[65]  Another study, however, mentioned in a recent C. D. Howe Institute Commentary (April 2001) reports that hospitals in Singapore did not begin to compete on price and the per capita cost of health care rose faster after the introduction of the health care model that included MSAs than it had prior to that time. ^[66]

 

7.2     MSAs in South Africa

The private health care insurance market in South Africa offers a wide range of insurance plans to residents that elect to be treated in private facilities.  Since their introduction in 1994, MSAs have grown to half of the private insurance market. [67]

In South Africa, MSAs allow individuals to do essentially two things: (1) to pay for medical expenses that are covered by insurance but are less than the deductible amount specified in their medical insurance policies; and (2) to pay for certain types of heath care that are not covered by insurance (for example, corrective eye surgery).  MSAs are set up as insurance plans that typically have the following features:

·        first dollar coverage for non-discretionary services, such as heart bypass operations and other inpatient hospital services;

·        a deductible of about $1,200 for discretionary expenses, such as visits to a doctor and other outpatient services;

·        first-dollar coverage for medications required to treat certain chronic conditions. [68]

MSA contributions are given favourable tax treatment.  Two-thirds of any employer contribution to an MSA for employees is excluded from the employee’s taxable income and two-thirds of employee contributions can be made with pre-tax dollars. ^[69]

For the most part, there is a considerable amount of flexibility in the various MSA plans offered in South Africa.  There would appear to be few limits on the amount that an individual can contribute to his or her MSA to cover expenses below the insurance deductible.  An individual, an employer or both can make MSA contributions and unspent balances in an account can be distributed back to the account holder annually. ^[70]

A study prepared for the National Center for Policy Analysis (NCPA), a long-time proponent of MSAs, concluded that the South African experience with MSAs has been a positive one.  MSAs have become a popular health care vehicle due in no small part to a flexible regulatory environment that allows insurers to tailor plans to the needs of the private market and offer incentives to encourage a healthy lifestyle and wellness. [71]  More precisely, the study reported that:

·        MSAs save money – on average MSA holders spend about half as much on outpatient services plus drugs as do people in traditional plans. 

·        there is no evidence that MSA holders substituted care with no deductible for care with a high deductible. 

·        similarly, there is no evidence that MSA holders forgo appropriate care – a comparison of catastrophic claims under MSA and traditional plans did not reveal a higher level of such claims by MSA holders.

·        although MSA plans appeal to people who are healthy, MSA plans can be attractive to those who are sick and have high health care costs. ^[72]

 

7.3     MSAs in the United States

Much of the discussion and literature and most of the controversy and debate relating to MSAs originates in the United States where, in the wake of rising health care costs and increasing criticism of the system of managed care by HMOs and other providers, MSAs have been proposed as means of reducing health care spending and empowering health care consumers.

MSAs are authorized favourable tax treatment under both federal and State legislation.  MSAs are currently offered by employer-sponsored insurance plans as well as under the Medicare Plus Choice.

 

7.3.1   Private Sector MSAs

The first federal program in the United States to authorize favourable tax treatment for MSAs became effective on January 1, 1997.  The Health Insurance Portability and Accountability Act of 1996 (HIPAA) established a four-year medical savings account demonstration project ending in 2000 and set out the requirements for the tax treatment of MSAs at the federal level.  The demonstration project has since been extended for two additional years.

The federal MSA demonstration is limited to 750,000 MSA account holders. ^[73]  Those eligible to participate in the federal MSA program include self-employed individuals and businesses with 50 or fewer employees. (Unlike the federal MSA scheme, state MSA programs do not cap the number of employees.)  While employers with more than 50 employees are restricted from offering the federal MSA tax benefit to employees, they can still offer MSA-style programs, although with limited tax benefits.

In order to participate in the program, participants must have a qualified high-deductible (catastrophic) health insurance plan to cover large health care expenses.  A high deductible health plan is a comprehensive health insurance plan with a higher annual deductible than typical health plans and a maximum limit on annual out-of-pocket medical expenses.  For individuals, the deductible must be between $1,550 and $2,350 (with a total out-of-pocket maximum of $3,100), and for families, the deductible must fall between $3,100 and $4,650 (with a total out-of-pocket maximum of $5,700.)  The MSA is set up through a trustee who can be a bank, insurance company or any other entity approved by the Internal Revenue Service.

Contributions to an MSA can be made by the employer or the employee, but not by both during the same year.  For individuals, contributions up to 65 percent and for families up to 75 percent of the annual health plan deductible can be contributed.  There are also upper limits on contributions based upon the individual’s wages or compensation.  The MSA is portable; it is owned by the account holder and follows the account holder when the person changes jobs.

MSAs offer a number of tax advantages.  Employer deposits into an MSA plan are not classified as taxable benefits for employees, employee contributions qualify for a tax deduction and funds accumulate in the MSA tax-free.  Contributions in excess of annual limits, however, are subject to a 6% excise tax. MSA funds are typically used for routine health care expenses.  Withdrawals from MSA plans are tax free if used for medical expenses that would qualify as a medical deduction for income tax purposes.  Non-medical spending from an MSA is subject to taxation and additional tax penalties.  Money remaining in the MSA account at the end of the year can be rolled over to the next year without penalty.

A beneficiary can be designated for an MSA account. If a spouse is designated, on death the account is treated as the spouse’s plan. If someone other than the spouse is designated, on death the account loses its MSA status and its fair market value is taxable to the designated beneficiary. Where there is no designated beneficiary, the fair market value of the plan is included in the deceased’s final income tax return.

The proponents of the 1997 legislation thought that insurers would be quick to enter the MSA market and many individuals would opt for MSAs.  However, the market has developed slowly with some 100,000 MSAs having been set up. ^[74]

A report to Congress by the Medicare Payment Advisory Commission (MedPac) on Medical Savings Accounts in the context of Medicare (November 2000) cited four main reasons for the slow development of MSAs. ^[75]  These are: limited supply, lack of broker interest, limited demand and program design problems.

·        Limited Supply: The federal law establishing MSAs limited eligibility to self-employed people and those employed in firms with 50 or fewer employees.  According to the MedPac report, these eligibility requirements had the effect of limiting suppliers of MSAs to insurance companies that participate in or want to enter the individual and small group insurance markets.  Ccompanies entered the MSA market to have a market presence should the plans become popular but many did not enthusiastically pursue MSAs when they found that the level of interest in the plans was low.  Insurers were also reluctant to enter the market because MSAs were established as a four-year demonstration project. ^[76]  Similarly, a United States General Accounting Office (GAO) Report to Congressional Committees on MSAs (December 1998) found that while a wide range of insurers were offering MSA plans, only a minority of them were marketing them aggressively. ^[77]

·        Lack of broker interest: The MedPac report points out that agents have not displayed a great deal of interest in selling MSAs.  Because MSA policies tend to have lower premiums than other policies, agents receive lower commissions for sales.  Furthermore, the public’s lack of familiarity with MSAs and the somewhat complicated nature of the accounts required agents to devote a considerable amount of time to selling the product.  As a result, agents have been reluctant to commit the time necessary to learn about and sell the product. ^[78]

·        Limited demand: The MedPac report points out that self-employed individuals could constitute a potentially large market for MSAs.  Many of the self-employed, though, continue to prefer the certainty of traditional comprehensive medical insurance plans with relatively low deductibles. ^[79]  The GAO report confirmed that sales were lower than expected.  Some insurers participating in the GAO survey felt that the low sales numbers were not surprising in light of the complexity of the MSA product and the limitations of the demonstration project. ^[80]

·        Program design problems: The MedPac report also notes that the restrictions applying to federal MSAs have impeded their growth.  These restrictions, which were put in place in part to allay concerns about possible negative effects on tax revenues and the health insurance market if MSAs were taken up in large numbers by healthy and relatively wealthy individuals, have had a dampening effect on the MSA market.  Consequently, the number of policies was limited to 750,000 and no new policies could be issued after December 31, 2000, minimum and maximum deductibles were established, a limit on out-of-pocket amounts was imposed, the amount that could be contributed to an MSA was set at between 65 percent and 75 percent of the deductible, and only the employee or the employer could contribute to the account, but not both. ^[81]

A 1998 Policy Report by the National Center for Policy Analysis looked at obstacles to the growth of the U.S. MSA market. ^[82]  Among other things, the NCPA suggested that the range of permitted deductibles was too narrow and the limit on the amount that could be deposited to an MSA account could expose MSA holders to substantial out-of-pocket health care expenses before their insurance took over.  Concluding that the MSA legislation was “the result of a number of political compromises that had little to do with health policy, economic research or market demand”, [83] the NCPA made a number of recommendations for MSA reform, including the following:

·        allowing a wider range of deductibles to give insurers more flexibility to design MSAs to meet consumer needs;

·        allowing the market to determine the out-of-pocket exposure under MSA plans;

·        permitting employer and employee contributions to MSA plans; and

·        removing the enrollment cap of 750,000. [84]

 

7.3.2   Medicare Plus Choice

The Medicare+Choice MSA plan combines a high deductible health insurance plan (in the order of $6,000) and a medical savings account.  Under this program, Medicare pays the insurance premium, which because of the high deductible is lower than a typical health insurance premium, and deposits the difference between the cost of the premium and the normal Medicare capitation amount in an MSA.  Plan contributions are the same for all beneficiaries but payments are adjusted for demographic and health status.

The Medicare+Choice MSA was intended to give Medicare beneficiaries more control over their health care by allowing them to choose their health care providers under financial arrangements that they would negotiate.  One benefit it was hoped that this approach would achieve was reduced spending on discretionary health care as beneficiaries became more conscious of the costs involved.

Under the program, only the Medicare authority is permitted to make deposits to MSAs; Medicare beneficiaries cannot contribute to the account.  Deposits and interest earned are free of federal income tax and qualified spending from the account is tax-free.  Beneficiaries who do not have major health expenses can take the MSA payment as additional income over time.  The savings account can be used for medical expenses that qualify for income tax deductions and for payment of certain insurance premiums such as long-term care.  If the amount in the account accumulates to more than 60 percent of the annual deductible level, the amounts above 60 percent can be withdrawn penalty-free for any purpose (although these amounts would be treated as taxable income).  On death, the MSA can be transferred to a spouse who is designated as a beneficiary and will be treated as the spouse’s MSA.  Otherwise, the MSA loses its MSA status and the fair market value becomes taxable.

As of November 2000, no organization had applied to offer an MSA plan to beneficiaries under Medicare+Choice.  Consequently, Congress asked the Medicare Payment Advisory Commission (MedPac) to report on how the program could be changed to make it a viable option for organizations and Medicare beneficiaries.

MedPac’s November 2000 report, Medical Savings Accounts and the Medicare Program, concluded that the private sector would not offer Medicare MSAs for two reasons:

1.      little demand from the risk-averse Medicare beneficiary population, and

2.      the expense and difficulty of marketing a complex product such as Medicare MSAs to a fragmented and scarce set of customers. ^[85]

MedPac noted that as premiums under the traditional Medicare plan are relatively low and plan coverage is broad there is little incentive for Medicare beneficiaries to move to MSAs.  While MedPac observed that some of the conditions applying to the program that discouraged participation could be changed, it concluded that institutional changes would probably not encourage much participation because of the underlying market characteristics.  In addition, the report noted that most of the steps intended to increase participation would “decrease beneficiary protection or increase the financial risk to the Medicare program.” ^[86]

 

7.4     Proposals for MSAs in Hong Kong

In December 2000, the Hong Kong government released a consultation document on health care reform entitled Lifelong Investment in Health. ^[87]   Acknowledging that the sustainability of Hong Kong’s health care system is “highly questionable”, the document puts forward a three-pronged strategy for ensuring the system’s long-term financial sustainability.  The third prong, after reducing costs/enhancing productivity and revamping the fee structure, is the introduction of MSAs called “Health Protection Accounts”. ^[88]  Health Protection Accounts will have the following key features:

·        the creation of a personal account for the individual and the spouse comprised of mandatory contributions by the individual of one to two per cent of earnings from age 40 to 64;

·        savings cannot normally be withdrawn from the account until the person reaches 65;

·        on withdrawal, the savings can only be used for the person’s or spouse’s medical and dental care, based on public sector rates, or to purchase medical and dental insurance from private insurers;

·        if a person chooses services in the private sector, he or she will be reimbursed at public sector rates from the accumulated savings, any price difference will have to be met from the person’s resources outside the savings accounts or from private insurance;

·        on death, unspent savings left in the account will be passed on to the surviving family. ^[89]

The purpose of the Health Protection Account is to assist “individuals to pay for heavily subsidized medical services after retirement, and not to shift the burden to the next generations”. ^[90]  To keep the savings rate at an affordable level, the proposal limits withdrawals from the account until age 65 and after and provides for reimbursement of costs at public sector rates.  The government estimates that for a family at a median income level, based on the average utilization rate, a couple will be able pay for medical expenditures at public sector rates up to the average life expectancy age. ^[91]  The Hong Kong government intends to conduct a further study of the merits and feasibility of Health Protection Accounts in 2001-2002.

For individuals who have saved very little or who have exhausted their savings because of frequent illness, the paper makes brief reference to (but does not detail) a second “safety net” provided by the government.

To deal with individuals requiring long term nursing care, however, the consultation document mentions a proposal for a separate personal savings account, “Medisage”, with contributions from the individual at the rate of 1% of salary to purchase long-term care insurance upon retirement.  Because long-term care insurance is not well developed in Hong Kong, the government proposes to conduct more in-depth studies of options for long-term care and the features of the scheme. ^[92]

 

7.5     MSAS: the Debate

There is no consensus among experts on the impact of MSAs on health status and on health care costs.  On the one hand, proponents maintain that MSAs increase consumer choice, encourage patients to make more prudent use of health services and reduce health care spending.  MSA opponents, on the other hand, contend that MSAs can realize only small health care savings at best, segment the risk in the insurance market, drive up insurance costs for those remaining in comprehensive plans and have an adverse impact on health as people, particularly the poor and unhealthy, cut back on necessary health care.

Could a system of MSAs be implemented in Canada?  A study authored by University of Calgary health economists, Cam Donaldson, Gillian Currie and Craig Mitton, pointed out that the task in Canada would not be particularly easy.  In their view, there are practical problems associated with implementation and other structural issues that would have to be addressed before any benefits associated with MSAs could be realized.  First, the advantages of consumer choice associated with MSAs might be limited in the Canadian context because Canadians already have considerable leeway in choosing their doctors and specialists.  Similarly, MSAs might have a limited impact on encouraging Canadians to invest in their own health choices because Canadians can already make many of these investments. ^[93]

Donaldson, Currie and Mitton mentioned the problem of “asymmetrical information” as another limit on the possibility for gain from MSAs.  Many consumers may have difficulty making informed decisions about their health care because they lack the appropriate information.  In addition, the ability of consumers to become active health care consumers may vary across age and socioeconomic groups. ^[94]  Finally, they stressed that if governments were to allocate their health care dollars to MSAs, health care spending would remain the same.  With money in MSAs, however, consumers may demand more and better access to services but the system may not be able to accommodate those increased demands and expectations.  Their study concluded by suggesting that “valid and reliable piloting of the medical savings account model in a Canadian setting would certainly be required before fully informed judgments about its impact can be made.” ^[95]

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