Medical savings accounts: a solution to finance health care?

• Author: Ferrara, Peter J.

IN OFFERING his health care reform plan in 1994, Pres. Clinton indicated that one of his primary goals, in addition to universal coverage, was to rein in rapidly rising health costs. Ironically, his proposal, and similar ones by both Democrats and Republicans, only would have made the fundamental problem worse.

By expanding traditional third-party insurance to everyone and covering more services, with minimal deductibles, the reform proposal would have maximized the perverse, cost-increasing incentives of third-party coverage. With a third party guaranteeing payment of all medical bills, neither patients nor doctors significantly are concerned about costs. The result is the cost explosion the nation has seen over the past 30 years.

Medical savings accounts (MSAs) are the one reform proposal designed precisely to counter the fundamental cost-control issue. They restore direct incentives to consumers to rein in costs, which stimulates true market cost-control competition.

Moreover, they are the only plan that is consistent with maintaining quality and consumer choice. All other proposals involve shifting more power and control to some third-party bureaucracy, either the government or insurance companies, that then would limit and ration care to reduce costs. MSAs put individual consumers in control of their own health care decisions. Consumers--not the government or insurance companies--decide whether a procedure or treatment is worth the expense.

MSAs are far more than a theory. Despite the heavy discrimination against them in the current Federal income tax code, employers and workers across the country have begun establishing and using MSAs in place of traditional third-party insurance. They have proved highly effective at trimming costs, as well as popular among workers.

Economists from across the political spectrum understand that one of the major factors driving health care costs is the third-party payment system that insulates consumers from the cost of their health care decisions. A third party--a private insurance company or the government through Medicare and Medicaid--usually is paying the physician and hospital bills for the patient. As a result, the patient lacks market incentives to hold down costs. He or she is not concerned with avoiding unnecessary care or tests or shopping for the best-priced care.

Because consumers lack market incentives to control costs, physicians and hospitals do not compete to reduce them. Because a third party is paying the bills, patients do not choose doctors and hospitals on the basis of cost-effectiveness. Rather, they seek to maximize quality without regard to expense. If an extra procedure or test is of even the most marginal value, they will demand it, leading to runaway expenses.

The incentive to ignore the cost of even marginal increases in quality can be seen particularly in the development and purchase of new medical technology and equipment. In most other markets, new technological advances operate to reduce costs. In health care, however, such breakthroughs often seem only to increase costs sharply. Health care providers generally are looking not for new technological advances that would reduce costs to consumers, but primarily for those that will improve quality regardless of expense, because that is what patients are looking for.

The result has been a "medical arms race" with providers adding ever more expensive technology, even if it produces only minimal improvements in quality. Attempts to control the growth of medical technology outside a functioning market have resulted in arbitrary regulatory procedures and requirements, such as certificates of need, that limit consumer choice and have had an adverse impact on the quality of care without significantly affecting costs.

Third-party payment increases health costs in at least two other important ways. First, the degree of third-party payment varies greatly among different types of health services. That often leads patients and physicians to choose services with greater insurance coverage, even though alternative services with less coverage may be at least as effective and less expensive over all. For example, a patient and doctor may choose hospitalization and surgery, which are covered completely by insurance, to treat a condition, even though it could be treated at least as well with far less expensive drug therapy, for which there is little or no insurance coverage. A 1994 study by the National Center for Policy Analysis estimates that such actions unnecessarily hike national health spending by about 16%, or $140,000,000,000 per year.

[ILLUSTRATION OMITTED]

Second, excessive third-party coverage with low deductibles unnecessarily and inefficiently increases administrative costs. Many...