Medical Savings Accounts offer tremendous promise for reining in rising health care costs and giving individuals more freedom and choice. According to reports from the insurance industry, 3 million Americans are enrolled in MSAs, triple the number of just 10 months ago. Changing the tax code to make medical insurance tax deductible for individuals — as it already is for businesses — would accelerate this trend and free even more people from the tyranny of employer-dependent health care, just as portable 401(k) plans have done for pensions.
There are two reasons why even modest market penetration by MSAs will have positive effects on our health system. First, when people have an incentive to be frugal, they will shop hard for the best value on routine health services, just as they do when buying autos or groceries. Unlike health care paid for by third party insurers or government, with MSAs economizers benefit from their economizing.
Because consumers under the current system don’t benefit from economizing, there is no incentive to become better informed about different choices. Related to this, there is also little incentive for health care providers to facilitate those choices by providing useful information.
MSAs create those incentives. They turn consumers into shoppers looking for the best value, and that forces providers to explain clearly why the services they offer are a good deal. When this happens, claims that health care choices are too complicated for consumers will lose whatever validity they may have at present.
This leads to the second reason why even modest MSA penetration will change the entire system: the principle of "marginal utility." This doesn't mean "barely useful," but refers to the way businesses actually make decisions. One prominent economist described it like this:"It is on the margin, and not with a view to the big picture, that we make economic decisions."
Therefore, if an MRI clinic loses five percent of its customers ("the margin") to a competitor offering the same service for less, the clinic will respond by lowering its own prices. Today, individuals don’t care which clinic is more efficient (and thus less expensive) because they pay little, if any, of the cost. When even a small percentage of patients do care, efficiency will increase and costs will fall throughout the industry.
The issue is actually more profound than just MSAs. Currently, health care spending accounts for approximately 15 percent of gross domestic product, and almost half of those health care dollars are disbursed by government. Even if spending on health care doubled, the resources would still have to be allocated somehow, because demand is essentially unlimited.
There are two ways to allocate a scarce resource: Rationing by price or rationing by government. The first gives people more freedom and choice. Here’s an analogy: I don’t purchase very much scarce and expensive caviar, but I can if I want to. It’s my choice. Plus, the high price encourages competing producers to seek price-lowering efficiencies (like fish farms).
Government rationing takes away individual choice and also limits the incentives that drive providers to become more efficient. In health care, government rationing is usually imposed through the back door of "waiting lists." This is the approach used in Canada and England, and we’re moving in that direction.
The question we face going forward is whether individual health care decisions will be made by consumers or by government. This is not a liberal versus conservative issue, by the way, because it’s possible to provide care for the poor and indigent within a system of competition and market incentives.
MSAs offer an exit from our current road to government health care serfdom, and onto a path that puts more choices in the hands of individuals, rather than politicians and bureaucrats.
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Jack McHugh is a legislative analyst for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.
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