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
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
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.
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