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The Fraser Institute

Medical savings accounts bring consumer choice to health care

Contact:

Fred McMahon, Senior Economist
The Fraser Institute, (604) 714-4569,
Email fredm@fraserinstitute.ca

For Release: 13 February 2002

VANCOUVER, BC— With momentum building for the inclusion of medical savings accounts in Medicare reform, a new Fraser Institute study shows how MSAs can be used to transform the Medicare system top-to-bottom.

Although MSAs are usually thought of as a demand management tool—creating incentives for people to economize on medical services—Making Health Spending Work, released today, shows how MSAs can bring market dynamics and efficiencies to a publicly-funded health care system. The paper forms a chapter from Better Medicine: Reforming Canadian Health Care, edited by noted health policy analyst Dr. David Gratzer, to be published by ECW Press in Spring 2002.

"Competitive markets — companies and individuals striving to create superior, less expensive products — have brought choice and huge improvements to the lives of Canadians, whether in their safer, more fuel efficient cars, crystal clear televisions, or a choice of electronics that didn't exist a few years ago" says senior economist Fred McMahon, co-author of the study.

"Yet, Medicare continues to falter. Canadians wait in health-threatening queues. Canada suffers no shortage of dentists or veterinarians, but shortages of doctors and nurses plague the nation coast to coast in the publicly managed Medicare system," McMahon said. "For their medical care, Canadians deserve the choices, efficiency and innovation competition has brought to other aspects of our lives. We show how these dynamics can be created in a publicly funded system."

In recent weeks, Alberta's Mazankowski report and the Senate report of Michael Kirby have highlighted MSAs. Roy Romanow, head of the federal Royal Commission on Medicare, says he too is examining the concept. This builds on the groundbreaking work of Cynthia Ramsay, author of the Fraser Institute's Medical Savings Accounts: Universal, Accessible, Portable, Comprehensive Health Care for Canadians, which introduced Canadians to MSAs in 1998.

How an MSA system would work

Under the MSA system outlined in Making Health Spending Work, government would fund an MSA for each Canadian based on health factors, such as age, sex, and medical condition. Canadians could use their MSAs to purchase medical service from public or private sector providers.

Providers who best meet consumer demands would prosper and grow, forcing other providers to improve their services, thus creating incentives for increased efficiency and quality throughout the system. Canadians who outspend their MSAs would be covered by government-funded catastrophic insurance. Poor Canadians would have immediate access to this fund; wealthy Canadians could be required to pay some of their expenses before accessing the fund.

Using standard economic tools, Making Health Spending Work contrasts incentives in today's Medicare system with those in an MSA system. Today, neither consumers nor providers have strong incentives to promote efficiency. Both can often gain from waste. Only the distant bill-paying bureaucracy has incentives to seek efficiencies, but it lacks on-the spot information and is easily outmaneuvered. So, unable to impose efficiency or innovation, the bureaucracy all too often depends on health-threatening queues to limit demand or simply refuses to offer up-to-date treatment.

An MSA system realigns incentives. Consumers, instead of being indifferent to cost, seek the most efficient and effective treatment. Providers can no longer benefit from waste and ignore customer service. Their incentives become aligned with consumers to provide the best, most cost-effective service.

The Power of Special Interests

No monopolist, whether in the public or private sector, enjoys giving up a monopoly. Health care bureaucracies have proved resistant to change while public sector unions have led and funded the fight against reform of Medicare. From a purely human point of view, it's easy to understand why public sector unions in particular have fought so bitterly against reform.

Yet, the need for reform is clear. Canada ranks fifth among OECD members in the amount it spends on medical services yet ranks well down the list in OECD quality categories. Similarly, the World Health Organization ranks Canada 30th in its medical system, at the bottom of the list of affluent nations, along with a handful of other poorly performing developed nations such as the United States and Denmark. Medicare's supporters claim the system is fine as it is or just needs a little bit more money, despite the huge gap between spending and quality that international studies have found.

"The answer is not more bureaucratic control. The answer is grafting the efficiency and dynamism of market economies onto our publicly-funded system," says McMahon. "An MSA system creates dynamics for gains in productivity, improved resource allocation, and sensible demand patterns. Even more importantly, it allows individuals to regain control of their own medical decisions and provides the choices needed for such control to become a reality,"

 


Established in 1974, The Fraser Institute is an independent public policy organization based in Vancouver with offices in Calgary and Toronto.