Executive Summary

Medical savings accounts (MSAs) are health accounts that are established in conjunction with high-deductible health insurance. They can be set up by individuals, employers, or by the government. The most common type is the American employer-funded MSAs. In this type of health plan, employers purchase a high-deductible, or catastrophic, insurance policy for their employees, which is much cheaper than a traditional insurance package. Employers then deposit a portion of the funds saved into MSAs for their employees, who then use these funds to purchase medical care. Once these funds have been exhausted, the employees are responsible for the payment of their medical care up to the cap where the catastrophic insurance begins. All of the MSA funds belong to the employee, including any funds remaining in the account after a specific period (usually a year).

Evidence from American firms that have adopted MSA plans show that MSAs are conducive to more prudent health spending without compromising individuals' health. Where they have been adopted, MSAs have resulted in lower employer and employee costs, accumulated savings, and high degrees of employer and employee satisfaction. The empirical literature in the United States indicates that MSAs or similar arrangements have the potential to reduce health expenditures up to 20 percent. One would predict an even larger decrease in health expenditures had these simulations been performed using Canadian data because Americans already face financial incentives with respect to their use of health care while Canadians do not for the most part.

Opponents of cost sharing point out that, because of consumer ignorance, individuals may delay seeking care or forgo efficacious preventive care when faced with medical expenditures (i.e. when medical care is not free). This may subsequently result in higher medical expenditures if, for example, the illness has reached a more advanced stage. As well, it is often argued that, again due to consumer ignorance, physicians (suppliers) are able to induce demand. For these reasons, they argue, publicly funded health care and government intervention in the market are not only justifiable but necessary. However, studies have shown that, on the whole, cost sharing reduces the use of health care services with little or no net adverse effect on people's health and there is great uncertainty whether supplier-induced demand is a large problem in the health care sector.

Canadian governments could easily provide individuals with catastrophic insurance and deposit funds into MSAs. The size of the government contribution could vary from the whole to a fraction of the catastrophic insurance policy's deductible, depending on a person's health, age, and income level. When faced with medical expenses, individuals would first use the money in their MSA (which can be used only for health-related expenses). At the end of the year, any funds remaining in a person's MSA may be withdrawn, left to accumulate in a separate account for future medical expenses, or rolled over into a retirement savings plan.

The latter two options allow for capitalization of the health care market. Any funds invested today gain interest and can be used in the future for the more expensive care most individuals will need when they are older. This is the contrary of the current system, in which the tax dollars of today pay for health care today and, because health care funds are spent immediately, there is no opportunity for them to be invested and to grow.

Medical savings accounts can encourage more prudent use of the health care system and introduce competition into the medical market-place without creating financial barriers to care. MSAs provide incentives for consumers to take a more active role in their consumption of medical care services and in their overall health status. The most promising characteristic of MSAs in a Canadian context is that individuals will be able to purchase medical services with money they can otherwise keep because any funds remaining in the account at the end of the year are the property of the individual. In effect, MSAs can indirectly establish a cost-sharing device without infringing on the important philosophical cornerstones on which the Canadian health care system is built: universality, accessibility, portability. and comprehensiveness.

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Last Modified: Wednesday, October 20, 1999.