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© Copyright 2000 Rogers Media. The following article first appeared in the February 2000 edition of
BENEFITS CANADA magazine.
What Future Healthcare?
Reviving Canada's healthcare system demands radical change. The medical savings account is an
important start.
By David Gratzer
Forget about practising medicine," a provincial health minister's assistant advised, "the real money's in
healthcare consulting."
Provincial governments are desperate for advice on how to reform our healthcare system. For over a decade,
they have experimented with everything from bed closures to regional health boards, all in the name of cost
control. The results haven't been stellar. Waiting lists are long and growing. Hospital standards are
lackadaisical. High-tech diagnostic machines are scarce. Talented physicians are leaving for the United
States. The public is increasingly concerned.
What's a health minister to do? The answer may be found in a company from Indiana.
Based in Indianapolis, Golden Rule is an insurance company with some 1,300 employees. Like most U.S.
corporations, it provides its employees with healthcare coverage. In the early 1990s, management at Golden
Rule had a problem: with expensive new technologies such as MRI scanners and powerful pharmaceuticals, the
cost of healthcare was rising dramatically. The company had to find a way to save money on healthcare
coverage.
Many companies in the U.S. have responded to this problem by looking to health maintenance organizations
(HMOs), which attempt to balance patients' needs with cost control. Golden Rule decided that managed care
may not be the best option. Why have a bureaucrat make decisions for its employees? The employees should
make their own decisions. So in 1993 the company decided to experiment with a new type of healthcare
coverage.
To ensure that a major illness wouldn't bankrupt an employee, Golden Rule provided catastrophic
insurance--a policy that covered all expenses above US$2,000 a year. Thus, an employee hit by a bus or
stricken with cancer wouldn't have to sell his house to pay for the medical bills. For minor health
expenses such as yearly physicals, X-rays and prenatal care, the company deposited US$1,000 in a special
medical savings account (MSA). When an employee needed minor medical attention, she simply paid for it from
her MSA. For families, coverage began at US$3,000, with US$2,000 put into the MSA.
Because the plan was new, Golden Rule decided to make it optional. Employees could either stick with their
traditional insurance plan or choose the new plan. In 1993, most employees--some 80% in all--chose the MSA
plan. Over the next half-decade, the popularity of the program grew. Today the MSA plan is the choice of
98% of employees.
The popularity of the program isn't surprising. When an employee wants to see a doctor, she doesn't have to
fill out forms or get permission from an HMO bureaucrat. She simply goes to the doctor and pays for the
visit using her MSA. As an incentive for the employee to spend wisely, Golden Rule allows money remaining
in the account at the end of the year to be withdrawn and spent freely. For the average employee, this
translated into a US$1,000 bonus per year.
MSAs also offer employees new choices. Since they have cash on hand to pay for health services, they can
purchase preventive care. According to the vice-president's office, a full 20% of employees reported in
1994 that they purchased services they wouldn't have under the traditional insurance. Today the statistic
is closer to 26%.
And, for the management of Golden Rule, medical savings accounts have meant a drop in healthcare costs.
Major health expenses dropped in 1994 by 40%. This drop isn't surprising, patients have an incentive to
think before they use health services.
Is this the way to achieve a better healthcare system in Canada? Can we address the fundamental woes of
medicare without having to settle hundreds of details such as the ideal number of hospitals or the best way
to purchase laundry services?
QUESTIONING MSAs
1 How does an MSA work? Healthcare financed thro-ugh medical savings accounts is built on two
cornerstones: the MSA and an insurance for catastrophic illness. The account is just like a bank
account--it contains a certain amount of money that can be drawn to cover minor health expenses. The
insurance covers catastrophic expenses--thus, it doesn't kick in until a high threshold (deductible) had
been reached.
When we speak of MSAs, we really mean three different levels of payment. First, health services are paid
for by the money in the account. For instance, a man sees his family physician for an annual checkup at a
cost of $15. This amount would be paid from the account. Second, if the money in the account is exhausted,
the individual must pay out of pocket to a point. So a woman who sees many doctors for minor illnesses may
eventually have to take her chequebook to the doctor's office. Third, when patients are really sick, the
high-deductible insurance kicks in. It prevents a catastrophic illness from becoming a catastrophic
personal expense.
As a financial incentive to spend wisely, account holders are given options for using the money remaining
in the account at the end of the year. Depending on the MSA model, account holders can either roll their
balances into next year's account, thereby gaining greater future buying power, or withdraw the money.
2 Would people neglect their health? MSAs require that people make health-related decisions for
themselves. And who better than you to make decisions about your healthcare? It's easy to see the advantage
of such an arrangement. There's not only increased autonomy but also an increased incentive to not rush to
the doctor for every illness, because you get to keep any unspent money in your account.
But the MSA concept has its share of critics. Yes, abuse of medicare would be reduced. But at what cost?
The lonely senior citizen may no longer use her family physician's office for afternoon socializing because
of the financial disincentive, but will others begin to neglect their health? Will the neighbour two doors
down--who buys his salsa by the gallon to save money--avoid getting a minor problem checked out until it's
a major problem?
Healthcare, these critics suggest, is so complex that people can't be expected to know their own needs.
Does the average person really know the difference between a flu and meningitis, a mole and melanoma, heart
burn and heart attack? Encouraged not to use the system, won't patients underuse healthcare? Won't such
underuse result in higher long-term costs?
The argument is persuasive, but it isn't supported by the data. The California think tank RAND tracked
2,000 families over eight years in a 1984 study that cost more than US$100 million. The study compared the
health and the healthcare spending of two groups: one with free healthcare, the other with user fees for
services.
The result? People on the free plan were significantly more expensive but in the end no more healthy than
those on the user fee plan. The lack of difference in overall health status indicates that patients are
able to make intelligent healthcare choices when provided with a financial incentive to do so.
There's a further argument in favour of MSAs: they may actually make people healthier than the present
system. Because account holders would have cash on hand, they could utilize more preventive healthcare than
they currently do.
3 What are the immediate benefits of MSAs? Perhaps the single most important benefit of medical
savings accounts would be their effect on the doctor-patient relationship.
Under medicare at present the doctor-patient relationship is distorted. For the patient, there's no need to
think about cost. As a result, patients tend to overuse health services--they see doctors too often, they
request too many tests and they stay in hospitals too long. For the doctor, the impetus to serve the needs
of patients is replaced by the impetus to serve a fee schedule. Doctors thus have an incentive to
overprovide health services. Provincial healthcare reforms--really a euphemism for limiting the
availability of health services to patients--have attempted to offset these incentives.
MSA-based reforms would restore the doctor-patient relationship. Patients would be held financially
accountable for their decisions. Every dollar spent on a test would be one dollar less in a patient's
account. The doctor, in turn, would receive compensation from patients, not from a provincial government.
The doctor-patient relationship would be reinvigorated with financial ties.
4 What are the long-term implications of MSAs? Medical savings accounts offer a long-term advantage
over the present system: sustainability.
Although the effects of an aging population are seldom discussed in Canada today, this demographic shift
threatens to bankrupt our social safety net. An aging population has profound implications for future
healthcare usage. It's common sense, after all, that a 70 year old sees a doctor more often than a 20 year
old, and studies confirm this assumption. From a societal point of view, these implications are
far-reaching: as the percentage of elderly Canadians doubles to a quarter of the total population over the
next four decades, more Canadians will demand health services, yet the number of working Canadians will
decrease relatively. Canada's healthcare Titanic is heading full-speed toward a financial iceberg.
The problem is that the present system is financed on a pay-as-you-go basis. Today's medical bills are
footed by today's taxpayers: governments fund healthcare out of general tax revenue. Tomorrow, when there
are fewer taxpayers and more healthcare consumption, it will be more difficult for taxpayers to foot the
medical bills.
The pay-as-you-go approach to healthcare will inevitably result in disaster. The alternative is to have
people save for the healthcare needs of their elderly years. Because MSAs encourage people to save money,
they provide capitalization--just what Canadians need to see baby boomers reach and live beyond retirement.
It's possible to hypothesize what would happen over the next 40 years if MSAs were in place. Given the
incentive to spend wisely, today's middle-aged Canadians would spend the money in their accounts frugally,
allowing money to accrue over the years. The savings would grow, creating a healthcare nest egg. In their
elderly years, these new seniors would have to pay more for catastrophic insurance--the possibility of
catastrophic illness is much higher, of course, for seniors--but they would have savings to cover the
expense.
5 What about the poor? Many supporters of medicare have argued that any change to the system would
be detrimental to the poor. There is some evidence, in fact, that certain healthcare reforms may adversely
affect the poor.
The RAND Health Insurance Experiment, for instance, concluded that user fees caused poor patients suffering
from high blood pressure to neglect their condition. This wasn't the only such study. In 1982, California
substantially changed its health coverage for the poor. When the effects of these changes were studied,
researchers concluded that the poor suffered from a significant increase in uncontrolled hypertension.
The Consumer Policy Institute suggests that all preventive health measures--such as regular blood pressure
checks--should remain free. Cost-free prevention is likely unnecessary. After all, a well-designed MSA
system makes it easy for the poorest citizens to get quality healthcare--they can be directly granted money
by the state for their healthcare needs. And those with special medical needs--chronic conditions such as
hypertension or diabetes--could be granted more money.
In fact, the poor may well be better off under an MSA system for three reasons. First, MSAs would allow
them to pay for the many services that provincial governments have either deinsured or tagged with stiff
user fees. A poor Albertan is required to pay for both a visit to an optometrist and crutches should a leg
be on the mend. An MSA would provide him or her with the money to cover these expenses. Second, MSAs would
give Canada's poor the cash necessary to purchase certain types of preventive medicine. Third, an MSA
system would be sustainable over the long term. Those who will be hurt the most if our public system
collapses are the poorest citizens, for they are the least able to pay for healthcare.
6 Would MSAs pass the five pillars test? A healthcare system should be judged by its ability to meet
five criteria, the five pillars. Although the present healthcare system doesn't pass the test, an MSA-based
system would. Let's consider each criterion.
Patient orientation. Health services would have to make patients their priority or face the wrath of
an empowered consumer. With MSAs, patients would pay for their own healthcare. Thus, decision making would
rest not with bureaucrats but with patients.
Accessibility. Catastrophic insurance would prevent major medical expenses from becoming financial
catastrophes. And, since the state would directly help the poorest citizens by providing them with
healthcare dollars for their accounts, no citizen would be deprived of the healthcare needed.
Quality. As with any system that promotes competition, the clinics, hospitals and other providers of
healthcare services would have a financial incentive to improve services to attract patients. Healthcare
providers would naturally want to invest in the latest technologies, innovate their delivery of health
services and ensure proper quality standards.
Timeliness. In areas where patient demand outstrips the available supply--for example, high-tech
diagnostic equipment--clinics and hospitals would have an incentive to invest in the needed equipment.
After all, patients' needs translate into opportunities for healthcare providers in an MSA system.
Cost effectiveness. Because patients would be held financially responsible for their actions, they
would have a strong incentive to become more informed and then shop around before making healthcare
decisions. This effort would reduce the number of unnecessary tests and procedures. And it would force
healthcare providers to streamline--excessive administration and inflated employee wages hurt
competitiveness.
7 Can MSAs address the problems with medicare? Medical savings accounts aren't a miracle solution.
But an MSA system has the potential to address many of the problems with the present healthcare system in
Canada. Of course, the devil is in the details--a poorly designed MSA system is going to be riddled with
problems. Long-term sustainability, for example, is possible with MSAs--but only if people have an
incentive to spend the money in their accounts prudently and then have the ability to invest the remaining
funds. But MSAs are the way to go if we're looking for an alternative that addresses medicare's woes (e.g.,
waiting lists, a lack of high-tech equipment, an exodus of physicians) yet preserves the characteristics we
associate with an effective healthcare system.
Waiting lists are the biggest concern that Canadians have with their healthcare system. The lists are not a
medical but an economic problem. Because patients have no incentive to think twice about using healthcare
services, policy makers are forced to find ways to ration healthcare. Making patients wait for treatments
and tests is how provincial governments have opted to ration healthcare.
If waiting lists develop within an MSA system, they won't be tolerated (and certainly not encouraged) but
rather viewed as a bottleneck. Because healthcare providers under such a system compete for patient
funding, the bottleneck will be viewed as an opportunity--providers will have a financial incentive to try
to address the problem, whether by hiring more nurses and technicians or by acquiring new equipment and
facilities.
This is an abridged excerpt from Winnipeg-based author David Gratzer's Code Blue: Reviving Canada's
Healthcare System (ECW Press).
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