The Medisave Route to Health Reform

Change. The word has a powerful ring to it, and Americans have made their desire for change loud and clear--especially in the health care system.

Although many problems plague our current health care system, we shouldn't embrace reform simply for the sake of reform. After all, change can be for the better or for the worse.

Unfortunately, the proposal introduced by the President seems to fall into the latter category. The primary thrust of the plan is the creation of new government bureaucracies, price controls, tax increases and rationing.

The country's third-party system of medical services--a system in which individuals receive coverage paid for by business or government--promotes the overuse of health care services, driving up costs and preventing many from obtaining adequate health care. A third-party health plan is comparable to a credit card without the bill. Many individuals have to pay only a fraction of what they spend so they have little incentive to worry about how much they spend on health care.

A Rand Corporation study found that those who had "free" health care spent 50 percent more on health care, were 33 percent more likely to enter a hospital and were 25 percent more likely to see a doctor than those who had to pay for the majority of their costs. If we are to succeed in cutting back health care costs, this system must be replaced by one in which individual consumers are placed at the center of the decision-making process.


In place of the third-party system, the government should introduce a concept developed by National Center for Policy Analysis analyst John Goodman: the Medisave account.

A Medisave account is a personal tax-free interest-earning account that contains money earmarked for health insurance and other medical expenses. In essence, people with Medisave accounts would get tax breaks for their medical expenses. Such an account would permit people to change jobs without jeopardizing their coverage. Workers would own their own Medisave accounts, no matter where they worked.

Workers who chose Medisave accounts would receive larger paychecks--filled with money that employers had taken for employer-provided health plans. Thus, the cost for employers would not change. And the extra money workers received up front should be more than adequate to cover health insurance against major medical claims.

The average business spends $4,500 on each worker's health coverage. For only $1,500, workers could purchase catastrophic health insurance, which protects against medical emergencies.

The remaining $3,000 could be deposited into their Medisave accounts and used to cover minor medical expenses. For routine health services and check-ups, people could simply withdraw money from their Medisave accounts.

The average worker would be unlikely to spend the entire amount in his or her account. Thus, the Medisave account could be a vehicle for retirement coverage as well. Workers could withdraw the excess funds if they wished, but withdrawals for purposes other than health care would be subject to regular income taxes.

Most importantly, Medisave accounts would place the individual, rather than a third party, at the center of the health care decision-making process. Unlike often inflexible employer plans, workers would have the opportunity to pick the plans that best suited them.

Putting the individual back in charge would be a monumental step toward restraining the demand side of the health care equation. People would pay for medical treatments with their own money.

Medisave accounts would also streamline the supply side of the health care market, forcing doctors and other health care providers to improve their services and lower their prices. As services would be purchased directly by individuals, competition would expand among health care providers.

Cost and quality would be the primary factors for consumers to consider, so they would likely shop around for the best plans and prices. Increased competition would force those in the medical profession to improve services and cut costs; if they did not, customers would take their money elsewhere. Costs would be restrained not by rationing or price controls, but by increasing competition. With consumers paying for medical goods and services themselves, the health care market could then function like any other.

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