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The Medisave Route to Health Reform

By George Wang

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.

Reforming the tax code would also end a bias against low-income and unemployed workers. The present system most benefits those with high incomes. These wealthier employees have the best health care plans, so they receive the largest tax breaks.

On the other hand, those who are not as well off--the unemployed, self-employed, part-timers and workers who do not receive insurance from their employers--do not benefit at all. The tax break actually hurts them because it drives up costs and prevents many from obtaining coverage of their own.

Those who could not afford health care own their own would not be neglected under the Medisave plan. Medicaid currently covers these people, but it too is a system involving third-party payment and bad incentives.

A better way of ensuring the availability of health care would be to provide them with vouchers which could be deposited into their tax-free Medisave accounts. Recipients could then draw on these funds to purchase insurance and medical services.

Because Medisave accounts would be owned and controlled by individuals--and money not spent would be theirs to keep--voucher recipients would have reason to conserve their medical expenditures.

Many believe that the free market is dysfunctional in the field of health care and that Medisave accounts will never work. They say that although the market may operate well for other goods and services, it cannot work in health care, especially in the case of medical emergencies.

For example, critics argue that most Americans do not understand all the complexities of the health care system. They will not spend the money in their accounts wisely, the argument proceeds, so they need the government's assistance to make medical decisions.

But bureaucrats sitting behind desks are not very likely to successfully choose health care for all. Although very few Americans know how to repair cars or fix leaking roofs, they are still able to obtain these services by turning to skilled workers. The same could happen in a market for health care.

The free market could also be applied to emergency health care. Although people would not be able to compare hospitals and doctors in medical emergencies, they would be able to shop around for insurance, which would cover such emergencies.

Detractors of the market system claim that health care is a vital good, a basic necessity that should be guaranteed to all. But the same is true for food. Without food each individual would die--yet the government does not control the distribution or production of food.

Despite what some think, and despite the political rhetoric, we do not have a market system in health care today. Government regulations, tax code biases and other interferences with the marketplace have produced the wrong incentives and resulted in spiraling health care expenditures. Removing government interferences would enable the market to operate effectively, resulting in the best care for the most people at the lowest cost.

In deciding how to fix our health care problems, we should keep in mind a vital lesson that experience has proven time and time again: free markets work; bureaucracies and price controls do not.

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