What is a medical savings account? In Milton Friedman’s words , “A medical savings account enables individuals to deposit tax-free funds in an account usable only for medical expense, provided they have a high-deductible insurance policy that limits the maximum out-of-pocket expense.”
The requirement for a high-deductible (i.e. excess) insurance policy arises because of the policy objective of ensuring everyone is protected from financial ruin due to high-expense injuries. Low-deductible insurance policies are not appropriate as they generally cover only small monetary expense (which does not usually lead to financial ruin). The effect of instating medical savings accounts would be to voucherise the present Medicare system. As Friedman notes in his essay in the Hoover Digest (2001):
“It seems clear from private experience that a program along these lines would be less expensive and bureaucratic than the current system and more satisfactory to the participants. In effect, it would be a way to voucherize Medicare and Medicaid. It would enable participants to spend their own money on themselves for routine medical care and medical problems, rather than having to go through HMOs and insurance companies, while at the same time providing protection against medical catastrophes.”
While Friedman’s proposals are made in the American context, in principle, they would be suited to any country:
“A more radical reform would, first, end both Medicare and Medicaid, at least for new entrants, and replace them by providing every family in the United States with catastrophic insurance (i.e., a major medical policy with a high deductible). Second, it would end tax exemption of employer-provided medical care. And, third, it would remove the restrictive regulations that are now imposed on medical insurance – hard to justify with universal catastrophic insurance.”
“This reform would solve the problem of the currently medically uninsured, eliminate most of the bureaucratic structure, free medical practitioners from an increasingly heavy burden of paperwork and regulation, and lead many employers and employees to convert employer-provided medical care into a higher cash wage. The taxpayer would save money because total government costs would plummet. The family would be relieved of one of its major concerns – the possibility of being impoverished by a major medical catastrophe – and most could readily finance the remaining medical costs. Families would once again have an incentive to monitor the providers of medical care and to establish the kind of personal relations with them that were once customary. The demonstrated efficiency of private enterprise would have a chance to improve the quality and lower the cost of medical care. The first question asked of a patient entering a hospital might once again become What’s wrong?’ not What’s your insurance?'”
Voluntary medical savings accounts would allow for reduction in the health bureaucracy and place power over health decisions in the hands of those best placed to make such decisions – individuals and their families. As Medicare is gradually phased out, the medical savings account system would be completely optional for those no longer covered by the public insurance system. But the incentive of tax deductibility would apply to those who chose to take up the option, provided they purchase the required type of insurance.
For those wanting a tax-free medical savings account to insulate themselves against future medical expenses, but who are unable to afford the mandatory insurance, I propose that government step in and cover the costs. This will ensure every person who wants to insulate themselves against health costs is able to.
In summary, medical savings accounts would be established in the following manner:
1. Governments would establish the framework for voluntary medical savings accounts (with tax deductibility) for those no longer covered by Medicare.
2. To take advantage of the tax benefits individuals would be compelled to purchase insurance with a high-front end deductible (to limit their costs to a maximum amount for catastrophic events).
3. Those wanting a medical savings account but unable to afford the compulsory insurance will have their costs covered by government.
The present system of compulsory superannuation/social security contributions would be abolished.