China Embraces Medical Savings Accounts

Commentary, Healthcare & Welfare, Frontier Centre

Alberta’s new health care report tiptoes in the direction of major structural reforms to Canada’s faltering Medicare system, and its favourable reception indicates the depth of public frustration with the status quo.

Its themes of service guarantees, measuring costs, defining the quality of care and posting waiting times on the Internet echo successful reforms pioneered in Sweden. For the first time, the concept of medical savings accounts (MSAs), where money is transferred directly to individual consumers, enters the official dialogue as a means to fix Medicare. The Alberta version proposes to let individuals who do not over consume health-care services keep the money saved in an individual account.

Health insurance programs based on MSAs have produced substantial savings for American companies, a 23% average reduction in spending, according to the Alberta Health Commission report, without any loss of wellness for account holders. MSAs lie at the heart of Singapore’s top-rated health-care system, notable for its simultaneous capture of low costs, excellent services and facilities, high salaries for providers and health outcomes superior to Canada’s (Singapore ranked number 6, in the World Health Organization Report, a United Nations international comparison of healthcare effectiveness published in 2000, compared to Canada’s 30). China, rapidly industrializing and challenged with servicing the health needs of the largest population in the world, began to embrace MSAs in 1994.

China faces the same demographic challenge as occidental countries. Its population is aging rapidly, meaning it needs to upgrade its medical system to meet the increased need. Since China began to marketize its economy in 1978, per capita income has quadrupled, meaning that the money exists to pay for more health care. The country has since reduced its government share of GDP from 75% to 35%, with spectacular economic success, meaning that its nominally communist leadership has an enhanced appreciation of the benefits of decentralized markets.

When the Chinese decided to tackle health care early in the 90s, they looked at models other countries use to finance it. The visit to Canada was spectacularly brief; the delegates commented that Medicare was “too socialistic” and packed their bags. A lengthier look at Singapore’s Medical Savings Account system convinced them to try it. According to researcher Yin Li in a 1999 book “Reform of the Medical Insurance System” (Guangdong Economics Press), China is pleased enough with the results of its MSA pilot project to extend it throughout the country.

What are MSAs? Instead of taxing the money and then providing health care, the government requires all workers to put a portion of their earnings into a special account dedicated to medical needs. Consumers pay providers like they do for any other good, and they get to keep the money they don’t spend. A portion of the account must be used to purchase insurance for long-term and catastrophic care. Lastly, the government endows a special fund to extend the service to the non-working populace, the disabled, the elderly and the unemployed.

Singapore’s triad has been dubbed the 3M system, respectively called Medisave, Medifund and Medishield. That country now beats Canada’s in every respect, by providing prompt and universal access to high quality medical care. It costs a fraction of our budgets because it breaks the purchaser of health resources away from the provider, forcing the latter to compete for patients with better service and more efficiency. Yet health-care workers in Singapore are paid as much as their American counterparts, the highest salary levels in the world. And waiting lists are non-existent, or very short.

China’s MSA project differs from Singapore’s in a few minor respects. Mandated contribution rates started out at a lower rate, although they have since moved closer to Singapore’s, between six and eight percent of salary, depending on age. If an individual account is exhausted, its holder is required to pay up to another five percent of salary into the plan. Anything beyond that is covered by the country’s social insurance pool, although this fund also has a schedule of deductibles. During its wholesale transformation from state-owned to private enterprises, the government has promised to pay 60% of MSA premiums for laid-off workers, and it targets civil servants and pensioners for premium subsidies.

The Chinese MSA program started in 1994 in two cities, Zhenjiang and Jiujiang. In 1996, it expanded to 40 others, with local variations allowed. On the island of Hainan, for instance, MSAs are only used to pay for visits to clinics, while hospital coverage remains the responsibility of the social pool. In 1999, more cities were added, including the largest, Shanghai and the capital, Beijing. The project also began to require higher premium levels in urban areas, two percent of salary from employees and six percent, split between MSAs and the pool, from employers. Although hard statistics on the success of the project are not yet available, its rapid expansion indicates that it is working well.

Canadians argue incessantly about protecting the health care industry from the alleged dangers of competition. Canada remains one of only a handful of countries that forbids public payment to private clinics, despite lengthening line-ups and deteriorating service at funded facilities. Yet a structure of rational incentives that employ a mechanism of choice from a dispersed provider pool is precisely what Medicare needs.

For those Medicare purists who insist on total government financing of health care, it is feasible to construct an MSA model that is not funded by pay-cheque deductions. Under this scenario, Health departments would simply disburse their annual budgets to citizens instead of bureaucrats, and endow MSA accounts for each of us. The crucial principle is retained, namely that spending is controlled by individuals with an incentive to husband the resource. The advantages of a competitive health care market would still be captured.

The response to Alberta’s health report by various groups including the federal government has been generally positive. Linking individual behaviour to rewards within a consumer-oriented model is creating superior outcomes in other countries, and it can work here as well.

If communist China is allowing individual medical accounts, how long can Canada hold on to its dead-end policy of disallowing competition in Medicare?

”Code Blue” by David Gratzer is available through the Frontier Centre online bookstore