The Gaps Left By Private Health Insurance - Dissertation Example

 Do Medical Savings Accounts Fill the Gaps Left By Private Health Insurance? To what extent do medical savings accounts address the deficiencies of private health insurance? Discuss with reference to relevant country experience. Introduction Medical Savings Account and Private Health Insurance are the two private mechanisms for funding health care. The Singapore system of health care through its profound model of Medical Savings Account has recently attracted universal attention and it has been practiced by many countries in different ways. Singapore shows an illuminating example of modern, effective and universally applicable health care system. The private health insurance market failed to serve health care to those who are in greater need of it. The poor and unhealthy were being deprived of health insurance due to the increased expenses of premium and other costs. With countries currently experimenting Medical Savings Account and experiencing market failure of Private Health Insurance, it is appropriate to revisit both systems and to analyze whether medical savings account can fill the gaps left by private health insurance. This research paper presents a detailed discussion on how effective is medical savings account and how can it fill the gaps left by private health insurance. The paper details the reasons behind market failure of private health insurance and successful pathways of Medical savings account. Medical Savings Account Medical savings account evolved first in Singapore during 1984 as an alternative method of prepayment which is meant to address cost escalation caused by moral hazards (Mossialos and Dixon, 2002, p. 121). Medical Savings Account is a trust or custodial account for which a bank or an insurance company works as trustee for the benefits of the individual or family (Prescott, 1998, p. 27). Medical savings accounts are savings accounts for individuals by which people are required to deposit money or are encouraged to deposit money. The money collected by medical savings accounts should be utilized solely for the personal medical expenses (Mossialos and Dixon, 2002, p. 5). Medical saving accounts are considered to be tax-deferred because money contributed to medical savings accounts or money earned from unused balances are exempted from employee’s personal tax and these allow customers to save money for medical expenses. Either employer or employee keeps a portion of that part of money which is spent on health insurance to the Medical savings account and the other portion is used for obtaining catastrophic policy to cover medical expenses. Health Savings Account, a synonym for Medical savings account was created on December 2003 by a Medicare Bill signed by George W. Bush. It functions as a part of high deductible health plan in America. It can be best viewed as Medical IRA because, Health savings account combines a health insurance plan with a tax free saving account (Sedhom, 2008, p. 1) The medical savings account is based on the principle of self-reliance, because citizens are required to keep a portion of their income for saving purpose every month mainly for meeting their health care costs (Mossialos and Dixon, 2002, p. 121). According to Michael D. Barr (2003), the basic idea and philosophy of Singapore health care system underpinned with Medical Savings account is ‘individual responsibility, coupled with government subsidies to keep basic health care affordable’. The patients are entitled to keep a portion of the money that they spend on health care expenses so that it enables them to pay more when they demand a higher level of service (p. 710). The Singapore system of medical savings accounts is evolving efforts to reconcile the aversion of Singapore government to welfare concepts that health services must be provided to the whole population for both economic and political apparent reasons (Barr, 2003, p. 710). The difficulties faced by individuals and families in the health care and insurance market like moral hazard, adverse selection due to lack of risk pooling and increased administrative and maintenance expenses could be overcome with the help of medical savings accounts. In Singapore, medical savings account functions in an effective way that each working person or employer for employee must compulsorily contribute a certain portion for health care. The money contributed to medical Savings accounts can be utilized for meeting various medical expenses that are tax exemptible. These medical expenses include anesthetic, chiropractor, surgery, acupuncture, psychologist etc. the unused money can be saved for further needs and the interest earned thereof is also tax deductible and thus medical savings accounts. The customer is free to withdraw money at the year end keeping a minimal balance. Contributions to the medical savings account have no lower limits, but were restricted to have upper limits. It is because, the unlimited savings account may later on turn to be an open source of tax preferred saving vehicle for high income individuals (Prescott, 1998, p. 27). Medical savings accounts function in an effective way in Singapore where it constitutes to be a form of compulsory contribution for health care. Singapore health care system includes three parts namely Medisave, Medishied and Medifund (Mossialos and Dixon, 2002, p. 121-122). According to Mediasave, each employee must deposit 6-8% of tax deductible income in to a Medisave account to pay for hospital and outpatient expenses. The employee’s family will be compensated by the account balance at the time of his death. Medishield is an insurance system against catastrophic illness for which insurance premiums are deducted from medical savings account. Medifund is like an endowment fund by which poor people are provided with medical care at open wards (Mossialos and Dixon, 2002, p. 122). Private Health Insurance Private health insurance is the primary source of health insurance for non-elderly Americans. Employment-related insurance is highly important among private health insurances (Stapleton and Burkhauser, 2003, p. 183). Private health insurance premiums are paid by individual in a way that employer and employee shares it or it is paid wholly by the employer. The premiums are calculated and based on certain criteria like individual risk, probability of a person’s illness and health care expenses, nominal risk that is accounted in a particular geographical area etc (Mossialos and Dixon, 2002, p. 5). The premiums are calculated on the basis of risks associated with and these premiums are pooled among workers. Independent private bodies can collect premiums for health insurance. Through tax relief government supports and subsidizes the expenses of private health insurance. Mossialos and Dixon (2002) stated that funds are generally pooled among subscribers of the same insurance company in the case of private health insurance. If premiums are calculated on the basis of community being rated, the pooling of risk is between high risk and low risk members in the same geographic territory (p. 6). Private health insurance coverage varies among different segments of the population. Gutowski and Bonin (1998) finds out that people in southern states, low income families and young adults have lower access to private health insurance than national average. People who are employed in small firms or small scale industries, part time workers or those who work in agricultural sector are less likely to get coverage of private health insurance (p. 19). Private health insurance is classified as substitutive, supplementary and complementary. It also comprises of different types according to the calculation of premium for each one. Substitutive insurance is available only to those who are excluded from public insurance cover or those who have freedom to opt out of the public health care system. More specifically, only healthy as well as wealthy people are going to benefit from substitutive insurance. ‘People who earn less need to pay higher premiums to compensate for the higher risks’ shows that funding mechanism is regressive and funding arrangements are not proper for the welfare of the public. The health care services that are not fully covered by statutory health care system are covered by complementary private health insurance and this is, up to an extent, not affordable to those who are earning less as in the case of substitutive insurance. There too remains an unequal funding distribution that poor people have over burden of excessive premium payments (Mossialos and Dixon, 2002, p. 5). Private Health Insurance and Market Failure There is higher demand for health care among poor people, but it is not supplied accordingly. A vital portion of the market demand has been untouched by the health care marketing system. It can be said to be the economic problem persisting in health care insurance market. ‘People who earn less need to pay higher for premium’ is certainly the most obvious unequal distribution of health care system which in turn shows the ‘gaps left by Private Health Insurance’. Scott (2002) finds that there are various reasons behind the market failure of health insurance market. Basically, the effective way to run a market is through a perfectly competitive market. But, many of the assumptions of perfectly competitive market model do not apply with health insurance market. Uncertainty, externalities and information asymmetry are the main reasons that led to the market failure of private health insurance (p. 13-14). Basically, people are uncertain about when they are going to benefit with health insurance, how much they will be able to use and how much will it costs etc. As obvious from insurance market, there are premium differences between a large and small company. A large company with more number of policy holders is more likely to charge fewer premiums than that of a small company with fewer members. It is because; the fixed administration and maintenance expenses are pooled among large number of people in the case of a large insurance company. The large company certainly has economies of large scale. This creates premium variation in the market as well. Scott (2002) argues that the above scenario will cause small companies either to quit the market or to be merged with large companies. The large companies will have monopolistic behavior in the market which in turn may lead to exploitation of consumers in health care market (p. 15). The higher premiums set by large companies with monopolistic characteristic would be unaffordable to a major part of the population and hence they would probably not insure. Scott (2002) finds that lack of financial responsibility by patients as well as doctors leads to the market failure of private health insurance. It is known as moral hazard. (p. 15). When expenses for goods or services are paid by a third party, it is quite psychological that the value for that goods and services would be considered less. A ‘paid service’ and ‘free service’ are different in values and responsibilities. Customer is more likely to buy the service if it is free and same time, the utility will diminish or the value considered for that service will decline. But, if the service is a paid one, the customer is not likely to buy it more as he needs to pay each time. The case of private health insurance is same. When a patient’s medical expenses are paid of or reimbursed by the insurance company, neither patient nor doctor feels that costs are incurred. This is the moral hazard prevailing in health insurance market. Scott (2002) emphasizes that patient is more likely to visit doctor it the service is free and as a result he would be least bothered about adopting healthy life routines as they know that there are un-paid services available in the even if they fall ill again. This increases the health care costs which leads to increased premiums and in turn fewer people to buy insurance (p. 15). According to Scott (2002), adverse selection remains to be another reason behind the market failure of private health insurance. It is because of that there is uncertainty in health insurance market. While companies set a community rated insurance premium, how much would be the individual health care consumption and expenses remains uncertain or unknown to the companies (p. 17). In this scenario, even those who are less risky also will be charged of higher premiums. Some people opt not to insure in such instances. Same time, for higher risk individuals, the community rated premiums may be less comparatively and as a result companies would suffer loss. Scott (2002) argues that insurance premium will turn to be increased when community rated premiums set by the companies are less for the higher risk individuals (p. 17). These market situations will necessarily make insurance companies aware of gathering information regarding low risk and high risk individuals. Insurance companies would certainly have two faces in dealing with high and low risk individuals. They would attempt to insure low risk individuals and try to avoid high risk individuals. Only the healthiest individuals are insured. Scott (2002) finds that health insurance market’s failure is also caused by externalities that may positively or negatively affect third parties (p. 18). When an individual uses health care, it would certainly affect others positively or negatively. According to market economic assumptions, the costs and advantages of a person’s consumption of services would not affect others, but only him. According to Scott (2002), externalities in health care insurance are the costs and benefits that fall on others that in turn can be regarded to be misallocation of resources leading to over or under production of the services (p. 18). Health insurance market failure has largely been caused by unequal distribution of information about health care between doctors and patients. Doctors have more information regarding health services to be provided and about the final effect. Scott (2002) argues that information asymmetry between doctor and patient creates agency relationship between doctor and his patient which in turn allow more freedom to the doctors to perform or function according to their will and ways as they seem advantageous to them (p.19). Doctors often think to work in order to increase their earnings and in extreme to cause any harm to the patient that may is likely to benefit the doctor. If patients also get same information as do doctors get, the potential harm in information passing and thereby health care exploitation by doctors can be avoided. Identifying the gaps left by Private Health Insurance There have been growing concerns and debates over the effectiveness and applicability of Private Health Insurance market in providing public health care. As is discussed earlier, there are various reasons for market failure of private health insurance like uncertainty, externalities and asymmetry of information etc. People with severe chronic disabilities who need to obtain private health insurance may face difficulties regarding coverage and it is even difficult for those who are under severe attacks of diseases to obtain insurance out of work due to high premium and underwriting expenses. Premium for individual insurance policies is higher than that of employment related insurance and also this insurance premium may vary depending on how a state regulates its health and insurance market (Stapleton and Burkhauser, 2003, p. 184). It means, poor and low income people have worst health, in most cases, and thus, they have to spend more to get the required health care coverage. It also can be observed from those countries where private health insurance is the main form of insurance that a good majority of the population lacks appropriate health care. When insurance premium is getting higher and is becoming unaffordable to poor and un healthy people, they opt out taking insurance.The gaps left by Private health insurance is apparent from the cases of many countries and it has been widely debated that Private health insurance is not an effective mechanism for funding health care because, the neediest people for health care are deprived of the fuller benefits of health care systems in many countries. Lubkin and Larsen (2006) emphasize that private health insurance is declining in US market though it accounted to be 61 % of the total health care funding. Majority of US residents under the age of 65 used to obtain health insurance through their employers. The most important thing to be noticed is that the goal and ultimate target of most of private health insurance companies are to generate revenue and to maximize it (p. 619). Harrington and Estes (2004) argue that if private health insurance plays vital role in health care and it manages health care system rather than public health care, the health care future would be a difficult scenario. The health care would be provided by private companies and it would be financed through either private or government insurance plans. It will turn to be an expensive health care system. In contrast, a government administered health plan like Medicare would be significantly and dramatically less expensive than private health plans (p. 409). How can Medical Savings account fill the gaps? Mossialos and Dixon (2002) examines how successful is the Medical savings account system in providing public health in Singapore and thus to bring up with rapid economic growth. The as of 1992, 95% of working Singaporeans deposited and saved money with Medical savings account that accounts to be US$ 9 billion. The recent rapid economic growth in Singapore is certainly due to their high technology medicine as well as extraordinarily high savings rate (p. 122). Medical savings account provides easy access to all the sectors of the public including both poor and unhealthy people. It is a sound mechanism for health care funding as it has combined publicly subsidized primary and required hospital services and it ensures that every one has access to the medical care (Mossialos and Dixon, 2002, p. 122). The Singapore medical savings account is an illuminating example of health care reform that is based on the consumer choice, accountability, self reliance and affordability. Basch (1999) describes that Singapore’s medical savings account system is a profound system as each person has a separate personal account which is not poled in to general fund. Medisave is not insurance, but a forced saving plan. In catastrophic illness another fund called Medishield will pay additional costs. The third component called Medifund provides safety net of last resort (p. 388). As there is separate saving account for each person and it is not pooled in to general fund, it created efficiency and avoids uncertainty. In contrast, the general pooling or community pooling in Private Health Insurance causes uncertainty which in turn causes market failure. Barr (2003) emphasizes that the Medisave system of Singapore will certainly attract the attention of international health care markets, because, it has been operating on its basic principle that every person in the paid workforce needs to keep a portion of their earnings to a personal account which is managed by government (p. 712). Medisave covers the patient’s share of hospitalization costs. The money saved in a medical savings account can be inherited by family people. Medishield is low cost catastrophic illness insurance scheme associated with medical savings account in order to help members meet their hospital expenses resulting from major illness. Medisave is a compulsory insurance to all, but, Medishield is a voluntary opt out scheme (Barr, 2003, p. 713). Medifund is an endowment scheme which offers charity style relief. Poor and unemployed people can make use of this scheme and they are entitled to prove the need for government financial aid. Medical savings account system that prevails in Singapore has no price competition factor. The health care is provided in most radical way with use of high technology and the quality they provide in their health care system has inflated costs. The failure of Private health insurance is largely affected by higher premiums and unaffordable health care costs for a major part of the population. As has been discussed earlier, Private Health Insurance markets are dominated by companies with monopolistic behavior and hence there is supplier-induced demand. But, medical savings account provides greater access and flexibility to the individuals so as to enable public get health care effectively. The principle idea behind medical savings account is to provide access to all individuals to health. Government influences public to take responsibility of their health care and hence Medisave is compulsory for them. Health costs have been controlled and reduced, over consumption of medical care has been prevented and health care demand has been decreased by increased quality of the services being provided. In contrast, the health care costs have been increased, demand for health care has been increased and over consumption has been increased in the case of private health insurance market. Conclusion Medical Savings Accounts have proved success in providing effective health care to the public and it is currently able to fill the gaps that are left by Private health Insurance. Off course, Medical Savings Account still needs to cope with changing environments and varying needs of health care market. The private health insurance market has shown many adverse effects of poor and unhealthy people being opted out of taking insurance. These difficulties can certainly be solved by the Medical savings accounts as it enables individuals to save money compulsorily and to meet their medical expenses when they are in need. The Private Health Insurance faced market failure due to uncertainty, asymmetry of information between doctors and patients and externalities. Medical savings accounts are based on responsibility of individual and health care providers which in turn avoids uncertainty. People are spending money for their medical needs from their own savings and hence there are no moral hazards. These show that, gaps left by Private Health Insurance can be filled by Medical Savings Accounts up to an extent. References Barr N.A (1993), The economics of the welfare state, Second Edition, Stanford University Press Barr M.D. (2001) Medical Savings Accounts in Singapore: A Critical Inquiry. Journal of Health Politics, Policy and Law Basch P.F (1999), Textbook of international health, Illustrated second edition, Oxford University Press US Gutowski and Bonin (1998), Private Health Insurance: Continued Erosion of Coverage Linked to Cost Pressures, Illustrated Edition, DIANE publishing. 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