Lecture 4 - Medical Savings Accounts and User Charges

Question 1

What are MSAs?

Answer 1

Voluntary or compulsory contributions to an individual savings account. Intended to spread the cost of ill health over time. It is a prepayment with no risk pooling.

Question 2

What countries use MSAs?

Answer 2

USA, Singapore, China, South Africa

Question 3

What are the benefits of MSAs?

Answer 3

Encourages personal responsibility for health
Combats moral hazard, improving efficiency
Savings are tax free or tax deductible
Enhances financial protection for individuals
Funds roll over year to year
Lower monthly insurance premiums (MSAs are usually combined with high deductible, low premium health plans)

Question 4

What are some limitations of MSAs?

Answer 4

Information asymmetry - people may not be able to decipher high-value vs low-value care, or determine quality (might not be any value from customer purchasing power)
Savings may not be enough to cover care, especially long-term hospital stays
People may seek low cost low quality services
High risk/chronic individuals won’t have enough savings
Tax subsidies favour the wealthy
No risk pooling
May have a cap on maximum contribution
Tax losses due to subsidies

Question 5

What are the implications of MSAs on efficiency?

Answer 5

No risk pooling which has negative impacts on financial planning and stability of insurance companies
MSAs decrease healthcare spending by reducing use, but this is true for beneficial and non-beneficial services
Tax losses due to subsidies
Consumer purchasing power may not work due to information asymmetry (for quality or value/benefit to them)
People may seek low-cost, low-quality services
Risk segmentation means money is not being allocated where it is most needed
Cost control is done by reducing demand leading to delayed or skipped care. Ideally should be controlled by supply to improve allocative efficiency
Administrative complexity

Question 6

What are the implications of MSAs on equity?

Answer 6

Risk segmentation
No risk pooling
Financial barriers to accessing care
Tax subsidies favour the wealthy
Shift risk and cost to individuals
Benefit the rich, healthy savers and high-rate taxpayers

Question 7

What is the theory behind creating user charges?

Answer 7

Raising revenue
Direct people to more cost-effective use
Reduce excess demand (moral hazard)
Prevent physicians from overprescribing since patients are subject to charges

Question 8

What is the economic rationale for user charges?

Answer 8

Cost to society from overuse outweighs the benefit to the individual resulting in welfare loss. User charges reduce overuse.
Restores the price signal so allocation is based on willingness to pay, resulting in allocative efficiency (goods and services meet the wants of the community). Results in welfare gain.

Question 9

What are the efficiency limitations of user charges?

Answer 9

To improve efficiency, you want to reduce waste and increase the use of highly effective services. User charges can decrease service use.
If providers are paid by FFS this may induce a demand for only high-income individuals

Question 10

What are the negative implications of the economic rationale for user charges?

Answer 10

Access to care should not be based on willingness to pay (equity). Rich people can end up using ineffective services.
If people can’t pay for the effective services it is inefficient
Economic rationale assumes demand and supply are independent which is not true
Assumes that there is no information asymmetry and consumers can differentiate between high and low value care

Question 11

What are the types of user charges?

Answer 11

Direct:
- Co-payment
- Co-insurance
- Deductibles

Indirect:
- extra/balance billing
- reference pricing
- coverage exclusions
- benefit maximums

Question 12

What are direct user charges?

Answer 12

Patient pays a specified amount, and insurer pays the remainder

Co-payments, co-insurance, deductibles

Question 13

What are indirect user charges?

Answer 13

Insurer sets the amount they want to pay and user pays the remainder

Extra/balance billing, reference pricing, coverage exclusions, benefit maximums

Question 14

What are co-payments?

Answer 14

User pays a fixed fee per item of service.

Question 15

What is co-insurance?

Answer 15

User pays a set proportion of the cost of service.

Question 16

What are deductibles?

Answer 16

User pays a fixed amount prior to insurance coverage kicking in.

Question 17

What are the incentive effects of deductibles?

Answer 17

When not close to deductible limit, utilisation and price consumed may decrease

Near the deductible limit there is a sudden incentive to consume more

Question 18

What are the incentive effects of co-insurance?

Answer 18

Incentive to select cheaper products/services

Greater incentive to curb cost than co-payments because cost is usually larger.

May be problematic due to uncertainty about total cost

Question 19

What are the incentive effects of co-payment

Answer 19

No incentive to consume cheaper drugs unless the associated co-payment is lower.

Patients may decrease their use of service.

Question 20

What is extra/balance billing?

Answer 20

Patient pays anything which exceeds the amount the insurer covers. Common in the US

Question 21

What is reference pricing?

Answer 21

The maximum price an insurer will reimburse for a group of similar drugs. If the user picks a drug that is more than the reference price they pay the difference.

Incentive to pick generics.

Question 22

What are coverage exclusions?

Answer 22

Services not covered by insurance

Question 23

What are benefit maximums?

Answer 23

The total amount of money an insurance company will pay for a covered service within a specific time frame

Question 24

What are some user charge protection schemes? (6)

Answer 24

1. annual caps on spending
2. exemptions (for chronic conditions, elderly, pregnancy women)
3. Reduced rates and discounts for pre-payment
4. Tax relief
5. Complementary private insurance to cover user charges (e.g. Canada)
6. Substitution of treatment by doctors/pharmacists so patients get low-cost or no-cost alternatives

Question 25

Do user charges improve efficiency?

Answer 25

There is strong evidence that user charges do not enhance efficiency or curb costs, while having significant equity implications

Question 26

What are value-based user charges? What do value-based user charges in the US cover?

Answer 26

Ties user charges to the effectiveness of the service. Encourages patients to select high-value services that lead to better health outcomes.

Some insurers in the US now offer enrollees reduced user charges for drugs prescribed for certain conditions (e.g. asthma, diabetes) and/or specific drug groups (e.g. beta blockers). Created because regular user charges failed to grow healthcare spending or increase efficiency

Question 27

What are multi-tier formularies?

Answer 27

A form of value-based user charges.
Tier 1: generic drugs, have lowest co-payment
Tier 2/3: brand name, split into preferred and non-preferred drugs (non-preferred most expensive)

Some evidence of cost saving using this method.

Question 28

Explain the RAND Health Experiment (including authors and year)

Answer 28

Newhouse et al 1987

• Explored whether co-insurance impacted healthcare use.
• They conducted a randomized experiment at 6 sites within the US, enrolling approximately 6,000 individuals in one of 14 co-insurance plans.
  o Co-insurance rates ranged from 0%, 25%, 50% and 95%.
  o Expenditure limits ranged from 5%, 10% and 15% of family income up to a maximum of $1000.
• The researchers then followed up with the population 5 years after their enrolment in their health plans.
• They found that per-capita spending on the free plan (0% co-insurance) was 45% higher than those in the plan with 95% co-insurance.
• User charges did not have an impact on the quality of care received.
• Poorest and sickest in the sample had better health outcomes under the free plan.
• The study also found that a 10% increase in co-insurance led to a 1-2% fall in health care demand.
  o People on free plan were more likely to visit the GP and use hospital services. Same use of outpatient services.
  o Reduced the use of effective and ineffective care
  o Cost savings by using less services, not cheaper services.
• Therefore, the findings of the RAND experiment suggest that increasing prices by increasing user charges deter people from using care. Lessening user charges can lead to better health outcomes in the poor and sick.

MAIN TAKEAWAY: Price affects utilization

Question 29

Do user charges result in long-term cost control?

Answer 29

No evidence of cost control or improved efficiency.

Question 30

What is the squeezed balloon effect?

Answer 30

If you squeeze primary care, they will pop up somewhere else in the system e.g. later unwanted outcomes

Question 31

Can user charges enhance efficiency without lowering equity?

Answer 31

Potentially

Question 32

Are differential charges effective?

Answer 32

Yes, guide people away from expensive patented medicines, but only when there is an effective generic alternative

Question 33

Can user charges enhance efficiency without lowering equity?

Does the type of health service matter?

Answer 33

Yes, user charges directed at preventative services are harmful

Question 34

Can use charges enhance efficiency without lowering equity?

Are protection mechanisms effective?

Answer 34

To some extent – they have to be carefully designed and implemented, unlikely to be perfect

Question 35

Can use charges enhance efficiency without lowering equity?

Does the type of user charge matter?

Answer 35

Yes, co-payments are the most benign, but co-insurance is potentially more harmful. Deductibles have more negative efficiency effects

Question 36

Can use charges enhance efficiency without lowering equity?

What are the equity-efficiency trade offs

Answer 36

Even if you implement a user charge that promotes efficiency somehow, there might still be an equity effect because the people paying them are likely to be the heavier users of care. User charges can be considered a “tax on the sick”

Question 37

What are some policy options when it comes to user charges?

Answer 37

Value based user charges
Multi-tier formularies
Charging patients for missed appointments (improve efficiency)
Charging patients for bypassing GPs to get specialist services (used in France, pay 50% more)
Supply-side reform; improve access to preventative care, promote value-based care, risk stratification (identify people with high risk and accommodate for them e.g. poor, chronic, pregnant)

Question 38

Why focus on supply-side reforms?

Answer 38

To improve allocative efficiency

Question 39

How has the NHS achieved similar goals to value-based user charges without user charges? (Thomson et al, 2010)

Answer 39

1. Strong Primary Care: The NHS focuses on primary care, where patients have a regular doctor who coordinates their care. This helps avoid duplication, inappropriate referrals, and overprescribing.
2. Free Preventative Care: The NHS already uses financial incentives (free care) to encourage desired behaviours like enrolling in disease management programs and adhering to medication.
3. Quality and Outcomes Framework: This program provides incentives for good patient outcomes, including disease management (preventative care)

Shows that removing user charges may enhance efficiency more that implementing them.