Cost Sharing
in Health Care Financing:
International Experiences
Teh-wei Hu
廿一世紀的來臨將帶來很多的挑戰，而其中最大的挑戰之一亦是無可避免的是醫護融資和服務質素的問題，人口的迅速老化，昂貴的醫療新科技將會使醫護的費用大大增加，本文探討醫護融資的方案，及列舉中國大陸、美國及新加坡各地的措施作出比較，以供香港醫護的決策者作為參考。
Introduction
One of the greatest challenges countries around the world will face in the twenty-first
century is health care financing. With rapid ageing of their populations and rising costs
of modern medical technology, most countries face the prospect of rising health care
expenditures. Politicians and policymakers are searching for reforms to curtail these cost
pressures without dramatically compromising standards in health care access and quality.
Hong Kong is, of course, no exception. Health care financing in Hong Kong is potentially
further complicated by the expected large influx of immigrants and the ensuing strain on
the health care system.
There are three basic options for meeting increasing health care expenditures: reforms
affecting the demand for health care, reforms influencing the supply of health care, and
rationing of health care services. Some countries are engaged in supply-side reforms, such
as the United States with managed care, while others attempt rationing of health care
services, such as the United Kingdom and Oregon's (U.S.)
Medicaid program. However, most attempts at health care system reform have targeted health
care demand. This paper focuses on these demand-side reforms: who pays for health care
services and how will these payments get made?
Basic Economic Concepts
Major illness is an unpredictable event; such illnesses also put patients at an enormous
amount of financial risk. Insurance, whether offered by the private sector or the
government, has been established as a method of payment to minimize the financial loss
from illness. Society, as a whole, benefits from the availability of insurance as
large-scale risk pooling can reduce the individual risk via the law of large numbers.
However, there are two concerns that arise with the existence of health insurance. One is
called "moral hazard" and the other is "adverse selection."
Moral hazard describes the condition where individuals use more services than they would
have in the absence of insurance, which results from a lowered cost (and in some cases, no
cost) of health care consumption faced by insured individuals. The existence of health
insurance tends to reduce (and sometimes eliminate) incentives for individuals as well as
physicians to seek lower prices of health care. Physicians may generate their own form of
moral hazard when they provide more services and charge higher fees, knowing patients do
not pay the full cost of care.
Adverse selection refers to the problems caused by segmentation of the insurance market
based on different risks. Insurers may contribute to this problem as financial incentives
exist to lower the risk burden compared to the aggregate premium. Health insurers tend to
recruit healthy individuals and deter less healthy individuals from enrolling. Adverse
selection may occur on the part of consumers as healthy individuals may have less
incentive to participate in an insurance scheme while an individual with poor health would
be eager to join the insurance program. Therefore, the problem of adverse selection may
defeat the original purpose of health insurance, which is to provide equity and efficiency
in the health care market.
To reduce potential adverse selection and to achieve risk pooling, insurance programs need
to have a large enrollment either through community level or compulsory participation.
Large enrollments prevent insurers from selecting only the good risks from a population.
Voluntary participation may create adverse selection as sicker individuals would want to
participate in the insurance program while healthy individuals would stay out of the
insurance program.
Payment schemes that involve cost sharing, such as deductibles and co-payments, have been
developed to combat the potential problem of moral hazard. Some health care systems
combine both schemes while others use only co-payments. Literature has shown that cost
sharing is an effective approach to reduce moral hazard, but it does not necessarily
reduce the rate of health cost increase as providers can request more services or charge
higher fees. Therefore, supply-side control is important in attempts to contain rising
health care costs. Deductibles also incur administrative costs from monitoring of payments
and can also deter individuals?desire to initiate health care services.
Medical Savings Accounts
One recent innovation in health care financing is the medical savings account (MSA).
Medical savings accounts are a means to institute demand-side controls on health care
utilization. MSAs usually require an individual to establish a special account funded by a
fraction of one's salary combined with employer
contributions. Monies from this account can be withdrawn for health care expenditures and
residual funds can be used to save for future retirement or other expenses. The medical
savings account alone is similar to any savings account and does not constitute insurance,
as there is no pooling of risk. Thus, individuals are still at risk for high expenditures
from a catastrophic or chronic injury/illness. To minimize this risk, MSAs are combined
with insurance plans that cover catastrophic medical care needs. MSA funds are often
sheltered from taxes as an incentive for people to purchase these plans.
Medical savings accounts not only act as a cost-containment mechanism, but also provide
the additional benefit of increasing overall funds available for health care. Because the
individual controls withdrawals from the MSAs, account owners have an incentive to seek
the most efficient use of funds. Moral hazard is minimized as consumers face the real
price of medical care with their own money. In essence, the MSA is like a deductible
scheme where one must pay costs of medical care below the threshold for catastrophic
coverage. MSA funds also increase the total amount of financing available for health care.
As individuals deposit funds into their MSAs, this earmarking increases the total amount
of monies available for health care. To the extent that these MSA funds are used for
health care services, these accounts could generate more funds from the private sector and
relieve the pressure on public financing.
A number of countries have used MSAs as part of their health care system. As of now, only
three countries to date have used MSAs as a financing mechanism: Singapore, China, and the
U.S. MSAs have been proposed in other countries, such as Canada and Switzerland, but have
yet to be adopted. The experience, goals, and results of the MSA program in these three
countries have been mixed.
Singapore
The first country to use MSAs was Singapore, which instituted MSAs in the mid 1980s. The
goal of Singpore's MSA program, Medisave, is mainly to
mobilize private resources for health care, although control of moral hazard was clearly
also a consideration. About 80% of Singapore's population
hold Medisave accounts to pay for high-cost inpatient care. These contributions are
tax-deductible but bear a low interest rate. Two other government programs, Medishield and
Medifund, make up the rest of Singapore's health care
financing system. Medishield is a catastrophic insurance plan which Medisave account
holders can buy into. Medishield has high event-based deductibles and is backed by sizable
government subsidies; essentially, it acts as a stop-loss provision for its account
holders. Medifund is used as a safety net targeted towards low-income households. As of
1995, Medisave was an important part of financing inpatient care; Medisave financed 27% of
services provided and 45% of net patient bills. However, health expenditures rose faster
following introduction of Medisave. Singapore did not institute provider-side price
controls, instead depending upon competition to bring down costs. However, hospitals
competed on technology rather than price, leading to widespread duplication of expensive
medical equipment and high-technology services. In addition, competition for physicians
between the public and private sectors escalated physician earnings.
China
Urban China faced a health care crisis as self-insuring enterprises could not cope with
rising health care cost inflation. In 1994, China followed the Singapore's lead and began its own Medisave account experience with a health
care financing experiment conducted in two urban cities, Zhenjiang and Jiujiang. This
experiment required all industry workers and government employees to join an MSA. Both
employees and employers make contributions to this health care financing scheme. Employees
are required to contribute 1% of their salary to their individual account. Employers
contribute 10% of the employee's salary, with 4% (or
6% if the employee is over 45) going to the employee's individual
account and the remainder going to a Social Insurance Account. When seeking care,
individuals must initially finance care with their MSA. When the MSA funds are exhausted,
individuals are required to pay a deductible which is equal to 5% of their annual salary.
Once the deductible is met, the Social Insurance Account begins paying for part of the
health care costs. However, the Social Insurance Account does not pay for all costs;
co-payments are required, although these decrease as costs rise. Supply-side controls
exist through the Health Insurance Bureau, which has a prospective budget for providers
based on the previous year's expenditures.
Furthermore, fee schedules, drug formularies, and other guidelines are employed. Five
percent of the agreed budget is withheld for quality assurance. Studies on the Zhenjiang
experience have shown that MSAs have reduced cost inflation through reduction of hospital
utilization rates, length of stays, and emergency visits via substitution with outpatient
care. Zhenjiang's risk pool reform has been a
successful story of cost-containment.
United States
In 1997, the U.S. Congress passed a bill that allowed individuals to establish MSAs on a
voluntary basis. The goal of the U.S. MSA program was to contain health care costs while
giving individuals their choice of providers and control over their care management. MSAs
are managed by banks or insurance companies; contributions can be made by either employers
or employees. MSA funds are income-tax exempt if a catastrophic insurance plan with an
appropriately high deductible is purchased. Contributions have no lower limit, but have an
upper limit to prevent MSAs from being tax shelters. In order to minimize adverse
selection, enrollment was capped at 750,000; it was expected that healthy individuals
would opt to establish MSAs. However, as of December 1998, only 42,000 MSAs were
established. An additional 390,000 MSAs were subsequently made available to the elderly
through Medicare reforms. However, as of March 1999, no MSA sponsors have come forth to
develop MSAs for the elderly. Designers of the U.S. MSA program appear to have
overestimated demand for MSAs. In addition, most observers do not believe that the MSA
program will substantially lower U.S. health care costs in the long run as technological
changes will likely cause health care costs to continue rising.
Lessons Learned
Cost sharing can take many forms, such as deductibles, co-payments, or medical savings
accounts. Cost sharing is one method of controlling health care cost inflation, and does
so by limiting moral hazard. However, cost sharing alone cannot achieve control of health
care cost inflation, because providers have the ability to increase services utilization
and charge higher fees. Therefore, to contain health care costs, supply-side control is an
important complementary policy instrument to cost sharing policies. The experiences in
Singapore and China are instructive; without price controls, Singapore suffered from
non-price competition which prevented Medisave from affecting health care cost inflation.
On the other hand, China has experienced significant reductions in health care cost
inflation when combining medical savings accounts with supply-side control policies.
Medical savings accounts are essentially a self-insurance mechanism. It can be used for
many purposes, such as inpatient care, outpatient services, itemized illnesses, long-term
care, or as a retirement fund. However, MSAs alone do not have a risk pooling feature.
Combining MSAs with a risk pooling scheme prevents individuals from bearing the full brunt
of financial risk. In order for MSAs to act as an insurance plan in health care,
supplemental catastrophic insurance is a necessary component.
A catastrophic plan is a necessary but not sufficient requirement for MSAs to be
implemented as an insurance plan. MSAs should be compulsory, since a voluntary program
will create pressures for adverse selection and lead to inequity as the healthy and
wealthy will benefit, especially if there is a tax benefit associated with MSAs.
Furthermore, compulsory participation may be a requirement for viability. The U.S.
experience suggests that voluntary MSAs are unlikely to compete well with other forms of
insurance despite the tax benefit.
Beyond cost containment, another goal of MSA programs has been the mobilization of private
financial resources for health care. Both Singapore and China have had some success in
this respect. However, private financing may alter utilization patterns between public and
private health care providers. If there are quality differences (i.e. waiting times,
choices) in the health care services provided by the public and private sector,
individuals will be more likely to use private sector services. This movement should
release pressure on funding public sector health services. However, private sector
providers could generate more unnecessary services and raise fees if they knew additional
funding for health care financing existed. Again, supply-side control would be an
important factor.
Asian countries also tend to have higher savings rates than their Western counterparts.
This factor may also play a large role in the relative success of MSA plans in Singapore
and China.
Implications for Hong Kong
In Hong Kong, public sector health care services have relatively low cost sharing while
private sector health care services are financed by private insurance or out-of-pocket
payments. There is also no control of health care supply in the private sector. In order
to control health care costs increases or to limit moral hazard, it makes sense to impose
more cost-sharing mechanisms on both public and private sector utilization. An MSA plan
would have an advantage over traditional forms of cost-sharing by generating additional
financing resources in addition to its effects on cost inflation. An MSA plan could be
implemented immediately, or phased in slowly by introducing deductible increases in the
short-term. However, the goal of cost-containment may not be achieved if the supply side
is not also reformed. Monitoring of pricing, practice patterns, and quality control are
necessary for the success of any cost-sharing proposal.
Given the experiences from Singapore and China, Hong Kong should consider medical savings
accounts as a policy option. However, there are several key factors which need to be
considered before implementation:
1. What should be the upper and lower limit of contributions to a medical savings account?
2. How should low-income individuals be handled? Is there an available means test?
3. What is the defined benefit under MSAs?
4. How should a supplemental catastrophic insurance fund be set up?
5. What should be the terms of an MSA (such as withdrawal policy, maximum cumulative
balance, how unspent funds get used)
6. What tax incentives should be provided and how should taxes on accumulated interest
income from MSAs be handled?
7. What impact will MSA savings have on other savings in the economy?
8. By whom and how should MSAs be managed?
While MSAs can be a flexible policy instrument, these questions show how complex
implementation of an MSA policy can be. To answer these questions, more study is needed on
Hong Kong's medical expenditure patterns, income
distribution, savings behavior, the price elasticity of demand for private health care
services, the income tax structure, potential administrative costs, and public opinion.
Prof. Teh-wei Hu is Professor of Health Economics at the University of
California, Berkeley. The article was the speech he delivered at a public forum on
"Health Care Reform:Health Financing and Delivery - Options and Public Choice".
The Forum was organised by the Hong Kong Policy Research Institute, the Hospital Authority
and the City University of Hong Kong on 25 June, 1999. The author would like to thank
Michael Ong, M.D.-Ph.D. candidate at the University of California Berkeley, for his
assistance with research and editing.
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