In a sound publicly funded medical savings account system, Canadians would receive annual health allowances based on their age and sex as well as their medical condition. These allowances, which would exceed their expected medical needs, would in most years allow Canadians to save money, which they could then use to meet medical needs that they now often cannot afford, such as prescription drugs and home care. And the system would cost the government no more than the current medicare system.

August 7, 2002

In contrast, the MSA system that Raisa Deber and her colleagues designed fails on three counts: It doesn’t give the sick enough health care to meet their needs; it gives a windfall to the healthy; and it makes no provision to protect the public purse. The Deber medical savings account system is guaranteed to fail.

After designing this unworkable system – one no serious proponent of medical savings accounts would ever put forward – Deber et al. then calculated its cost using “real” data, as if the real data compensates for illogic in their system. Their exercise was akin to designing a house with no roof, and then using real precipitation data to calculate the resulting damage to its furnishings from rain and snow. Theirs was an exercise in unreality.

Deber et al. complain that I focused on just one of their computations, implying that their paper dealt credibly with a number of scenarios. In fact, their paper contained only one computation – it showed a $505-million loss resulting from a 54% increase in health costs – and this one computation was then widely reported in the Canadian press. Deber et al. computed no other scenarios, although they did say they planned to investigate other scenarios: They would have been better advised to wait until they had relevant results before publishing their paper.

Before they do more work, however, they need a basic understanding of how medical savings accounts work: Their response, above, demonstrates that they thoroughly misunderstand the concept. They need to drop their actuarially unsound fixation on giving all Canadians the same allowance ($730, in their study) regardless of their needs.

The Milliman study conducted for Consumer Policy Institute provides an example of an actuarially sound methodology. The allowance increases every year, because health costs tend to increase with age, and it also differs by sex, because males and females have different health needs (see graph).

In Milliman’s actuarially based report, a typical 75-year-old woman would receive an annual allowance of $3,330 for her routine needs, plus government insurance for hospital care and other extraordinary needs that medicare now provides. A typical 21-year-old male would receive much less – only $246, plus the same government insurance – because he needs much less. Giving him $730 when he needs $246 wastes precious health-care resources, and giving her $730, when she would need far more, gives her no chance to save, making the allowance worthless.

When Deber et al. divide the population into age categories, they group people into meaninglessly large categories, such as 25-34 and 45-64, as if the needs for a 25-year-old and a 34-year-old, or a 45-year-old and a 64-year-old are similar. And they don’t distinguish between males and females. In contrast, Milliman’s tables show great differences in medical needs among people within these categories. A 34-year-old woman would need an allowance of $707, more than twice as much as the $321 allowance a 25-year-old male would need. A 64-year-old woman would need an allowance of $1,966, three times the $636 allowance a 45-year-old male would need. Fitting people with very different medical needs into these broad categories, and giving them the same average allowance, as Deber et al. do, is a recipe for disaster.

The Milliman study is able to tailor health allowances to people’s actual needs because its data is far more fine-grained and reliable than the crude cuts Deber et al. employ. Milliman took Statscan’s health spending estimates for the following five years – Ms. Deber can call that hypothetical if she wishes – and then applied actuarial techniques to determine at what level to set allowances for Canadian men and women of all ages.

Deber et al. imply that MSA proposals routinely surface, only to be discredited and then replaced with other faulty approaches. They also dismiss most MSA proposals as vague. In fact, only one feasibility study of any depth has been done for an MSA system for Canada – the $80,000 Milliman study, published four years ago. This study has been prominent in the debate: Much of the commentary over MSAs that has since occurred, and most of the analyses that have since been conducted, have to some extent relied on it. Alberta’s Mazankowski Report arrived at its favorable view of medical savings accounts after reviewing the Milliman study. Most recently, the Romanow Commission released a Fraser Institute report that endorsed Milliman’s estimate that a medical savings account system would save consumers $6-billion annually.

To date, no study has refuted the Milliman report, despite its central role in the medical savings plan debate. If Deber et al. can discredit it using their data, they should do so – discovering a flaw in this study would benefit their campaign against medical savings accounts as nothing else would. Otherwise, Ms. Deber should explain why she and her colleagues analyze proposals that do not exist while ignoring the one Canadian proposal that does exist.

Ms. Deber and her colleagues characterize the medical savings account concept as a “zombie” – this group’s longstanding label for ideas they dislike – because it refuses to die. Speaking of medical savings accounts in the Canadian Medical Association Journal, they stated that “It is past time that they be buried.”

The best way to kill off a misguided concept would be to demonstrate its flaws. That none have yet been identified after four heated years in public policy circles speaks volumes.

Lawrence Solomon is executive director of Urban Renaissance Institute and policy director at Consumer Policy Institute, divisions of Toronto-based Energy Probe Research Foundation.