Here’s Your Allowance, Dear

Michael Fitz-James
Canadian Healthcare Manager
October 1, 1998

Healthcare allowances for all Canadians: Are they the long-awaited financial solution to our healthcare troubles, or just a really ‘dumb idea’?

Should Canada be using a “healthcare allowance” (HCA) system which supposedly “empowers” consumers by giving them greater control over how their health dollars are spent? Although the idea has many detractors, it is being taken seriously by some in the insurance sector, and has received a lot of play in the media recently.

An allowance system, it’s argued, gives consumers an “incentive” to use health resources less wastefully and also gives greater access to services not currently covered by public plans.

The chief proponent of the proposal, the Toronto-based Consumer Policy Institute, argues that an HCA-based system could control costs at their current levels, and perhaps even drive them down slightly.

Here’s how it works: The federal and/or provincial government would create a system which covers both “catastrophic” insurance coverage (for serious health problems) and an annual “allowance” for more routine healthcare matters. This allowance would be a theoretical amount and would vary according to age, gender and health status.

The government would provide each individual with a healthcare allowance “account,” which would be owned jointly by the individual and the government.

Allowance dollars would be deposited into this account and could only be spent on approved healthcare services, the cost of which would be fixed by the government. If consumers spend more than their allowance on routine care, they’d have to pay any extra from their own pocket, but only up to a certain “threshold.”

After that, the government would cover 100% of the extra cost. Any spend above the threshold would be considered part of catastrophic insurance.

If there was money remaining at year’s end, half would be returned to the government and half would remain in the account and would belong to the consumer.

That excess, which would earn interest and be free of income tax, could be applied against account overspending in future years, or to health services not covered by the plan, like dental care, drugs, chiropractic services or psychoanalysis.

If the unspent surplus in the account grew to exceed an individual’s anticipated medical needs, it could be rolled over to a retirement savings plan (RSP) and be used to supplement income in later years. The money would be taxable once removed from the RSP.

As a practical example, take a 30-year-old healthy male who could be allocated a total annual insurance threshold of $520, calculated on the average use of the healthcare system by all similar individuals. Of that amount $416 would be included in the consumer’s HCA account and $104 would be allocated to the consumer.

Assuming the individual spent nothing on health care over the year, the HCA account would have a balance of $416 at year’s end. A modest $200 spend would leave a balance of $216.

However, if our consumer spends $450, he’d be expected to pay the extra $34 himself and the balance left in the account would be zero. A spend of $l,000 in the year, would mean a claim of $480 over the $520 threshold. $416 would come from the HCA account and $104 from the consumer (for a total of $520). The extra $480 would be paid by the Medicare plan.

For a 75-year old female, the threshold could be much higher – say $3,700 – of which $3,330 would be deposited to her HCA account. A maximum of $370 (or 10%) would be borne by the consumer if any overspending occurred, and any claim over and above that, would be paid by medicare.

“The basic concept underlying the Health Care Allowance is that getting people involved in spending dollars for their own health care will dramatically change the way people use discretionary services,” says an actuarial report prepared for the Consumer Policy Institute by the U.S.-based healthcare consultants, Milliman & Robertson.

However, the report says, “little if any change is anticipated for high cost services that relate to serious conditions. The proposed system’s financial objective is to remain cost-neutral compared to current provincial health plan expenditures.”

“The arithmetic doesn’t work”

An HCA system, says the report, would also reduce system fraud because consumers would be paying for their health services themselves. Additional tax revenue would be generated for governments once accrued principal and interest in the accounts was converted to retirement income.

Basically, says Lawrence Solomon, director of the Consumer Policy Institute, the HCA system “creates a market in the healthcare sector. The funds can’t leave the sector, but there is still a market within it.

“On average, our actuarial studies show, in three out of four years people will have money left over in their accounts, so they can put money aside for other purposes.”

Since more consumers will start using the healthcare system less wastefully, Solomon believes healthcare providers will want to maintain their incomes by being more proactive in offering preventative services.

“Physicians would become diligent in reminding women they’re due for a Pap smear or men when it’s time to screen for prostrate cancer,” he says.

And consumers will have an incentive to use such services because if they don’t use their allowance during the year, it will revert to the government “It’s use it or lose it,” says Solomon.

Both rich and poor would be empowered under an HCA system because both would be given the same number of healthcare dollars and could spend them at their discretion.

And consumers would directly see the economic impact their healthcare spending choices have. For example, consumers would see that an emergency room visit costs much more than a trip to the family doctor, so such inappropriate hospital use would be discouraged.

And since some of the non-covered services could be paid for from account surpluses, employer health benefits plans (which now cover these costs) could be cheaper, and the savings passed on to employees as salary.

Mark Litow, a consulting actuary with Milliman & Robertson in Brookfield, Wis., says the idea for HCAs springs from the new concept of “medical savings accounts,” which are starting to be used in the U.S. and have been around for some time in South Africa and Singapore.

In the U.S., the idea parallels an RRSP, where contributions are made to create a fund against future healthcare spending. Sometimes they’re rolled into employee benefit plans, and the U.S Internal Revenue Service has apparently created some limited tax treatment provisions to encourage them, say Litow,

Still. Noralou Roos, co-director of the Manitoba Centre for Health Policy and Evaluation in Winnipeg, says she doesn’t think the idea, “imported from the U.S.,” will have much use here, although the insurance industry is apparently taking it seriously.

“In the Canadian context. I think it really doesn’t make sense,” she says. The idea’s premised on the notion that consumers use health services wastefully and that by their choices they can use it less wastefully.

“I’d ask for evidence for that assertion,” says Roos. “We’ve tried to look at the factors which predict why people go to the physician. We come up with indicators that suggest that those who are unhealthy go to the doctor and those who are healthy don’t.”

“There’s evidence that physician practice style – how many times the physician suggests the patient come back for a re-visit – is a big driver of utilization and has as much influence as any patient-driven factors.”

Michael Mendelson, senior scholar with Caledon Institute of Social Policy in Ottawa is even tougher on the HCA concept. At a conference last May at the McMaster Centre for Health Policy Research, there was a tough debate over HCAs, and Mendelson concludes they are a “dumb idea.”

Mendelson, a former deputy minister of health in several provincial governments, now formulates health policy, and believes HCAs are being touted as “a new panacea – there’s one that sweeps through the U.S. every few years”

In Canada, however, “it’s a very fringe idea because it’s totally unclear what problem this is meant to solve, and it’s totally clear it will create many other problems of a major sort- You’d have a hard time finding any reputable health economist who would endorse this idea,”

The HCA system, says Mendelson, “assumes much of the expensive use is a consequence of consumer demand” and while such demand does drive initial visits to a physician or emergency room, that cost is “less than 10 percent” of the total system.

Creating an incentive is the same, in economic terms, as charging a user fee and, says Mendelson, “study after -study” has shown that user fees don’t, lower utilization – in fact “perversely,” it usually goes up.

“There’s no reason in logic or in evidence to assume that a user charge will reduce inappropriate utilization any more that it will reduce appropriate utilization.”

What’s more, he says, “the arithmetic doesn’t work – the amount of premium you’d have to pay, assuming zero administrative cost – would be more than, or equal to, your average costs. And as for administrative costs, this would cost a bloody fortune to administer.”

And Mendelson sees other problems: “You’re sick and your wife has cancer, so you use up your entire medical savings account. But Joe Blow next, door doesn’t have cancer, and retires with an extra $100,000 for being in good health. Is this the idea of the Canadian system?

“Does it seem fair that we should have taxpayers paying subsidies to people who aren’t sick? Is this a reasonable redistribution of income – from the sick to the healthy?”

Plus the “one payer” (i.e. the provincial government) in the current system has the power to control health care costs, something that would be lost if each individual paid their own healthcare bills.

“And what’s the purpose of this? It’s not like our system’s out of control. Why give up on one of the world’s best systems for some fly-by-night stupid idea – something coming out of the U.S. that’s not relevant to our situation at all?”

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