Urban Renaissance Institute

Raisa Deber, Evelyn L. Forget and Leslie Roos
National Post
August 7, 2002

It is regrettable that Rise of a ‘Zombie’ (July 31), Lawrence Solomon‘s response to our peer-reviewed paper analyzing medical savings accounts in the Canadian Medical Association Journal (July 23), resorted to ad hominem attacks rather than dealing with the real policy issues raised.

Advocates of MSAs assume that enormous savings can be made – Mr. Solomon estimates $6-billion per year – through replacing the existing system of hospital and medical insurance by individual accounts. The extent of possible savings clearly depends on the actual distribution of health expenditures. Our analysis accordingly examined the distribution of health expenditures in the Manitoba population.

MSA advocates who dislike our findings have focused on one of the computations we performed: If one chose to give each Manitoban the average amount spent in 1997-1999 for physician and hospital care ($730), it would result in a 54% cost increase, all going to healthy people. This result occurs because 80% of Manitobans spend less (usually far less) than the average, while the sickest 1% accounted for 26% of costs. However, our paper stressed that many different MSAs could be modelled. We also noted that total costs would clearly depend upon such factors as how much of the surplus healthy individuals were allowed to keep, and presented a table giving a breakdown of expenditures by age category.

The key reason why MSAs are “guaranteed to fail” is that, in every age group, 80% of all people incur costs less than the average for that age. In most formulations, one is still sending money to a lot of relatively healthy people, without generating offsetting savings from the sickest. (If, on the other hand, government does not provide these people with an allowance, costs can indeed be shifted on to business and individuals; this, however, is no longer an MSA but a high-deductible catastrophic insurance plan.) The fundamental issue which MSAs must confront is that “incentives” to economize on use of care cannot generate meaningful savings from people who are not already spending much for insured health-care services.

Most MSA proposals tend to be vague. Whenever specific proposals are made and do not hold up under analysis, a new variant crops up, usually without enough data to fully evaluate its implications. Mr. Solomon holds up as his gold standard a Milliman & Robertson study, which refers to the actuarial study, prepared by Mark Litow and Stacey Muller, conducted for Mr. Solomon’s Consumer Policy Institute, dated June 9, 1998, and posted on Mr. Solomon’s Web site. As far as we can determine, this paper did not use actual data on the distribution of health costs, which would not have been available from the national sources they used. Instead, it appears to have taken average spending for each age-sex category, with an unspecified “adjusted claim probability distribution” drawn from a proprietary U.S. database used to construct premiums for group insurance policies rather than to predict individual spending.

We welcome any analysis using real data, rather than hypothetical distributions. Although our research continues, in all of the many variants we have analyzed to date, given the extreme skewing of the actual distribution of health expenditures in the population, our results suggest that, no matter how you formulate MSAs, these accounts are not cost saving, unless coverage is cut to the extent that they no longer constitute insurance.

Read Lawrence Solomon’s response, “Medical Savings Accounts live”

Read “Rise of a ‘zombie,'” the article by Lawrence Solomon that initiated this debate

Lawrence Solomon
National Post
August 7, 2002

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.

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.

Source: Consumer Policy Institute

Read “Rise of a ‘zombie,'” the original article by Lawrence Solomon that initiated this debate.

Read “Return of the ‘zombie,'” Raisa Deber’s response.

Lawrence Solomon
National Post
July 31, 2002

Put yourself in the shoes of Raisa Deber, a professor of health policy at University of Toronto and one of the medical establishment’s leading strategists and defenders of medicare as we know it.

Imagine that, like her, you are rock-sure of your position. And that your peers in Canada’s medical establishment – academics and administrators who have the ear of government bureaucrats – overwhelmingly share your perspective, particularly about the evils of anything that smacks of private sector involvement in health care. You and your peers, in fact, are so sure of yourselves that for years you have publicly and proudly labelled unwanted ideas as “zombies.” Rising to the top of the zombie list are medical savings accounts, a proposed reform to medicare that would give every Canadian an annual health-care allowance. Their proponents — many medical professionals as well as organizations like the prizewinning Atlantic Institute for Market Studies — favour medical savings accounts for different reasons. Some like medical savings accounts because they promise to contain health-care costs, others because the quality of health care would rise, others still because they promise to empower the poor — the group that suffers most under our paternalistic medicare system — by giving them more say in health-care decisions that affect their lives.

Medical savings accounts were once obscure notions, discussed avidly among policy wonks yet all but unknown to politicians or the public at large. Then David Gratzer, at the time a mere medical student, described medical savings accounts and their potential in a book called Code Blue. The description struck a chord in a country concerned about the direction of medicare, the book won a coveted award, and medical savings accounts were no longer obscure. The national press began to write about them, the public began to talk about them. An Angus Reid Group poll showed two-thirds of Canadians liked the concept of health-care allowances, and politicians began taking notice.

Out of the blue, it seemed, medical savings accounts became respectable, even though Raisa Deber and her peers were certain that the concept was bogus. Senate committees became receptive. The Alberta government’s Mazankowski report proposed them, and the Alberta government indicated it would adopt them. Even the federal government’s one-man commission into health care, run by medicare’s best-known public defender, Saskatchewan’s ex-premier, Roy Romanow, was now studying them. If you were Raisa Deber you couldn’t help but fear that he might open the door to them in his much awaited report. Worse, what if he, too, succumbed to this zombie notion, as have so many others?

To Raisa Deber, with important decisions about to be made, time was of the essence. A report from a Toronto-based consumer group, the Consumer Policy Institute, showed that medical savings accounts would work well in Canada, improving health care while saving $6-billion a year. This report – now in every provincial health ministry, used by Don Mazankowski and being analyzed by Romanow’s commission – had to be refuted.

Raisa Deber asked her colleagues to write a counter-study, to head off the decisions now being made. But her colleagues needed more time to attempt to refute the consumer group’s report – a major, $80,000 analysis – and they couldn’t easily trash its authors. The report happened to be produced by Milliman & Robertson, one of the world’s premier actuarial firms, famous in health-care centres for having discovered how to structure an earlier health-care innovation – HMOs. Milliman is the gold standard in health-care analysis.

What would you do in Raisa Deber’s shoes? At your canniest, you could not have proposed a scheme as brazen as hers. Instead of refuting the study that Milliman produced – the only feasibility study of health-care allowances conducted for Canada – she refuted a study that Milliman didn’t do, and never would have done. She and her colleagues created a system of medical savings accounts so stupid in design that it would be guaranteed to fail. Then she figured out the cost of her stupid system and published it last week in the Canadian Medical Association Journal.

How does the Deber design differ from the Milliman approach, which was designed to cost the same amount as our current medicare system? Under the Milliman approach, all Canadians – young or old, sick or healthy – would receive a tailor-made health-care allowance from the government that would be more than they’d ordinarily need to meet their routine health needs, and they would also have unlimited, free care for major illnesses, such as those requiring hospitalization. After paying for their routine medical expenses out of their health-care allowance, they would then return to the government half of whatever they saved (savings would occur three out of every four years on average) to allow the government to break even. Canadians would keep the other half of the savings for themselves, to spend on prescription drugs, dental work, chiropractic, acupuncture or any other uninsured health service. In unhealthy years, when the allowance wasn’t enough to meet their health-care needs, medicare would kick in after the patients paid a modest deductible ($99 in the case of a typical 30-year-old male; $351 for a typical 75-year-old woman). The poor would pay nothing, ever, even though they, too, would realize savings in three out of four years. In fact, the poor would save more than the rich under the Milliman plan, because they suffer from many more health problems, and would as a result receive much larger health-care allowances.

In contrast to the Milliman study, the Deber approach punishes poor people and sick people by giving them the same amount as healthy people. It also shortchanges the public purse by returning no savings to the government. Deber designed a plan that gave healthy people a windfall, that forced the sick to spend their entire allowance and more, and that gave the government no share in any savings. Not surprisingly, the Deber plan is utterly unaffordable.

Medical savings accounts aren’t perfect – what health system is? But evidence from around the world shows no other approach to health care comes close in meeting the needs of citizens, whether in rich industrialized countries, that can afford to spend large amounts on health care, or in poor, Third World countries that can’t. China experimented with medical savings accounts in two cities, found they worked impressively, and expanded the program to over 50. South Africa, after throwing off the shackles of apartheid, has made medical savings accounts a major vehicle for delivering health care. In Canada and the United States, employer health benefit plans commonly use medical savings accounts systems and the U.S. government is evaluating a pilot project involving several hundred thousand Americans.

Deber dismisses these diverse approaches from around the world, saying “Analysis of experiments, particularly in Singapore, yields mixed results.” What was she thinking about? On many if not most counts, Singapore outperforms Canada – it has lower infant-mortality rates, better-equipped hospitals, and short waiting times for surgery. The World Health Organization ranks Singapore’s health system as the world’s sixth best; Canada’s ranks 30th. And Singapore does all this while spending less than 4% of its GDP on health care, a fraction of what Canada spends.

Deber does get one thing right in her criticism of medical savings accounts for Canada: “What has been missing is Canadian data.” Like other countries, we need to experiment with new ideas, measure the results, and adopt what works. Alberta, to its credit, plans to be the first province to adopt medical savings accounts, and should, in the years ahead, provide the data honest researchers need in evaluating whether medical savings accounts can help all Canadians.

Read “Return of the ‘zombie,'” Raisa Deber’s response to this article.

Read Lawrence Solomon’s reply, “Medical Savings Accounts live”