April 10, 1996

Medical savings accounts benefit sick as well as healthy
Adverse selection criticism flawed, Cato paper says

"Despite recent attacks, medical savings accounts remain the best hope for
reforming the Medicare system," says analyst Peter Ferrara in a new Cato
Institute briefing paper.

In "The Establishment Fights Back: Medical Savings Accounts and Adverse
Selection," Ferrara notes that medical savings accounts (MSAs), by means of
which consumers control their own health care spending, have become
increasingly popular in the private sector.  That popularity, he says, has
led critics of incorporating the concept into Medicare reform -- big
insurance companies, organized seniors groups and the Clinton Administration
-- to attack MSAs unfairly.

The most common claim of critics is that MSAs lead to "adverse selection" --
appealing only to the healthy and leaving traditional Medicare to serve the
sick, which would result in large cost increases to the federal system.

Recent studies purporting to show that Medicare reforms that include MSAs
would give rise to adverse selection are flawed, Ferrara argues.  Studies by
the Congressional Budget Office and Lewin-VHI, Inc., fail to recognize the
cost-reducing power of MSAs.

"Those analyses are wrong," says Ferrara, "because MSAs provide better
benefits for the sick than does Medicare.  Consequently the sick as well as
the healthy are more likely to choose them."

Ferrara writes that established interests that dominate health coverage fear
competition from MSAs.  Consequently, they have produced a blizzard of
criticism to short-circuit that competition.

"While the criticism has been echoed by those ideologically opposed to
markets, it cannot withstand scrutiny," he says, and predicts that MSAs will
be the dominant form of health coverage in the 21st century because they
control costs and increase consumer choice.

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Briefing Paper no. 26