IMAGINE for a moment that car insurance worked like health insurance. In addition to covering major repairs, this new system of car insurance would also cover car maintenance, such as oil changes. Consumers would no longer have an incentive to shop around for the cheapest oil change since they would not be paying out-of-pocket for this service. Instead they would demand the highest-quality oil without regard to cost. And auto mechanics would no longer have an incentive to keep costs low.
Enter the Automobile Maintenance Organizations (AMOs). Similar to Health Maintenance Organizations (HMOs), AMOs would keep costs low by cutting deals with mechanics and controlling unnecessary services. In this scenario, you, the consumer, would pay a flat fee and in return the AMO would manage all of your car services - both maintenance and major repairs. You would be assigned to a "Primary Care Mechanic" who would oversee your preventive automobile maintenance. The AMO would set standards for when your car needed an oil change and would restrict you to certain mechanics and auto repair shops. These restrictions would be offset, however, by cheap insurance premiums.
So what's the problem? AMOs limit your freedom to choose. AMOs give insurers the power to decide which mechanic and which shop you can go to. This is exactly what has happened in the health care industry. Over the past decade employers have begun cutting deals with insurance plans and HMOs to lower costs. And although this has helped curtail spending, it has simultaneously restricted consumer choice.
There is a better way for employers and government to cut health costs and decrease unnecessary consumption, while at the same time empowering consumers. Establish Medical Savings Accounts.
Medical Savings Accounts (MSAs) are tax-deferred accounts set up for individuals to pay for routine medical care. Rather than sitting in the insurers' or HMOs' bank accounts, money for routine health care is placed in an individual Medical Savings Account. Using the car insurance analogy, MSAs work in the following way:
Let's say that on average your employer pays $4,500 per year for your car insurance, covering both maintenance and major repairs. With a Medical Savings Account plan, your employer (or Medicare) would deposit $3,000 into an account for you to purchase routine services. The remaining $1,500 would be used to buy a catastrophic insurance policy for major accidents.
The most important feature of MSAs is that they give you the freedom to choose your auto shop (clinic) and mechanic (doctor and/or other practitioner) for routine services. They create an incentive for you to search for high-quality, low-cost services. And unlike flexible spending accounts where you lose what you do not use, MSAs allow unspent funds to accumulate for future use, such as when you are unemployed or between jobs. These accumulated savings could help end the "job-lock" problem where individuals are afraid to change jobs for fear of losing insurance benefits.
A bipartisan bill has been introduced by Reps. Bill Archer (R) of Texas and Andrew Jacobs (D) of Indiana to allow for the establishment of MSAs. The "Family Medical Savings and Investment Act of 1995" will correct the perverse incentives in the health care industry. MSAs can lower health spending by making consumers more aware of how their health care dollars are spent. But most important, they will empower consumers and give greater freedom of choice in health care.