Medical Savings Accounts Study
Financing, Controls, and Conflicts of Interest

Third-party payers do not bear final legal responsibility for insured patients' bills. While patients may be the payers of last resort, the system isolates them. Isolated from the cost of their consumption, patients are ignorant of the consequences. This causes an inherent economic conflict of interest and creates incentives that work in contradictory and undesirable ways.

When user and payer are separate entities, the user consumes more of what he does not need and for which he does not have to pay. Patients and providers may collude knowingly or unwittingly merely to extract payment from a third-party source—other people's money. The result? Insurers, intermediaries, patients, and providers expend scarce resources on matters unrelated to the best health practices and procedures.

Reactive and skewed incentives produce enormous economic friction and provoke elaborate countermeasures. These efforts lead to behaviors that get in the way of genuine cost reduction. People do respond to economic incentives, good or bad, with generally predictable consequences.9

In life-threatening or other urgent situations, patients and their families rarely are price sensitive. This is understandable. But even when seeking or using routine and elective services or when choosing a health plan, most people bear little personal monetary risk. They have little incentive to consider costs. Without such incentives, patients rarely seek or have access to price information. They rarely comparison shop, and they often feel uncomfortable asking about prices at the point of service for fear of offending the physician on whom they rely.

When patients do not directly pay for services, a third party pays. This third party's motivation may not primarily serve the best interests of the patient, but may act as an economic adversary, denying payment for services whenever possible. Third-party payers develop highly creative and complicated methods to control the supply of medical services. Similarly, providers counter with equally creative schemes designed to increase reimbursement.

Payers' attempts to decrease utilization put providers and patients in opposing camps. Payers require providers to bear the risks and assume whatever costs neither party has paid. Incentives for ever more intensive supply-based management of health care increase. Efforts to control supply-side costs have evolved into elaborately organized, corporate systems that integrate administration, finance and delivery of health services. We have come to label these systems "managed care."

"Isolated from the cost of their consumption, patients are ignorant of the consequences."

"People do respond to economic incentives, good or bad, with generally predictable consequences."

Evergreen Freedom Foundation P.O. Box 552, Olympia, WA 98507 Phone: (360) 956-3482, Fax: (360) 352-1874 Email: effwa@effwa.org