Medisave Accounts in Singapore

In 1984, Richard Rahn and I wrote an editorial in the Wall Street Journal in which we proposed a savings account for health care. We called it a Medical IRA. That same year, Singapore instituted a related idea: a system of compulsory Medisave accounts. Through the years, my colleagues and I at the National Center for Policy Analysis have kept track of the Singapore experience, including publishing a general study of Singapore’s social welfare system in 1995 and a study of its health care system in 1996.

It’s taken about almost three decades, but all of a sudden Singapore has come to the attention of a lot of other policy wonks, including a book by Brookings, a whole slew of posts by Austin Frakt and Aaron Carroll, a good overview by Tyler Cowen, and lots of links in all of this to other studies and comments.

Before commenting on the commenters, let me jump to the bottom line, which was completely missed by Austin and Aaron, as well as some others: No, Singapore does not have a free market for health care. What it does have is an alternative to the European/American welfare state, in which private saving and private insurance do what employers and governments do in other countries. The Singapore philosophy is:

• Each generation should pay its own way.
• Each family should pay its own way.
• Each individual should pay his own way.
• Only after passing through these three filters, should anyone turn to the government for help.

If the United States adopted a similar approach to public policy, there would be no deficit problem in this country.

How the system works. In Singapore, people are required to save for health care, retirement income, and other needs. They can use their forced saving to purchase a home, pay education expenses, and purchase life insurance and disability insurance. For individuals up to age 50, the required saving rate is 36% of income (nominally divided: 20% from the employee and 16% from the employer). Of this amount, 7 percentage points is for health care and is deposited in a separate Medisave account. Individuals are also automatically enrolled in catastrophic health insurance with a deductible of about US $1,172, although they can opt out. When a Medisave account balance reaches about US $34,100 (an amount equal to a little less than half of the median family income) any excess funds are rolled over into another account and may be used for non-health care purposes.

Some hits and misses by the commenters:

1. A number of commentaries (including comments by Singapore officials) seem overly focused on the issue of whether health care should be delivered in free markets or in regulated markets. However, that has always been a secondary issue, if an issue at all. Medisave accounts are self-insurance, as distinguished from third-party insurance. They affect incentives on the demand side of the market, regardless of how capitalistic or socialistic the supply side is. The issue both in the United States and in Singapore is: can individuals be counted on to manage some of their own health care dollars in a responsible way, or does health care work better if all the dollars are controlled by third-party payers? This topic has generated extensive, heated debate in the United States ― ever since we formally proposed Health Savings Accounts in the early 1990s. For example,Paul Krugman (who has almost a perfect record for getting everything wrong in health care) called HSAs a sop to the healthy and the wealthy. After three decades of experience, Singapore has shown the world (to the great consternation of the critics) that individual self-insurance works and it works well.
2. There has been a lot of back and forth about whether Medisave accounts have reduced overall health care spending, including some commentary by William Hsiao, who seems to have forgotten the Econ 101 distinction between the income effect and the substitution effect. Anytime you force people to save for a consumption item and the savings rate for a lot of them is higher than what they were previously spending, total spending is going to go up. Duh. That’s the income effect. But, money in the accounts belongs to the account holder and anything not spent in the current period rolls over and is available for future spending. Choosing between current and future spending is the substitution effect. So, compared to taxing people and giving the revenue to insurance companies to pay for first dollar coverage, of course spending is going to be lower than it would have been. How could it be otherwise?
3. The most important thing Singapore has accomplished in health care (in contrast to all the other developed countries) is an enormous shift of money and power from the public to the private sector. Since 1984, the Singaporean government’s share of the nation’s total health care expenditure dropped from about 50% to 20%. When you stop to think about it, that’s incredible.
4. Finally, the most important feature of Singapore’s overall approach to social welfare is that the country has found a rational way to provide services that are provided by ill-conceived social insurance programs in the rest of the developed world. As is well known, programs for the elderly have devolved into little more than legalized Ponzi schemes in the United States and throughout Europe. Governments everywhere have made promises of benefits they were unwilling to fund. So now they must either default on those promises or impose draconian taxes on the productive sector. Singapore has avoided that problem.

[Cross-posted at Psychology Today and John Goodman’s Health Policy Blog]