Budgetary Implications of a Publicly Funded Medical Savings Account Plan

There is no consensus on whether a publicly funded medical savings account (MSA) program can generate net savings for government. We develop an analytical framework and demonstrate that the savings/cost implications of such a program depend critically on six factors: the size distribution of health-care expenditures, the MSA incentive effect, health-care expenditure expectations and whether they are fixed or flexible, the random incidence of illness, and optimally differentiated MSA allowances. Using the 1999 size distribution of health-care expenditures for the 45­64 year-old Manitoba population, we show that MSA allowances save the government $42 per capita under the most favourable assumptions, but that, under more realistic assumptions, they are consistently more costly than medicare.