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 over all 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.

Comments (39)

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  1. Devon Herrick says:

    This is the type of health care system the Unites States should have adopted years ago. The current pay-as-you-go funding mechanism creates temptations for politicians to extend benefits that are unsustainable; and to saddle future taxpayers with the current generation of seniors’ debts. People understandably dislike the idea of rationing. Yet, consumers ration their own spending every day with the decisions they make. This type of system would create 50 million advocates for price competition and likely have spillover effects on the medical costs of the remaining 260 million people.

    • JD says:

      It is definitely a step in the right direction and probably the best system currently on earth.

    • Perry says:

      I agree Devon. The other problem with third party insurance is that they can make decisions on what they will pay for. If I want acupuncture instead of surgery and I want to pay for it on my Medisave account, it’s my business. This also paves the way for doctors to discuss reasonable medical care and testing based on evidence, but leaves the decision to the patient, as it should be.

  2. Connor says:

    “its own way.”

    Ahhh. Freedom. I forgot how good you sounded.

  3. I was invited to talk about my approach to health insurance policy at a conference in Singapore in 1997 because the conference conveners thought that my approach was similar to what they were planning for Singapore. They were correct.

  4. JD says:

    The Singaporean ideal of self-reliance is something our nation should’ve been leading on.

  5. Peter Ferrara says:

    The same concept was adopted for Social Security in Chile over 30 years ago. People pay about half what was required for the former government non savings redistribution system and get much more in benefits than the old system even promised. But we cannot even discuss this rationally in the United States today. That is a symptom of America falling behind.

  6. Uwe Reinhardt says:

    I find quite interesting John’s passage:

    “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.”

    To see John regard as a secondary issue (if an issue at all) government interference on the supply side — including interference on pricing — is memorable. I will remember it.

    I do agree, however, that relative to generous third-party payment mechanisms that make even highly expensive health care financially accessible to everyone regardless of income class, a regime of forcing households to self-ration their use of health care on the basis of income class would be very likely to result in lower national health spending and lower taxes on the well to do. John is right about that.

    The trick here, though, would be to get a politician — say, Sen. Orrin Hatch or Paul Ryan — to propose openly that he favors rationing health care in the US by income and ability to pay. Is America ready for that yet?

  7. John Goodman says:

    Uwe, the Singapore government denies that anyone is denied essential medical care because of an inability to pay. Also, the deductibles are lower for low-income individuals.

    And I have an intense interest in liberating the supply side, even though Singaporeans do not seem to share that interest.

    • Uwe Reinhardt says:

      John:

      Even if there actually were rationing of essential medical care by income class, would you not expect government officials to deny that.

      I am stunned that such a denial becomes a robust data point for you. Frankly, I would have liked to see a more robust study of that facet.

      • Becky Burke-Pair says:

        The Singaporean model builds in rationing, though they do not see it as such. When developing a long range plan for the govt.’s leading hospital, we calculated bed need based on Singaporean use rates, not U.S. They needed triple the neonatal intensive care beds on island. Answer? Those who cannot get a bed will go off island for care. Only the affluent can afford that. Intrigued by their levels of care in hospital, tiered. Patient and family can do more of the care to save money, including option of old fashioned wards. Incentives to be judicious in use of HC dollars is built into the system and consumer adapts. Price controls exist as do controls on licensing physicians to keep supply down believing that more physicians drive up costs, not reverse. Govt. has begun to strictly limit licenses to MDs trained in a handful of medical schools, on island favored, where MDs get trained in frugal use of care. Terribly interesting system. Large pieces could work in U.S.

  8. rex says:

    Paul Krugman is wrong in arguing that that only the healthy and wealthy benefit from health saving accounts. Healthy people who have Health Saving accounts are much more likely to avoid unnecessary medical treatment when compared to healthy people who have access to zero copay health insurance. This frees up resources that are then devoted to people who are actually sick. What the heck is wrong with that!

    • Uwe Reinhardt says:

      To rex:

      Krugman is not even a tenth as stupid as the supercilious commentary on this blog suggest.

      Relative to a regime of more first-dollar coverage, a system of high deductibles with tax-preferred HSA does do two things:

      It does reallocate part of the financial burden of health care from the chronically healthy to the chronically sick;

      It makes health care for high income people cheaper on an after tax basis than it is for low-income people.

      I know employment based health insurance has the latter effect two, and I oppose it there as much as I oppose tax-preferred HSAs.

      • rex says:

        You can means test an HSA. For those who are temporarly very poor, provide a refundable tax credit. For Warren Buffet, provide nothing.

      • John Goodman says:

        Ok. Let me sift through this.

        We (at the NCPA) have always favored putting third-party premiums and HSA deposits on a level playing field under the tax law. So if the former gets a deduction, so should the latter. If the former get an exclusion, so should the latter.

        We have also proposed a much better system (Goodman and Pauly 15 years ago in Health Affairs): a fixed sum refundable tax credit (preferably the same number of dollars for everyone) and the opportunity to make after tax deposits to a Roth HSA.

        Is that egalitarian enough for everyone?

        Also, Uwe, have you ever heard of Cash and Counseling — where homebound disabled Medicaid patients manage their own budgets? Think of it as an HSA for poor people with medical problems. It works like a charm.

  9. Tom Chapman says:

    Excellent piece John! Wish we could learn from them!

  10. Uwe Reinhardt says:

    Austin:

    You stumbled over the same issue in John’s post that blew me over.

    It reminds me of the assertion by Reggie Herzlinger that the Swiss System is a model of Consumer Directed Health Care. In fact, it is one of the most highly government-regulated systems I can think of.

  11. Roger Waters says:

    John,

    I remember the “Medical IRA” when my job was a health legislative assistant. I recall working on regulations when the HSA was finally allowed to exist and become tax deductible. That all took years and years.

    Why do we take so darn long to understand and adopt great ideas, and then ignore them and the underlying philosophy? (personally, it seemed all those utopian seeking, 20-something, newly minted, Kennedy School grads working on the Hill with me had “policy amnesia” and always wanted to do something new, different, cool, and impractical)?

    Thank you for sharing the Singapore Philosophy, that makes so much sense – but may be too harsh for our bleeding heart friends? To quote Hank Williams “your bleeding heart…will make you weep…you’ll cry and cry…” – oops, my apologies for the digression.

    Again, thank you!

  12. Scott Strauss says:

    Can you imagine the outrage – American being told they have to save for medical care and retirement!! How un-American!! If I want to live in poverty when I retire, that should be my choice – not the government’s. If I want to be uninsured – that should be my choice – not the government’s!!

    • Uwe Reinhardt says:

      Yes, that’s the American way. It’s because we’re smarter and less myopic than people in other countries, so government doesn’t have to tell us what to do.

  13. Andrew Thorby says:

    Excellent article. Thanks for taking the time to write it. Unfortunately it is a utopian dream that this would ever become policy here in the US. We alone still cling to a system of weights and measures that originated in medieval England. We alone still have a 3 month summer vacation so the kids can help with the harvest – resulting in the shortest school year in the OECD and then wondering why our kids don’t know as much as the Aussies or Brits when they graduate high school. We alone have the electoral college as if the telegraph hadn’t yet been invented. As a nation we just aren’t very good at looking around us and then adopting best practices.

  14. Michael Dee says:

    The question is how would the idea of “mandatory” savings be accepted in the US? Think about it, 36% of your income must go into the savings pool and Insurance is mandatory. Most housing is built and owned by the Government and when you “buy” and apartment you are really just buying a long term lease from the Government. Your return on these savings is funded by investment in Government debt. The Government takes your savings and invests that in global markets via their government owned investment company. When the Government earns a return half goes into future Government reserves and half is used to fund the Government.this is a very Government heavy system hence Singapore is known as the “nanny state”. It works but it would be virtually impossible to impliment in the US. I know as I have lived in Singapore for over 10 years.

  15. Greg Scandlen says:

    There appears to be an American version of this emerging in the market, however clumsily. I will write about it next week.

  16. Bob Hertz says:

    If health insurance and pensions are voluntary — and I mean voluntary for the firm, and voluntary for the individual — then large numbers of persons will have no health insurance and no pension. Other financial needs will seem more pressing than insurance, and retirement savings will start too late or not at all.

    I spent a large portion of my working life in the marketing of insurance and retirement plans to small businesses. And this is not just my observation of course.
    The ranks of Medicare and Social Security have millions of seniors who need extra
    benefits……because they are desperately poor after working 40 years in the industries like food-retail-hospitality where benefits are voluntary. (Some of the elderly made decent money, but are poor because of divorce and/or bad financial choices. But still, benefits were voluntary for them.)

    Most readers of this blog who are not doctrinaire libertarians would agree that this is a problem.

    If voluntary benefits create a social problem, then the way to solve this is some form of coercion.

    Speaking in very general terms, the Singapore system coerces the individual to save for health care and retirement.

    The American system coerces all citizens to pay taxes, in order to bail out those who make bad choices or are too poor to make any choices.

    Michael Dee’s comment after living in Singapore gets to the core of what I am talking about. Their systems have many aspects of coercion.

    Peter Ferrara might say that Singapore’s coercion is smarter than our tax-coercion, and makes for better economic growth. I sense he is right but I lack the knowledge of economics to know for sure.

    When individuals save, they have the advantage of compound interest on their side. A tax based system like ours is going to be in constant crisis to do bailouts and terminal funding for individuals (and local governments) that are in total financial crisis. (c.f. Detroit, Stockton CA, etc etc)

  17. It seems to me that Social Security and to some extent Medicare, were sold to the American voters as personal, although mandatory, savings accounts.

    As a practical matter of course they were taxes in the sense that the return on investment was much smaller for those who made large “savings”.

    It’s much more transparent to face up to the necessity of this fact by simply placing government subsidies each year in poorer individuals’ savings accounts. And also having a safety net of some sort for those who have been extremely unlucky.

  18. jenny says:

    they wrote a WALL STREET JOURNAL in 1984 for saving accounts for health care. its so nice to read this story. i like it.

    Linkedin Tips

    http:linkedinsummarytips.com

  19. Andy Wong says:

    Your article only touches on the structure of Singapore’s healthcare system, and misses many crucial features – the most salient of which is that citizens are broadly speaking not satisfied with it. The government has in fact recently – and to much fan-fare – made claims of moving towards a more “liberal” universal healthcare. Unfortunately (or fortunately, depending on your agenda), this is not much more than propaganda.

    You write about “MediSave”, but this in fact only one of three pillars in what is known as the “3M” system, the other two being MediShield and MediFund. The most interesting is MediShield.

    It was revealed recently in a parliamentary response that around two billion dollars in premiums have been paid into MediShield while only 1.3 billion has been paid out in claims. As for the difference, no one knows. The scheme is administered by the government and this is just one of many examples where citizens see themselves exploited as a revenue source by the big government machinary of Singapore rather than as people to be democratically represented.

    Despite perceptions that MediShield is an insurance scheme, in fact the majority of the risk is borne by the individual. The government’s contribution of around 30% to healh care spending (according to the WHO, not the 20% you cite) is capped in a low risk co-payment model – hospital bills over a certain threshold are entirely paid by the individual and certain chronic conditions are excluded completely.

    Back to MediSave, as you note this is essentially a forced savings model, so those not in formal employment – including taxi drivers who are almost universally self-employed – do not have an account. Think about that next time you take a cab in Singapore. We should also note that the government has recently made another fan-fare of relaxing criteria around MediSave spending limits. That’s right, the government regulates that you cannot spend your own forced savings on certain arbitrary healthcare costs, but will very generously this year relax (some of) those rules.

    I’m not sure what sort of healthcare you wish for the poor or unemployed in America, but in Singapore there is a saying “you die, your business”. It means the state will do nothing, or almost nothing to take care of you. The Singapore government’s 30% contribution to healthcare costs is half the OECD average, and lower even than those poorest countries on the World Bank’s four teir income scale.

    http://andyxianwong.wordpress.com/

  20. Bob Hertz says:

    I sure hope some libertarians respond to Andy Wong:

    a. Critical illnesses excluded???

    b/ “You die, your business”

    I am not opposed to a health care system that refuses to pay for terminal chronic conditions. Keeping everyone alive to age 95 is not my goal for society.

    I only want honesty.

    According to Andy Wong, the rulers of Singapore wpuld be challenged by Sarah Palin. Which is fine, but then let’s force Sarah Palin to advocate for higher taxes.

    • Andy Wong says:

      Minor correction, it is chronic rather than critical illnesses that are excluded. There are some hints on the policy here.

      http://www.todayonline.com/singapore/medisave-expanded-cover-five-more-chronic-conditions

      Adding cover for five more chronic conditions seems like progress, but it doesn’t change the fact that there are X unnamed chronic conditions that are still excluded.

      But it is the finances of the system which are probably most troubling for libertarians:

      “Two billion dollars in premiums have been paid into MediShield while only 1.3 billion has been paid out in claims”

      No one knows quite where the difference has gone, but it is widely assumed to be under the “care” of Singapore’s two sovereign wealth funds. One is run by the PM himself, the other by his wife…

  21. Bob Hertz says:

    I am little disapponted that no one picked up my thread about voluntary health insurance vs coerced health insurance or coerced HSA’s.

    i was trying to highlight a great dividing point in American social thought, which is the conflict between paternalism and invididualism.

    Paternalism says that society and tradition know what is best for you, and saving is best for you, so you will do it.

    Individualism allows you to experiment.

    This is an issue throughout American social life, and commentators as varied as Charles Murray and Myron Magnet have discussed it.

    My own feeling as I grow older is this: the disasters from experimentation are so harsh, that paternalism should be taken very very seriously.

    • Devon Herrick says:

      Paternalism says that society and tradition know what is best for you, and saving is best for you, so you will do it…

      My own feeling as I grow older is this: the disasters from experimentation are so harsh, that paternalism should be taken very very seriously.

      Bob, I think you’re on to something. The social contract behind Social Security, Medicare and Medicaid assumes society has certain responsibilities to ensure what is best for society. This assumption is based on the fear that some people would not plan if the decision was left to them.

      Individuals have stronger incentives to plan for medical care in old age, and retirement, when they can internalize all the positive benefits of planning. But historically the aged discovered too late that they lacked the resources to retire. The infirm learned to late they lacked the resources to finance health care in old age.

      Individual have few incentives to plan for these contingencies if society is willing to take on the role of social insurance. Keep in mind that insurance is asset protection for people rich enough to possess assets worth protecting. Society has an interest in ensuring (or coercing) these societal protections since people (i.e. society) would be bothered by witnessing old, homeless people starving and dying on the streets. If society is forced to act, it becomes a societal expense with requires revenue to fund.

      The problem: not only does social insurance create a perverse incentive for people not to plan for themselves. Social insurance also creates the perverse incentive for politicians to make promises they will never have to pay for. When social planners were contemplating Social Security in 1935 and Medicare/Medicaid in 1965, they undoubtedly didn’t take into account the scope of the perverse incentives. Individual accounts and individual control for MSAs/HSAs/IRAs probably seemed a bother at a time when hospitals were places to die and people who made it to Social Security age drew benefits for only about two years before they died.

      Governments like Singapore are trying to find the delicate balance between coercive taxation to fund the social contract, while maintaining the appropriate incentives. The Singapore system may have glitches. It may have over-zealous regulations in places. There may be winners and losers under this system. But it appears they are ahead of most developed countries in trying to strike a balance between perverse incentives, appropriate incentives, individual responsibilities and the collective good.

  22. Bob Hertz says:

    Thanks Devon for realizing that the paternalism issue is very complicated.

    Individualism allows us to make mistakes, and then allows both us and our fellow persons to learn and become wiser. Everyone has a purpose in life, if only to serve as an awful example.

    But this ‘learning process’ is achingly long and gradual. The 1920′s was the most individualist era in America up to that time. When the Depression hit, people who had not saved or obtained secure jobs were driven right to the edge of starvation.

    This produced a generation of Americans who were frugal and careful, having essentially been “scared s–tless’ by the 1930′s.

    Then the social insurance and prosperity of the 1960′s eroded this frugality for many Americans, and as a result we now have more people than ever dependent on government just to survive (and it keeps getting worse).

    In this sense we are just lurching back and forth. Paternalism is beginning to look attractive to me when it incorporates lessons that have taken many decades to seep in.

    When an animal in the wild makes a mistake, it is usually eaten. The lessons of poor judgement are shall we say driven home in a hurry.

    When humans make a mistake by dropping out of high school, or not buying insurance, or not saving for retirement, they do not just starve to death in three months as awful as that would be. Instead they hang around on public support for decades. They even have more children than the educated group, which is about as anti-Darwinian as you can get.

    All of which goes to back up my point that the world is more subtle than just bad government slavery versus good personal freedom.

    Bob Hertz, The Health Care Crusade

    • Greg Scandlen says:

      Bob and Devon –

      I reject the dichotomy you both are making between the individual on one hand and the State on the other. Bob almost gets there with this — “All of which goes to back up my point that the world is more subtle than just bad government slavery versus good personal freedom.”

      In fact, human beings are an enormously cooperative species. We like to work together to solve problems and take care of one another. We don’t need the State for this to happen. Capitalism itself is characterized more by cooperation than by competition.

      I am working on a paper about fraternal mutual aid societies. These were ubiquitous long before the welfare state came about. Interestingly, they did not simply offer financial benefits, they also inculcated their members with standards of virtuous behavior, similar to the virtues Bob identifies in the post-Depression generation — thrift, humility, civility, caring for others, etc. Members would visit and support other members in times of hardship or stress.

      Now, of course there will always be outliers, people who are criminal or dysfunctional. Some people will take suicidal risks. That, too, is built into the species and there is nothing that can be done about it by the State or any other organization, short of locking everyone in a padded cell where they cannot hurt themselves.

      Curiously, many of the suicidal risk-takers are the very people who do the most to advance the species. Bill Gates thinks every single person should go to college, even though he himself dropped out and took an insane risk on personal PCs. Social planners would have condemned this young fellow for toiling away in his daddy’s garage instead of getting a nice steady job and saving for his retirement.

  23. Bob Hertz says:

    Greg – my grandfather came from Poland/Russia in the early 1900′s. He and hundreds of immigrants like him got a start in business through interest free loans from the Jewish Workman’s Circle.

    So you are on the right track.

    But I do not think there was a West Virginia coal miners Workmen’s Circle or an
    Okie’s Workmen’s Circle or black sharecropper’s Workmen’s Circle. I think these groups needed the state.

    • Greg Scandlen says:

      On the contrary, Bob. Take black sharecroppers — there were two black fraternals in in Mound Bayou, Mississippi that opened up their own hospitals to serve precisely that population during a time of Jim Crow. Similar things happened across the South. Across the country (and in England) the fraternals were organized and managed by uneducated workers. Working people are not stupid and they are not helpless.

  24. Rituparna Basu says:

    John, why are the savings compulsory in Singapore? I’d think if the principle is, “You’re responsible for paying for your health care, not others,” you could just leave people free to plan for their medical expenses as they see fit. Those who wanted to save e.g., 36% of their income could. Those who preferred to save less could do so, but if they became ill, they’d have to pay the price (seeking charity, help from family/friends, etc.), not everyone else.

  25. Theresa BrownGold says:

    Americans will see the “forcing” of health savings upon them as anti-American just as they argue the individual mandate is limits choice.

    The Singapore system is a nonstarter for that reason.

    As far as Rituparna’s comment goes, we already have the system where people who cannot pay beg from family, friends, seek charity. And the emergency rooms are dispensing primary care at exorbitant prices that cost us all.

    With that thinking, why don’t we just round up all the low-wage earners who are sick and uninsured and create a medically unfit ghetto for them to figure it all out for themselves.