Discounting of Medical Savings Accounts

Medical savings accounts (MSAs), personal medical accounts that are restricted for health-care consumption only, have been widely adopted to cushion individuals against the financial risk due to illness and to address the potential moral hazard problem in the health insurance system. This paper studies the effects of MSAs on health-care expenditures and suggests that there may be some inherent tension between the two purposes of MSAs: account holders are likely to discount MSA funds because of their restricted use, which renders MSAs to be less effective in controlling health-care costs. We exploit a quasi-natural experiment in China that exogenously reduced MSA funds for enrollees in certain age cohorts. We find that this reduction led to a large and statistically significant decrease in health-care expenditures that is unlikely due to an income effect. The effect was driven by enrollees who were likely to exhaust MSA funds and enter the deductible phase in which they paid out-of-pocket.