The economics of incentive-based health care plans

Medical savings accounts (MSAs) belong to a larger class of incentive-based health care plans. Using a model that allows the consumer to invest in hea lthy activities, we examine the efficiency properties of incentive plans an d compare them to traditional full-coverage and deductible plans, under bot h experience rating and community rating. The model also is extended to inc lude utilization of preventive health care. Properly constructed incentive plans have the capacity to induce socially efficient levels of healthy acti vities and preventive care, raising the expected wealth of consumers withou t reducing insurers' profits.