Health Care Financing: Exploring a Solution
By Monique Veilleux
In the Public Interest, May 2025
The concept of a "three-legged stool" to manage retirement risk refers to the three usual sources of revenues: Public pension, employer retirement plans and personal savings. Why couldn’t this concept be extended to manage future health care expenses? To cover these expenses, an individual can count either on a public (universal) health care system, group or individual insurance, and private savings. The solution proposed is the creation of a Registered Health Savings Account (RHSA) to complement government coverage and private group insurance. This solution is inspired by financial savings products we have in Canada, all of which are registered with the Canada Revenue Agency. Thus, and as a warning, since this solution was thought of in the Canadian context with respect to social security programs, legislation and taxation, it might not be directly applicable to other countries but could certainly give food for thought.
Canadian Landscape and Solution Rationale
In Canada, health care costs are supported by a universal public health care system, private group insurance, private individual health insurance, and private savings. Our public system covers necessary physician and hospital services with no co-payments or deductibles. However, it does not cover prescribed medications (with some exceptions), outpatient health practitioners, or medical equipment. Private insurance (whether group or individual) and savings can fill these gaps, but only partially. Indeed, not all workers have access to group insurance, which has limits and involves out-of-pocket expenses for the covered member, the same as private individual health insurance, which seems not so popular in Canada. The ability of public systems to provide efficient services is perceived as deteriorating because of a shortage of doctors and nurses. This causes increasingly long and frequent delays in the public system that induces patients with means to skip the line and seek medical care in the private sector, to be productive quicker or to reduce suffering time. Also, in Quebec, a clear trend of doctors leaving the public system to work in the private sector is being observed. With more doctors practicing in the private sector, more patients with means may be tempted to pay from their pocket for private doctor services. Those are the main rationales that led to thinking about the creation of the RHSA.
A Potential Solution: RHSA
Before describing the main elements of the RHSA, it is important to mention the four premises (or principles) that are the basis of the solution developed:
- Individual Accountability for Health Expenses: Encouraging individuals to save for their health expenses can lead to better prevention and a healthier population.
- Early Savings Leads to More Accumulation: Starting savings early allows for greater accumulation to cover future health expenses, which increases with age.
- Preferred Tax Treatment for Personal Health Savings: Contributions to the RHSA should be tax-deductible to encourage savings. This is paramount; otherwise, the model does not hold!
- Complementing Current Systems: The RHSA is intended to complement, not replace, the current public and private health care systems.
Main Elements of an RHSA
Contributions: The RHSA would be set up as a personal or family trust, with voluntary contributions. Minimal yearly contributions would be required to cover maintenance costs and ensure sufficient accumulation.
Accumulation—flow in-and-out: The flow in-and-out of the account could be illustrated as follows in Figure 1:
Figure 1
Flow in-and-out of RHSA
Utilization of account: Funds in the RHSA would be used exclusively for health care expenses not covered by public or private insurance, such as health care insurance premiums, uncovered drug expenses, paramedical services (including dental services), private health services, and medical supplies.
Management by financial institutions: Financial institutions would manage the RHSA, ensuring funds are used for their intended purpose, providing payment facilities, and coordinating with private insurance. They would set a minimum balance to maintain in the account and charge opening account and administration fees but would be allowed only minimum profit (from RHSA’s return).
Illustrations of RHSA’s balance under three scenarios: To better picture the accumulation in the RHSA, end of year RHSA balances were evaluated and graphed, based on a set of assumptions, some of which vary upon one of the three scenarios analyzed—individual in good health, one in poor health and one in good health but who dies unexpectedly at 45. The most important assumptions are a beginning of year (BOY) contribution defined as a percentage of salary (3% to 5%) and projected health expenses deducted at end of year (EOY). The health expenses were estimated starting with the Canadian Institute of Heath Information’s (CIHI) estimate of total, per capita, provincial government health expenditures by age-band for Canada in 2020. They were then “converted” to private expenses using the fact that provincial government (public) health expenditures account for 71.8% of total, that is public and private. Thus, 28.2% of CIHI estimates were used for private health expenditures, which were then forecasted to 2024 and projected using a 4% annual trend.
Resulting figures from each scenario where contributions up to death are allowed are summarized in Table 1.
Table 1
Summary of RHSA’s Balances and Other Results under Three Scenarios
Tax Treatment: Contributions and interest income from the RHSA would be exempt from tax, with a limit on annual contributions to prevent it from becoming a tax haven.
Comparison with Singapore’s Health Care System Model
When the abstract of this solution was submitted for presentation at the 2023 International Congress of Actuaries, organizers warned me that the solution looks like what they have in Singapore. After learning about their three-tier system, I noticed that both systems emphasize individual responsibility for health care costs and provide tax incentives for savings. However, the main difference between the two, is that in Singapore’s Medisave program, contributions are compulsory whereas in the RHSA, contributions would be voluntary.
Potential Obstructions and Counterarguments
In developing this solution, I played devil’s advocate by attempting to anticipate the main potential obstructions and refuting them with some counterarguments:
Potential Obstruction # 1: Saving money is already difficult for some people.
Counterargument: The RHSA would benefit those with foresight and means to save, freeing up public resources for those less wealthy.
Potential Obstruction #2: Loss of income tax revenue for government (because of tax-deductible contributions).
Counterargument: The estimated loss of tax revenue (which should be clearly defined) would likely be relatively low compared to the overall health care budget.
Potential Obstruction #3: Violation of the universality and accessibility principle.
Counterargument: There would be no violation because the public system would still exist and be available because the RHSA is intended to complement, not replace, the public health care system.
Potential Obstruction #4: Coordination with other health insurance coverage (group, critical illness, private/individual).
Counterargument: Coordination with other sources of reimbursement would be necessary to avoid fraud and overpayment (reporting needed).
Potential Obstruction #5: Why not use the Tax-Free Savings Account (TFSA in Canada) for health expenses?
Counterargument: It is better to have separate accounts for the following three main reasons:
- (a) Contributions to RHSA would be tax-deductible, whereas TFSAs are not.
- (b) it would ease the coordination of payments with other health programs; and
- (c) for tracking and statistical purposes on private health expenditures.
Potential Obstruction #6: Could an RHSA put group insurance at risk, ultimately replacing it?
Counterargument: Again, the intent of an RHSA is not to replace “one of the legs of the stool” but to add a third one, to complement it. There is still a proportion of people who are not covered or do not have access to group insurance. Moreover, in group insurance, the employer’s participation in the premium is still valued by employees.
Possible Obstruction #7: Government could be tempted to disengage further.
Counterargument: RHSA would be essentially used to cover routine care. The government health care budget could be allocated to catastrophic coverage like high-cost drugs, technological innovation or cost associated with a pandemic.
Conclusion
The RHSA would offer a tax-sheltered savings instrument for health care expenses, encouraging early savings and individual responsibility. While it specifically addresses the health care financing issue, challenges in accessibility, efficiency, and management of health care systems still need to be overcome.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the newsletter editors, or the respective authors’ employers.
Monique Veilleux, ASA, AICA, is an associate actuarial consultant with Hub International Quebec Limited. Monique can be contacted at monique.veilleux@hubinternational.com.
The author would like to thank: Marc Drouin, FICA, vice-president, Employee Benefits Consulting, National Accounts with Hub International Quebec Limited, and Pierre Saddik, FICA, FSA, president at Saddik International.