Health care spending in the United States could be reduced by as much as one-fourth by a system that combines tax-free Medical Savings Accounts for smaller bills with high-deductible health insurance policies for catastrophic expenses.

The concept has been endorsed by Republicans and Democrats in Congress. Here is the way a Medical Savings Account system could work:

• Individuals or their employers could set up the accounts, which would be similar to Individual Retirement Accounts except that they could only be used to pay medical bills.

• In many cases, people could fund the accounts with the premium savings from buying high-deductible health insurance policies - which are often greater than the deductible itself.

• Anything the individual didn't spend on medical care would remain in the account, which would grow tax-free.

• An account would be personal and portable, remaining with a person who changed jobs or became unemployed.

• A system of refundable tax credits could make Medical Savings Accounts possible for people with low incomes.

To make Medical Savings Accounts feasible, a change in the tax law is needed to give all spending on medical care equal tax treatment.

Medisave accounts would restore the patient as the principal buyer of health care. Patients would be encouraged to be more prudent buyers of medical care because they would be spending their own money.

Source: John C. Goodman and Gerald L. Musgrave, "Controlling Health Care Costs with Medical Savings Accounts," NCPA Policy Report No. 161, January 1992, National Center for Policy Analysis, 12770 Coit Rd., Suite 800, Dallas, Texas 75251, (972) 386-6272.

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