Medical Savings Accounts

Brief Analysis: New Health Options (SUMMARY) (TEXT)

Legislators and policy analysts are proposing options to make health insurance more affordable, reduce the number of uninsured and give people more control over their health care.

Rep. Bill Archer (R-Texas), House Ways and Means Committee chairman, has proposed giving tax deductions to people who purchase their own health insurance. And Rep. Bill Thomas (R-Calif.), chairman of the Subcommittee on Health of the House Ways and Means Committee, has proposed to make health insurance personal and portable for everyone by means of a tax credit.

These proposals would give tax relief to people who purchase their own health insurance. Current federal tax policy encourages employers to provide health insurance instead of paying employees all their compensation in the form of taxable wages.

  • Under current law, every dollar of health insurance premiums paid by an employer escapes a federal income tax that reaches as high as 39.6 percent, a 15.3 percent Social Security (FICA) tax and perhaps a 4, 5 or 6 percent state and local income tax.

  • By contrast, the self-employed can deduct only 45 percent of the cost of health insurance (increasing to 100 percent by 2007).

  • The unemployed and those whose employers do not provide health insurance get virtually no tax break (see figure).

Both tax credits and deductions have advantages and drawbacks, say health policy experts. For example, deductions benefit high-income people more than those with low incomes -- due to the higher tax rates on their income. A tax deduction also encourages people to overinsure because the more they spend on health insurance, the more tax subsidy they receive.

Another way to expand self-insurance is through a type of Medical Savings Account (MSA) called a Patient Protection Account (PPA). This account would be structured like the new Roth IRA: anyone could make deposits with aftertax income and make tax-free withdrawals for any purpose.

PPA funds could be used to pay for health care not covered by health plans, giving people more freedom of access and choice. This would allow them to take advantage of the lower premiums offered by restrictive Health Maintenance Organizations (HMOs) and use the savings to pay for visits to out-of-network doctors, and drugs or diagnostic tests not covered by the HMO.

Source: John C. Goodman (NCPA president) and Merrill Matthews Jr. (NCPA vice president of domestic policy), "Health Plan for the GOP," Brief Analysis No. 263, April 29, 1998, National Center for Policy Analysis, 12770 Coit Rd., Suite 800, Dallas, Texas 75251, (972) 386-6272.

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