NCPA - National Center for Policy Analysis


January 14, 2005

There are 10 minor reforms lawmakers could enact that would pay big dividends, says John Goodman, president of the National Center for Policy Analysis. Creating Roth Health Savings Accounts (HSAs) for seniors would be a good place to start.

Currently, the elderly pay half their health care costs out of pocket. Even with the new Medicare prescription drug benefit, health care costs will continue to claim a significant chunk of their income. Roth IRAs are an attractive way for seniors to build up savings for medical contingencies. Since deposits to these accounts are made with after-tax funds, withdrawals are tax-free and penalty-free (after age 59).

Roth accounts offer better incentives than conventional Health Savings Accounts (HSAs), says Goodman:

  • A dollar withdrawn from a Roth account to pay medical bills is a dollar that could have been spent on other goods and services.
  • So, seniors won't spend a dollar on medical care unless it is worth a dollar to them. With a conventional HSA, by contrast, taxes must be paid on any dollar withdrawn for nonmedical purposes.
  • In this case, the choice between a dollar spent on medical care and, say, 65 cents spent on something else -- encourages the choice of medical care, even if it is worth only 67 cents to the buyer.

Roth IRAs could be turned into Roth HSAs by allowing deposits even in the absence of wage income, lifting the five-year moratorium on withdrawals for health needs, and removing the income limits on participation, says Goodman.

Source: John C. Goodman, "Ten Easy Health Reforms," Brief Analysis No. 497, National Center for Policy Analysis, January 14, 2005.

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