NCPA - National Center for Policy Analysis


August 13, 2004

In June 2002, encouraged by the National Center for Policy Analysis (NCPA) and the Wye Group on Health, the U.S. Treasury Department issued a Revenue Ruling clarifying that unused funds in Health Reimbursement Arrangements (HRAs) -- employer-funded accounts similar to Health Savings Accounts (HSAs) -- could be rolled over from year to year tax free.

Like Medical Savings Accounts (MSAs) in South Africa, HRAs are very flexible. Employers, for example, can alter copayments and deductibles to encourage employees to buy medications for chronic conditions or to encourage preventive care.

There are some limitations:

  • HRAs can never be cashed out and taken as compensation by the employee, and they are generally not portable.
  • Thus, HRAs are essentially expense accounts with use-it-or-lose-it incentives; nonetheless, they have been very important politically in building large employer support for consumer directed health care.

In contrast to HRAs:

  • HSAs create an actual savings account that belongs to the worker, can travel from job to job, and be passed on to heirs.
  • To a large extent, they allow people to choose between health care and other uses of money.
  • Funds can be withdrawn and spent for nonhealth purposes after age 65, after paying normal income taxes. Prior to age 65, a 10 percent penalty applies.

Health Savings Accounts is truly an idea whose time has come. HSAs promise to revolutionize the American medical marketplace. However, Congress should allow insurance companies and employers more flexibility to experiment and innovate, so that the market can discover what works best, says the NCPA.

Source: "A Brief History of Health Savings Accounts," Brief Analysis No. 481, National Center for Policy Analysis, August 13, 2004.

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