NCPA - National Center for Policy Analysis

Three Options for Personal Health Care Accounts

January 8, 2003

The Bush administration is examining three types of individual health care savings accounts to help control skyrocketing medical costs and decrease the number of uninsured Americans.

The three new health account approaches are intended to rectify restrictions on medical savings accounts (MSAs) created under a national pilot program approved by Congress in 1996.

One approach is a modified MSA open to all workers.

  • Under current law, tax-free MSAs are available only to the self employed and small business employees.
  • Once an employee uses up his MSA account, his deductible is decided through a complicated formula that fluctuates.
  • Reformers would like to see the deductible eliminated or replaced with a set deductible of, say, up to $1,000 the employee would pay before insurance from a health maintenance organization or a preferred provider organization kicks in.

Businesses are already experimenting with the second approach, called health reimbursement arrangements or HRAs.

  • Under this plan, employers would contribute a set amount of money -- generally between $600 and $1,500 -- to each employee's health care spending account.
  • If the employee doesn't spend all of the money in a given year, it may be rolled over to offset health care costs in the next year.

But an employee who spends the entire amount is responsible for paying a deductible before an HMO or a PPO kicks in.

A third approach is the flexible spending account (FSA). Many large employers now offer this benefit to their workers.

  • Under FSAs, employees may designate part of their pay to be set aside, tax free, for health care expenses that regular insurance doesn't cover.
  • But FSAs are based on an annual use-it-or-lose rule, giving those under the plan the wrong incentives toward year's end to spend the money or risk losing it.

The bottom line for improving such accounts is additional flexibility, says John Goodman of the National Center for Policy Analysis. "All three of these accounts could be made better," he said.

Source: Marilyn Werber Serafini, "Three Options on Health Care," National Journal, December 21, 2002.


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