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Health Accounts

Many larger employers offer at least a limited number of health care coverage choices for employees. But some of the coverage options that provide the greatest freedom of medical treatment also include significant out-of-pocket payments such as high deductibles or copayments. These options are attractive for many Americans because they depend on the patients and their physicians to make treatment choices, rather than insurance plan managers.

The President's budget includes two proposals to help Americans who want more control set up a tax-favored "health account," which would permit them to pay these out-of-pocket costs more easily. They would also allow Americans to build up an account to cover high medical costs when needed. These proposals address an imbalance in current tax rules, which favor medical spending controlled by health plans (which is built into the premium and is tax deductible) over medical spending controlled by patients (which, as an "out of pocket" cost, is generally not tax deductible).

Improved and Expanded Medical Savings Accounts. The President proposes to remove the excessive restrictions on Medical Savings Accounts (Archer MSAs), transforming them into a coverage option that is consistent with recent trends in private health insurance. Under the proposal, employees who have a health plan with a significant deductible (up to $1,000 for individuals and $2,000 for all other cases) could deposit funds into the account, tax free, up to the insurance policy's deductible.

The insurance plan could cover preventive care without counting against the deductible. Such plans are increasingly common as employees have become dissatisfied with restrictions on their care in HMO-style, low-deductible plans. Employees who choose these plans would still be protected against high medical expenses with a more affordable premium than in a low-deductible plan. The proposal would make health accounts available to all employees, and would not discriminate, as current law does, on the basis of how many employees their employer has.

Because the deductible requirements are much lower than current-law MSA limits, and because the other options such as HMOs offered by employers today typically impose significant restrictions on utilization, the improved health account plans would have an actuarial value that is similar to other plans offered by large employers. Thus, the improved health account plans would be unlikely to lead to the enrollment of much healthier individuals than in the other health plan options offered. The improved MSAs would also be available to individuals who do not have employer options.

The MSA arrangement would be made a permanent program in law, providing more incentives for insurers, financial organizations, and others to spend the start-up money and effort to create MSA products and integrate them effectively with the other health plan options they offer. The proposal costs $5.7 billion over 10 years.

Flexible Spending Accounts. Flexible Savings Accounts (FSAs) are tax-free accounts that many employers have set up to help give employees more control over their medical expenses as well as better protection against out-of-pocket spending. However, FSAs are subject to an end-of-the-year "use it or lose it" requirement that limits their value for protecting against unexpected out-of-pocket medical expenses.

The President proposes to expand FSAs to encourage employers and employees to increase their use of these accounts. Under the proposal, employees could roll over as much as $500 in unspent health care contributions to an FSA for use in the following year or to their 401(k) plan for retirement income or health expenses at older ages. The proposal costs $8 billion over 10 years.