THREE OPTIONS ON HEALTH CARE

The Bush administration is examining three types of individual health care savings accounts as means for controlling skyrocketing medical costs and decreasing the number of uninsured Americans, according to administration officials and outside policy analysts.

In recent weeks, administration officials have sent clear signals that President Bush and Health and Human Services Secretary Tommy G. Thompson want Congress to act on health care legislation in 2003, both because the problems of rising costs and the uninsured are worsening, and because the president would like to rack up some domestic policy accomplishments. Bush has already proposed offering refundable tax credits to help people afford health coverage on their own. Now, Thompson is exploring several models of individual health savings accounts, into which employers and employees would contribute tax-free funds to pay for medical costs up to a certain level; above that, a high-deductible catastrophic health plan would kick in.

On December 10, when Thompson held the first in a series of forums called "America Talks Health Care," the topic wasn't Medicare prescription drug benefits, the issue that dominated health care discussions in 2002. Instead, Thompson honed in on the problem of the uninsured. He called in John Goodman, president of the National Center for Policy Analysis, a conservative think tank, and Grace-Marie Turner, who heads the Galen Institute, a nonprofit, free-market research organization, to talk about the importance of new health care incentives targeted to individuals, particularly refundable tax credits. Both Goodman and Turner have long advocated market-based approaches to help the uninsured. Also speaking at the forum were representatives of Medtronic, a medical-device company whose workers have had individual health accounts for several years.

Goodman called it "very significant" that, as soon as the election was over, Thompson's office began scheduling town hall meetings on health care. "I think they're very serious about health care," Goodman said. "They're telling us it's a top priority for the president. They realize that if something is going to happen, it has to happen soon. They can't wait for the next election."

These new-style health accounts grew out of the failed concept of medical savings accounts, which allow the self-employed and small-business employees to save for some medical costs on a tax-free basis. In 1996, Congress passed Republican-backed legislation allowing a national pilot project of 750,000 MSAs. Only about 100,000 people signed up, and MSA proponents blame the legislation for making the system too confusing and restrictive.

The three new health account approaches under consideration by the administration are intended to rectify the shortcomings of the MSAs. "The administration is interested in improving all three accounts," said Goodman, who has been talking to executive branch officials about these ideas. "I don't know if they'll do all three, but they're looking at all three."

The first approach is a modified MSA that would be open to all workers. Once an employee's savings account money runs out, he or she would pay a deductible of up to $1,000 before insurance from a health maintenance organization or a preferred provider organization would kick in. Currently, the MSA deductible is decided through a complicated formula that fluctuates.

Businesses are already experimenting with the second approach, called health reimbursement arrangements or HRAs, under which an employer contributes 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.

In September, the Internal Revenue Service announced rules giving HRAs more-favorable tax treatment; the agency set no given deductible, and did not put limits on how much money a person may roll over from year to year. Under the IRS rules, employers may even allow employees to carry their unspent health account money to new jobs.

A third approach under consideration is the flexible spending account. Many large employers now offer this benefit to their workers, whereby 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 have a huge catch-22 that would have to be fixed legislatively, Goodman said. Currently, flexible spending accounts are based on an annual use-it-or-lose-it rule. "So it gives everyone the wrong incentives toward year-end. 'If I don't spend the money, I have to forfeit it; so I search for ways to spend money so I won't lose it,' " he said. "But the goal is to help the accounts to roll over."

The bottom line for improving such accounts is to create additional flexibility, according to Goodman. "All three of these accounts could be made better," he said. And as the administration maps out its health care strategy, experts at the Treasury Department are struggling with the details of how to administer the tax credits.