The salvation of American--and global--health care is at hand. In June the U.S. Treasury Department issued a ruling that removes one of the last major hurdles to the widespread use of tax-free Health Savings Accounts. HSAs are modeled after IRAs--money for medical purposes can be deposited free of tax, it can grow tax free, and it can be spent for medical care, tax free.

Several states mandate first-dollar coverage for certain types of health insurance benefits, no deductibles permitted. One of the key foundations of HSAs is a large deductible. The Treasury Department has mandated a transition period for states to remove regulatory impediments to HSAs. In the meantime consumers will be able to access this fantastic new tool.

The premise of HSAs is to once again put the patient, i.e., the consumer, in charge of the health care market. HSAs allow employers to offer health insurance with high deductibles--up to $2,600 for individuals and $5,150 for families. These levels make health insurance policies infinitely cheaper. In turn, companies-- workers, as well--put money into HSAs, tax free, that will cover the lion's share of the deductible. What an employee doesn't use stays in the HSA earning tax-free interest for future use. This is the antithesis of Flexible Spending Accounts, in which the worker loses whatever money in the account hasn't been spent by year's end.

For years at Forbes we have provided what have been, in effect, Health Savings Accounts. The insurance itself is a bargain (relatively) because the policy deductible is high. What makes the plan so attractive, though, is that we give everyone who works here $2,000 each year, which covers most of the deductible.

Money that isn't used is rolled over. If medical bills exceed both that $2,000 and the employee portion of the deductible, traditional health insurance kicks in. Our premiums last year went up only a fraction of the national average. When companies initially put such a plan in place, they often see a decline in premiums. Now that employees will have "skin in the game," employers rightly figure that those dollars will be spent more carefully, more wisely. For instance, why get an MRI when, in certain situations, an X ray would be just as good?

The virtue of HSAs, however, goes well beyond this semi-zero-sum mentality: The way health care is delivered will change as providers find it in their best interest to come up with inno-vative breakthroughs. The traditional cost-plus mind-set will wither away. We truly will get more for less.

Two examples that have already proved this--plastic surgery and laser vision surgery. Neither is covered by traditional health insurance unless the surgery is needed because of accident or disease. The cost of plastic surgery has not experienced the kind of inflation that has afflicted the rest of the health care industry. In recent years laser eye surgery that reshapes the cornea so a patient no longer needs to wear glasses cost more than $1,500 per eye; today the same procedure can be done for less than $500 per eye. As HSAs become more common, similar results will be seen in the rest of American medical care.

With HSAs consumers will want to know what a procedure costs in advance. Using the Internet, they can comparison shop, not only for price but also for quality. More and more, insurers will make available easily accessible checklists of what patients should expect from various kinds of consultations and procedures. Today if you question a hospital or physician about prices, they'll look at you like you're some kind of nut or, even worse, someone who's uninsured.

Up to now there have been precious few consumer-directed pressures to bring about better care at less cost. Every other facet of a free-market economy experiences technological advances that make for better products and services at less cost. Food outlays as a percentage of our incomes have been declining for more than 100 years. When you adjust for inflation, it's clear you get more car for your money today than you did a couple of decades ago. Ditto with housing. Ditto with personal computing. In most sectors growing demand is considered healthy, but in health care it's considered a crisis. Incentives for good consumer behavior are nearly nonexistent. When you or a family member needs care, you grumpily wonder how much it's going to cost you before you surpass the deductible.

Health Savings Accounts will let patients own and control a big chunk of the dollars spent on health care. People will try to get value for those dollars. HSAs don't take benefits away from people; they reward them for spending wisely. There will still be catastrophic coverage. People will be able to build up a rainy-day reserve, tax free. The account will belong to the employee, not the insurer, the employer or the government.

Companies applying HSAs will see a remarkable phenomenon unfold: Growing amounts of money will accumulate in these accounts. The accounts won't rival 401(k)s in size, but for many people they will become a significant asset, thanks to the miracle of compounding interest. (After a certain high threshold, some people may opt to put a piece of this money into bonds or even stocks.) HSAs will make insurance more affordable for small businesses, which will be a boon for many of today's uninsured. If Washington's chest-beating pols who posture as tribunes of the people really want to help, they will allow individually owned HSAs to escape state regulations that vastly inflate medical insurance costs, just as corporate plans do today.

For health care we will finally see the return of genuine insurance--coverage for major risks, instead of the dollar-for-dollar kind of coverage we have now. And, amazingly, consumers will be better off with HSAs than they are with what they have now.

Steve Forbes

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