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President Bush would like to expand health savings accounts as a way to encourage people to save and become more cost-conscious consumers of medical care. But are HSAs a good deal for everyone?

About 3 million Americans have signed up for the high-deductible insurance plans required for the accounts, which were introduced in 2004. The idea is to have people pay more for their health care in exchange for substantial tax breaks. Similar to 401(k) plans, HSAs let an individual put up to $2,700 in a tax-deductible HSA each year (and up to $5,450 for a family). Money can be withdrawn tax-free for medical expenses.

Bush wants to raise those amounts to $5,250 for an individual ($10,500 for a family), a proposal Congress, facing huge budget deficits, is unlikely to pass this year. Still, the administration wants to entice millions more into HSAs in the next few years.

How HSAs work

The accounts are open only to applicants who have a health insurance policy with a yearly deductible of at least $1,050 ($2,100 for families) and no other health coverage, including Medicaid or Medicare. Premiums tend to be less than those for policies with lower deductibles. Some employers offer HSAs to employees and may contribute to the accounts.

Unlike many company-sponsored flexible-spending plans that invoke a use-it-or-lose-it rule, HSAs allow rolling over money in the account from year to year to build up a medical expense nest egg. But if you use the money for other expenses, you pay income tax and a 10 percent tax penalty. After age 65, there's no penalty for using the money for nonmedical expenses.

Most states follow federal rules and give tax breaks for HSAs, but six states—Alabama, California, Maine, New Jersey, Pennsylvania and Wisconsin—do not.

The Upsides

The HSA is a good deal for Liz Greene, vice president for finance of the National Association of Industrial and Office Properties in Herndon, Va. Not only does Greene have her own account, she helped set up an HSA plan for the 30 other employees in her office.

NAIOP saved enough money with its high-deductible plan—rather than a plan with a "normal" deductible of $250 or $300 a year—to contribute $900 to the workers' individual HSAs the first year. That contribution will drop over the next three years, Greene says, but not below $750. Contributions to family plans are larger.

For Greene, 44, whose three children and employed 57-year-old spouse are also on the plan, it has worked out well. "We're relatively healthy, and we didn't come close to using the $2,200 [the company contributed for a family plan in the first year]," she says.

Vikram Kashyap, chairman and founder of Canopy Financial, a financial services firm that focuses on the health care industry and runs the website www.hsainsider.com, says many insurers have started to carry the high-deductible plans, tapping the HSA-driven market. He says HSAs prompt people to find less expensive care providers and services, such as blood tests, because they're spending their own money.

Another plus: People can hold on to their HSAs even if they change jobs or insurance companies.

The Downsides

But what about someone who doesn't work for a generous company? Or someone who retired at age 60 and has chronic illness or cannot afford to put away hundreds, or even thousands, of dollars for anticipated medical expenses? HSAs may not work for them.

Edwin Park, a senior health policy analyst at the Center on Budget and Policy Priorities in Washington, says people in relatively poor health may have trouble buying health insurance on their own in the first place. And those with little income aren't going to have the money to put in HSAs, no matter what the tax advantage.

"These are primarily tax shelters," he says. "If you are high-income, you can take advantage of them. And if you're healthy, you can sock away money; if you're not healthy, you can't" because you are using it to pay medical bills. People who can't afford high deductibles would have to go into plans with lower deductibles, which are more expensive.

Some critics worry that HSAs transfer too much of the burden for health care costs from employers to individuals. Others are concerned that people who have HSAs and are trying to save might skimp on care and delay screenings, immunizations or treatments.

On a more global scale, Park estimates HSA tax breaks could boost the federal deficit by $156 billion over 10 years, increasing the pressure to cut spending for programs like Medicare and Medicaid. And with more employers dropping health benefits, more workers may be forced into the individual market, where sicker people may be unable to get coverage at all.

Although Congress seems disinclined to expand HSAs this year, the issue is unlikely to go away as the country grapples with a troubled health care system. But HSAs are too new to know if they're an answer.

Sen. Chuck Grassley, R-Iowa, chairman of the Senate Finance Committee, wants to see if current tax incentives work before adding more tax subsidies. "Too often here in Washington," he said, "people try to solve problems by throwing money at them."

Elaine Povich is based in Washington and writes on politics, health and economics.