No one is better suited to making decisions about the trade-offs between money and health care expenditures than informed patients, acting on the advice of their physicians.

The key ingredients in resolving America's health care crisis are these: giving individuals more direct control over their health care dollars, freeing them from bearing the costs of the wasteful consumption decisions by other insurance policyholders, and rolling back the arbitrary constraints and unnecessary expenditures imposed by government.

One way to put those ingredients to work for the benefit of all of us is to allow individuals or their employers to make tax-free deposits each year to Medical Savings Accounts (MSAs). The accounts would be similar to Individual Retirement Accounts (IRAs), but would be used to fund health care expenditures over a person's lifetime.

People would pay small medical bills with funds from the accounts. They could buy high-deductible health insurance policies for protection against catastrophic expenses. Money for deposits to the account could come from the premium savings associated with higher deductibles. Calculations by economists at the Dallas-based National Center for Policy Analysis suggest that in a state with average health care costs, a family can save about $1,315 annually by choosing a policy with a $1,000 deductible rather than a $250 deductible. These are average savings. Families in higher cost states and those who now have comprehensive coverage could save even more.

MSAs would be allowed to grow tax-free, with withdrawals permitted only for legitimate medical expenses. They would be the private property of the account holder and become part of an individual's estate at the time of death. If created by an employer, they would still be personal and portable for the employee. Eventually, the funds could pay for postretirement health care or be rolled over into an individual's IRA or pension fund.

The biggest obstacle is the U. S. tax code, which subsidizes health insurance premiums paid by an employer but taxes dollars destined for savings to pay for such things as medical and insurance expenses. Under current tax policy, if an employer buys a high-deductible policy and tries to pass the savings on in the form of higher wages, or to place the money directly into a savings account, up to half of the amount goes to taxes. Current law encourages low-deductible health insurance, with insurers paying small medical bills that would be much less expensive if paid out-of-pocket.

In a report released in Michigan by The Mackinac Center for Public Policy last September, we cited studies showing that physicians spend about $8 to process a single insurance claim. Most third-party payers (typically insurance companies) spend another $8 for every check they write, and if the insurer makes an additional effort to verify the claim, the costs can be much higher. A $24 physician's fee can easily become $50 of total costs when third-party payment is involved--effectively doubling the cost of health care.

If everybody had catastrophic health insurance for large medical bills and MSAs for small bills, the administrative costs alone of the U.S. health care system would be reduced by an estimated $33 billion. More prudent buying of health care by patients could reduce spending by another $200 billion or more.

Medical Savings Accounts could also resolve a number of Medicare and Medicaid problems. The elderly could choose higher Medicare deductibles and make deposits to their own MSAs.

If most medical expenses were paid by people using their own MSA funds, patients would have a financial self-interest in eliminating waste and reducing costs in the medical marketplace. They could exercise greater control over how their health care dollars were spent. Third-party payers would interefere far less in the doctor-patient relationship. And health insurance companies could specialize in what they do best: managing risks for rare, expensive, catastrophic medical events.

It's high time our state and federal legislators thought less about burdening our economy and health care system with expensive government regulations and bureaucracy and more about employing the promising, incentive-oriented option of Medical Savings Accounts.