A little-known type of fringe benefit arrangement called the "flexible spending account" (FSA) could lose the Treasury $12 billion annually in taxes a few years down the road if it becomes widespread, and at the same time hinder health cost-containment efforts by reducing cost-consciousness among employes, according to a Department of Health and Human Services report.

The FSA's are special plans in which an employe asks his boss to set aside a certain amount out of his salary, typically $400 to $500 a year, to help him handle his out-of-pocket expenses, not covered by employer-provided insurance, for medical, dental, legal or day-care services. When such a plan is set up using part of the worker's salary as the source of funds, the law now allows the amount set aside to be tax free, not subject to income tax or payroll taxes.

A report to Congress based on a study directed by Stuart Schmid of HHS's Office of Health Policy, estimated that if the FSA plans were extended to all workers with health insurance policies on the job, the amount of income that would be sheltered from taxes could rise to over $30 billion and the Treasury revenue loss could mount to $12 billion a year, more than double the $5 billion previously estimated. The report said that since most of the money would be used to defray employe out-of-pocket costs for medical co-payments, premiums and deductibles, it make the average worker less cost-conscious about the use of medical services.