Philadelphia Reflections

The musings of a physician who has served the community for over six decades

Related Topics

Health Savings Accounts, Regular, and Lifetime
We explain the distinction between Health Savings Accounts, Flexible Spending Accounts, and Lifetime Health Savings Accounts. Sometimes abbreviated as HSA, FSA, and L-HSA. Congress should make it easier to switch between them. All three are superior to "pay as you go", health insurance now in common use, only slightly modified by Obamacare. It's like term life insurance compared to whole-life. (

Children, From Birth to Age 26

It's hard, nowadays, to know what age to select as dividing childhood from working adults. The age transition is slowly getting older, at least in the public mind. According to the Wall Street Journal, quoting William Kremer of BBC, the following was a quote from the Venetian Ambassador to England in 1500:"The English keep their children at home until the age of seven or nine at the utmost, then put them out, both males and females, to hard service in the houses of other people, binding them generally for another seven or nine years. Everyone, however rich he may be, sends away his children into the houses of others, whilst he in return, receives those of strangers into his own." In the 14th Century, Florentine merchant Paolo of Certaldo advised: "If you have a son that does nothing good, deliver him at once into the hands of a merchant who will send him to another country or send him yourself to one of your close friends. Nothing else can be done. While he remains with you, he will not mend his ways."

In the 20th Century, children were considered adults at 18, when they graduated from high school, then it became 21 or 22 corresponding to a college graduation. And now it is 26, as set down by the rules of the Affordable Care Act, which probably has Graduate School in mind. Or, because of the recession, perhaps it reflects the current difficulty of even a 26-year-old to find employment. This is a book about medical financing, not sociology or anthropology, but it must be noted that the official age of the end of childhood tends to reflect the difference between taking advice from your family and taking the advice of your classmates. In that sense, the education industry is crowding out the advice of the family, with resultant conflict during the period between nine and twenty-six. It seems to be the main source of friction from ninth grade to the end of graduate school, and probably also hastens the decline of religion as an influence since the teachings of school and the teachings of religion are sometimes in conflict. Religion may well play a central role in the coming revulsion against the education industry, judging by the undercurrents of teen-age rebellion. Underneath it, all would appear to be a dispute about the responsibility for paying the child's expenses, in collision with surrendering control of how expenses are to be spent. Just as there is growing rebellion about college expenses, medical care expenses will probably share in the coming rearrangements that appear inevitable. Finally, to get back to it, it is possible that age 26 will be lowered to a new point where parents really could be expected to pay the medical expenses of children, willingly. Meanwhile, the abrupt outwelling of sympathy for a sick person can be expected to blur these boundaries more than in other dependencies.

Admitting it is arbitrary, and mostly to maintain comparable statistics with the Affordable Care Act, we now define children as comprising the age group from birth to age 26, even though they may have risen to officer rank in the military forces, where many would be offended by the idea. For the same reasons, 26 is accepted as the age whose medical bills are "normally" considered the responsibility of parents, within the Health Savings Account system. We would like to recommend they be enrolled in an HSA at birth, with a single payment gifted by the parents at birth, sufficient to pay for all medical care to age 26, and including the option of including the child's own obstetrics in that calculation as well. That is what would be most convenient for insurance administration. Let's do some hypothetical math, along the line of what worked fairly well for somewhat older adults.


Grandparents Making a Gift of Lifetime Healthcare

Single Payments,($1000) at Birth; Longevity 85 yrs.

(Health Savings Account Must Achieve Growth to $10,850 at Age 26, $325,000 at Age 85.)

Interest Rate..........10%..............................7%............................3%.....

Achieved Age 26 $10,800.......................$5,000......................$2,100...........

Achieved Age 85 $3,000,000................$293,000..................$12,000...........


The purpose of this table is to illustrate that much might easily be achieved with a 10% return, but the same result cannot be confidently expected from lower returns. Lower returns are a definite possibility over a 26-year span of time. To achieve total health coverage with lower rates of prevailing return will almost certainly require more capital to be invested at the beginning, perhaps four times as much. A 3% return during a 3% inflation period, such as we have had for many years, would amount to standing still. Therefore, a gift of $1000 is going to stretch a great many budgets, so the best this approach can promise is to reduce, not eliminate, childhood health costs. Success can only be achieved by raising premiums later in life to make up the shortfall. It would take a skillful politician indeed to persuade half the population to stretch its budget this way, but we make the calculation in case politics demand it. Because this reproductive controversy would quickly degenerate into wrangles about which parent has what moral duty in the case of a divorce, this looks like an option which the affluent population should probably try, but government intervention in this direction is not easily foreseen.

One virtue in waiting for something to turn up lies in the mathematical near-certainty that things will be much more favorable if the trend toward increased longevity persists. For both mathematical and biological reasons, the curves of revenue and expense are not parallel straight lines. The laws of compound interest which make childhood investing risky, also make investing by old folks easier. While almost ridiculous amounts of money accumulate at 10% in the eighties, even more, ridiculous amounts are generated in the nineties. In the present example, 10% investing heads north of 3 million dollars at age 85, but comfortably exceeds 6 million at age 93. This mathematical pressure is made even greater if terminal care moves eight years later, without much more illness cost in the interval. The longest of long-term trends is for health costs to concentrate in the first year and last years of life: everyone is born, everyone dies. There's a gamble, of course. Living eight years longer may simply present the old geezers with eight additional years of medical costs, or eight more years in a nursing home.


Same Thing, With Longevity Increased to Age 93

Single Payments, ($1000) at Birth; Longevity 93 yrs.

(Health Savings Account Must Achieve Growth to $10,850 at Age 26, $325,00 (?) at Age 93.)

Interest Rate.........10%................................7%................................3%.....

Achieved Age 26 $10,800.........................$5,000........................$2,100..........

Achieved Age 93 $6,400,000..................$505,000....................$15,000...........


But at least an optional choice becomes necessary because obstetrics and neonatal care are presently included with the mother's health insurance, but sometimes not. A complicating issue with small-amount investing is that the amounts are ordinarily so small that managers of Health Savings Accounts rebel at the administrative overhead. On the other side of it, the generation of compound interest for 26 additional years significantly reduces the cost to the parents to the point almost anyone who achieves middle-class status could afford the single payment option. Generously estimating the lifetime average medical cost, of a child from birth to age 26, to be $10,000, it would take a payment of $925 to cover it all, at interest rates not likely to reappear soon. However, that same $925 would more than generate $4.9 million lifetime revenue to age 91. Assuming, at the other extreme, the mother's investing age to start at 26, her lifetime costs using present prices would be covered up to $412,000 to age 91. All of these suppositions are based on the strong hunch that the present Medicare deficits are unsustainable, not on any wish for them to be so.

When a child, who has been covered by a single payment at birth, reaches his 26th birthday, he finds his medical costs insured to the day of his death aged 91, but perhaps that was not the purpose of the gift. If the parents want the money back, they are probably entitled to it, since financial obligation only extended to age 26. Therefore it is important that some of the surpluses in the fund should be transferable to the original donor as an option. The annual gift tax exclusion probably removes the tax consideration, although it is true that that the Account has carried an option to supplement it, throughout the 26-year interval, and therefore the Account might contain enough money to buy out the second policy. The tax implications are therefore uncertain; when they are clarified, the issue of splitting the policy may be clarified, as well. It would seem that the birth of the first child might be a good time to start the parent's policy, since the parent would want to have some coverage for the obstetrical costs, and therefore often be the owner of ordinary health insurance for that purpose.

One thing remains as an absolute: very few newborn children pay for their own delivery. As a normal thing, all health costs of a child up to age 26 are born by the parent, who either makes the child a gift or loans him the money. Any changes in the law ought to follow the habits of society about this overlap of responsibility.

Childhood Coverage, A Summary. It remains attractive to search for ways to include childhood health costs in an HSA. The small amounts administrative cost could be addressed by issuing an interest-bearing bond at birth, redeemable at age 26, and preferably redeemable by rolling it over into an adult policy. However, no presently foreseeable opportunity to issue 10% bonds with 26-year call protection is available; the bond market simply will not sustain it. If it did sometimes sustain it, its repetition is uncertain. Single-premium insurance might be purchased by grandparents, but any government involvement would probably cause populist resentment. The only available non-subsidy method of funding this problem seems to be to borrow the money from later years when the revenue curve is more favorable.

Borrowing from a pool, especially if funded by unused surpluses which appear at death, might be acceptable as an interest-free return of a moral debt, but most sources are going to require the payment of interest on the loan, which defeats the investment purpose of the HSA. All in all, the best available interest-free loan equivalent would be to raise the cost from the individual's later account. After all, all childhood costs are paid by adults, as an interest-free loan to the next generation. When the child gets to be thirteen years old, the generosity may temporarily seem to have been foolish, but one that is eventually revised. Nevertheless, borrowing from yourself is only fair justice, and if the parents wish to give gifts, let them do it without coercion.

Originally published: Thursday, March 27, 2014; most-recently modified: Wednesday, May 15, 2019