Philadelphia Reflections

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

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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. (

Which Obamacare Plan Fits Best With Health Savings Accounts?

Health Savings Plans were designed over thirty years ago, well before the Affordable Care Act. The ACA does include pure catastrophic coverage. But it inexplicably limits such coverage to persons under the age of 30, and over that age, only in hardship cases. The paradox exists: Obamacare in fact imposes high-deductible features to every one of its products but includes too much baggage. The catastrophic options are far overpriced for such limited use. The new regulations should be dropped to remedy that awkwardness. Later in the book, it is of central interest to see how lifetime coverage compares in cost, against a "naked" catastrophic policy costing about $1000 a year. (see below)

Proposal (K): Congress should permit the sale of excess ("Catastrophic") indemnity health insurance, without any specified service benefit provisions or age limitations, with a deductible approximated to exclude most outpatient costs while including most inpatient ones. If future medical science should evolve to exclude an unmanageable proportion of outpatient procedures, the line may be adjusted. If inpatient and outpatient costs fail to segregate roughly around the deductible, a numerical deductible should be abandoned, and wording should be substituted which has that general effect. The designation of payment for emergency care should depend on whether the patient is admitted afterward. Reasonable limits may be negotiated on ambulance costs and other outriders such as expensive drugs and equipment use.
Furthermore, the ACA introduces the interesting concept of an upper limit to cash out-of-pocket costs, which creates a quasi re-insurance effect. That seems like a useful innovation, which mitigates the need to design a special re-insurance program for Health Savings Accounts. The unknown person who devised this idea is to be congratulated for simplifying the problem. Commercial catastrophic insurers are urged to take a look at imitating it, and the Secretary is urged to write regulations which permit the use of it, at the option of the insurer in consideration of the required flexibility of Catastrophic insurance regulation. This is an area where the use of dollar limits (indemnity) is clearly preferable to enumerated service benefits. When bills are large enough to exceed the deductible threshold, they are likely to be paid to institutions, where subsequent non-medical use is comparatively easy to identify.

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None of the Obamacare "metal" options is entirely suitable for a Health Savings Account. {bottom quote}
A high deductible is itself a desirable feature, while co-pay or coinsurance, is undesirable. The typical 20% co-pay feature has proven too small to have a restraining effect on usage and would have been dropped as useless, except for one thing. A 20% co-pay will reduce the premium by 20%, a 34% co-pay would reduce premiums by 34%. Therefore, in the heat of a salesman making a pitch, it is useful to be able to adjust the premium to just about anything requested, so the marketing departments usually press for inclusion of a "flexible" co-pay feature. But that is really just a smoke-screen. The effect of a deductible on premiums, on the other hand, is rather tedious to calculate, but its effect on outpatient shopping behavior is striking because a host of small claims are swept away when their price becomes too low to justify expensive individual claims processing. Just think for a moment of the effect: the higher you raise the deductible, the lower you make the premium. I seem to remember a time when the AMA offered a $25,000 deductible for $100 yearly premium. If we had stayed with that approach during the following fifty years, we might be in less of a pickle about rising health care costs.

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But, the bronze plan currently has the highest deductible and the lowest premium. {bottom quote}
So the bottom line is this: even the Obamacare "metal" plans demonstrate that the higher the deductible, the lower the premium. With the highest deductible and the lowest premium, bronze plan is currently the one to choose for linking to a Health Savings Account. It's nowhere close to a $100-dollar-a-month premium, however, and is not at all what I would have designed for the purpose. But if you must have an ACA high-deductible, take this one. And indeed, you probably must. The U.S. Supreme Court decision that it isn't a penalty, it is a tax, has been worked around by saying you have to pay a penalty of 1% of your income, unless the small tax penalty is larger, which it probably seldom will be. A young person might be able to pay the small tax penalty with his first job, but one hopes it will soon creep up on him that he actually has to pay 1% of his income when the happy day arrives he is so unlucky as to get a raise in salary. It's hard to interpret the rumor circulating around that the premium for a Bronze plan will double in 2015. Since by definition, a Bronze plan only covers 60% of the cost, it must be presumed all other plans will similarly double in price. That hardly seems credible, since it would push all Obamacare premiums into the unaffordable range, causing the system to collapse. If you are a gambler, try gambling this rumor is just a hustle, intended to get more people to sign up before it happens, thus allowing enough money to arrive, so it won't happen.

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The higher the deductible, the lower the premium. {bottom quote}
The Iron Law of Insurance.
So the way we would advise using the HSA has three components: 1. Choose the cheapest plan with the highest deductible. 2. Try to build up the HSA to $10,000 as quickly as you can, by contributing the full $3300 annual limit ( or $6000 family unit) even when you otherwise don't need to. 3. Try not to spend the funds in this best tax-sheltered account, unless you don't have any other funds at your disposal when you get sick. Bear in mind it is more favorably taxed than even an IRA.

If your Health Savings Account contains a $10,000 special-purpose fund for unexpected medical costs, compound investment income will make it grow considerably faster when you are young. That's a time when mathematics will make it grow fastest in the long run. Remember, you aren't required to do this, but take my word for it; it will make for much easier lifetime health financing if you can spare the funds.

And by the way, if you can think of any legitimate reason why we should forbid the sale of this type of insurance for any age group whatever, I wish you would come forward and explain it.

Originally published: Friday, August 01, 2014; most-recently modified: Sunday, July 21, 2019