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. (

Internal Borrowing Between Health Savings Accounts

The DRG system constrains hospital inpatient revenue so directly, that hospitals themselves constrain costs, although they generally seek ways to maintain revenue first. It never hurts to verify such impressions, but allowing a 2% profit margin while the Federal Reserve targets a 2% inflation, is probably already too severe. Since the only way to "upcode" this rationing system lies in admitting too many patients, the regulators designed a penalty system for "unnecessary" re-admissions. It largely had no effect. That is, patients who were re-admitted within 30 days, were generally found to need it, so after a time the penalty may even be repealed. Congress probably does not yet realize what a blunt instrument it has created. The DRG system is so draconian it probably incentivizes the hospital to constrain admissions of all kinds, since all admissions may be turning unprofitable. Consequently, the first step in reducing induced use, and charges, in the outpatient area would be to increase the profit margin to 4%, which is to say, 2% plus the inflation rate. We have already mentioned the need to discard the underlying ICDA code and replace it with a simplified SNOMED code, to improve its specificity and remove the upcoding temptation. Having done this, there would remain little reason to worry about inpatient costs; they are what they are, providing the cost accountants find a better way to handle indirect overhead.

This preamble may at first seem irrelevant, but its point is this: both the old employer-based system and the evolving Obamacare variant need to focus on the same problem which faces the Health Savings Account. Whether you overpay or underpay, the main cost distortion lies in the outpatient area. All three systems seem to agree that the use of high deductible insurance will solve the small-claims problem. But the history of health financing is that the medical system is entirely too willing to shape itself to the reimbursement climate. It may take some time, but it is highly predictable that medical practice will further evolve toward substituting outpatient care for inpatient care. The cost of shifting the locus of care is astronomical, and if we switch it back again it will be doubly astronomical. All of this cost should be attributed to the reimbursement rule-maker, not the provider or the patient.

Within the area we are discussing, higher than the deductible but lower than the inpatient cost, the ACA insurance approach tends to push up costs because internal cross-subsidy makes it appear cheaper, but it also makes it far easier to shift the cost of subsidies. Because by contrast, the HSA approach creates individual, not pooled, accounts, it is cheaper because the patient has the incentive of sharing the savings. But its lack of pooling makes it seem less benevolent for elective outpatient surgery, cancer chemotherapy, radiation therapy, and whatever else will be stimulated to migrate to this borderland between inpatient and outpatient. The stimulation will come from both the hospitals and the small-cost ambulatory areas, both being effectively excluded from alternatives. The managers of HSA need to anticipate this coming demand and facilitate it by pooling the funds to cross-subsidize it, struggling to consume much of the profits generated by shifting the locus of care from inpatient facilities and shifting volume profits from drugstores, pharmaceutical companies, and nursing homes. It isn't universally obvious how to do this. so the task must be assigned to someone.

Maintaining the solvency of HSAs encounters two types of problems, endogenous and exogenous. Endogenous means the growth curves of revenue and cost are not two parallel straight lines. A person may have a pitiful amount of money in his own account to pay a bill, but his age group collectively may have huge reserves, on average. Furthermore, a young person may not have enough cash to pay a bill, even though his future accumulations should be more than ample. Both of these problems depend on how much illness is found in young people, and one would hope will progressively diminish. However, the expected shortfalls at all ages must be somehow calculated, and matched against expected surplus; after providing a margin for error, an amount calculated to cover net shortfalls at each age should be escrowed in a "taxation" account, and later returned to individual HSAs as they balance out. There will be administrative costs, but one would hope there would not be much interest or borrowing cost. The goal would be to phase this process out, well before age 65, essentially returning the accounts to the same level of progress they would have achieved without the intervening disruption. My prediction is that most of this need will concentrate around pregnancy and neonatal care, with a low-level background cost of accidents and illnesses in other years. The general idea is to have each age cohort support itself, within the current year if possible, but borrowing against later years on a current-value basis, if necessary. Borrowing from other age cohorts should be seen as an emergency fallback only.

Whoever manages these "taxation" escrows would be well positioned to identify intergenerational anomalies, and therefore to manage the same sort of exogenous pressures. Such managers must look askance at all inter-generational appeals, but migrations from inpatient to outpatient must be matched by reducing the premiums of the catastrophic insurance and transfers to individual accounts. The catastrophic insurance stockholders will not cooperate without evidence of need, nor will pharmaceutical firms lower their prices without argument. Therefore, the managers of the "taxation" fund must establish adequate data resources, and negotiate small frequent changes rather that steep-step infrequent ones. To the extent this activity can stimulate anti-trust concerns, Congress might consider what issues there are, in advance.

Originally published: Friday, September 05, 2014; most-recently modified: Wednesday, May 22, 2019