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. (

Balancing the Books

Earlier, we introduced the concept that all health care costs ultimately are paid from earnings someone accumulated during the working years of, roughly, age 26 to 65. That reality doesn't change, whether the contributor was the individual covered by the insurance, or his parents, or grandparents. The contributor was almost surely earning a living at the time and therefore was in the working age group. Ultimately, the limit to what our nation can regularly spend on medical care traces back to what we can predictably earn, not on what we have saved, even though the same is not true for any particular individuals. The baby boom "bulge" illustrates the danger of overlooking this reality. It is now time to make additional use of the theory.

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HSA deposit limits were based on a maximum of $3300 per year, from 26 to 65. {bottom quote}
First, recall the calculations of HSA deposit limits were based on a maximum of $3300 per year, from 26 to 65. That sum is the maximum contribution now legally permitted for ordinary (non-lifetime) Health Savings Accounts. It was probably arbitrary, but in a decade of use, there has been no great complaint it is too low. It is surely greater than the indigent population can afford, so for them, the pressing need is to identify the level below which subsidies are justified. An upper limit applies to people who may be solvent, but who could not afford the protection without a tax deduction. These are both important limits to determine by experience. Right now, the more important question is: what affordable average level can cover the lifetime medical costs of the entire population, probably just accepting the Obamacare subsidy levels. An average cost is a number which is not a matter of opinion, even though at present it may be unclear. From this the conclusion emerges, we should start with what we have, the present HSA deposit limit, and later improve the other two Obamacare benchmarks by experience. "Experience" raises the question of how to assemble the data.

Data Collection. To monitor this system, and to derive these benchmark numbers, we must contend with the immensity of such data, keeping the administrative costs low by restraining it. Furthermore, the number of different companies managing such accounts might grow very large, thus multiplying the cost of data aggregation. At a minimum, we need monthly data from each managing company of 1) how many individual accounts it manages, 2) what the aggregate deposits were, 3) what the aggregate withdrawals were, and what the aggregate month-end balances were. In return, the agency selected to consolidate this data centrally should return quarterly aggregate numbers for the entire universe to raise alarms about outliers. These four numbers should not be an administrative burden, but unfortunately, the initial transition cannot be managed without data for every year age cohort separately. Ultimately, that will require a spreadsheet containing eighty or more rows representing each birth year cohort, listed in four columns. In view of the high national divorce rate, the temptation should be resisted to sub-aggregate the collection data by families, thus greatly complicating the reporting complexity. Other data for special purposes, like gender and marital status, disability, and employment, should be handled on a sampling basis, since they change infrequently, but vastly multiply the data cells. Income data is the most sensitive data of all, which HSA managers ordinarily do not possess. If at all possible, data required for establishing eligibility for a subsidy, should be obtained by maintaining a separate HSA entry on the IRS 1040 form, occasionally requesting unidentified aggregate data from the IRS. It is hoped it will not be necessary to collect data indefinitely, once the main transition is accomplished, perhaps eventually reducing it to quarterly reports, then annual ones.

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A lifetime HSA system can be passive with regard to health costs, leaving behavioral issues to other agencies, {bottom quote}
From the foregoing description, it should be possible to derive a skeleton description of the central planning required to run a nationwide program, which is large in expenditure, but comparatively small in administrative overhead, thus capable of remaining largely in the private sector. It is possible subscriber income will need to be added to the data set, but such temptation should be resisted. After all, the private insurance industry seems able to function without it. At most, the goal should be annual income reporting, otherwise running on a sample basis, and need-to-know. With deposits concentrating on people of working age, patient income data should already exist in the IRS system. Meanwhile, the HSA focus would be on whether its investment and deposit income match its medical expenses, both short-term and long-term. That is, predicting whether cash shortfalls will disappear with time, or whether investment income will chronically be in surplus for certain age groups, but in shortage for others. In the latter case, some borrowing facility may be needed. In addition, a monitoring function will probably be needed for investment managers who produce less than average gains for their customers, suggesting difficulties with overhead, investment skill, or kickbacks. Although subsidies for indigent patients will be necessary, it is not necessarily the function of the HSA to set the limits. In any event, overlapping agencies should share experience, not duplicate it. It is to be hoped DRG for hospitalized patients, plus market forces for outpatients can control provider charges without reliance on financial strictures. Regional medical cost norms must nevertheless be maintained for comparison with local ones, particularly comparing Medicare data with HSA data for the same services. The overall hope is a lifetime health savings account system can in time become largely passive with regard to health costs, leaving behavioral issues to other agencies, once the HSA has detected questionable data. Otherwise, as the cop on the beat, it could become unable to detect or define solutions for emerging changes in health science.

Let's summarize with specific numbers, however uncertain their precision. Our approximations of the functioning of lifetime HSA were based on parents making virtual loans or gifts of the obstetrical and pediatric costs to their child, and of Medicare paying for grandparents with money, they or the taxpayers earned while they were wage-earners. We are proceeding from the premise: health expenses are lifelong, but revenue for them derives only from the working population. The concept thus highlights affordability for the working population as the main limiting factor, which it surely is. We make the second premise: $132,000 total contribution seems to suffice for regular HSA coverage up to the 65th birthday. If compound investment income spread over forty years could generate about $75,000 in addition to the $132,000 contribution, the $75,000 at 6% on the 65th birthday will also pay for Medicare as if it was a single-premium insurance, based on CMS statistics, providing it continued to earn 6% as it is spent down over the next 20 years. Then, we envision a yearly escrow of $1400 to achieve $75,000 on the 65th birthday, while everything else in the HSA has been spent for current medical expenses of the earning worker. Even though current medical insurance is floundering financially, its present health insurance premiums suggest a yearly contribution of $1400 is attainable for most people, and a 6% interest rate does not seem unachievable, either. One additional little quirk of the numbers is $75, 000 will cover an increase in life expectancy from 78 to 91. This last little zinger is based on the uncertain but conceivable premise that future increased longevity will be achieved by moving the terminal illness costs backward 13 years, since everyone must die, but nothing says that an extra serious illness must intervene, and be survived, during the 13 years. It probably will, but you can't be sure.

So to carry this forward, an extra contribution of unknown size would include the childhood expenses. The reason it is unknowable is that much of it is buried in the parents' costs already, especially obstetrics, and the extra cost of childhood illness (take the CHIP program for an example) is pretty trivial. Unfortunately, the timing of childhood costs comes at a time in life when the parents have very little medical costs themselves, and for this purpose that's a bad thing. Costs early in life affect the compounding of income, more than the same cost later would. But let's say $600 a year extra would do it, which seems pretty generous. With conservative estimates of everything except coming scientific advances, $2000 a year, per person, from age 26 to age 65 should pay for the whole lifetime medical experience, assuming two children per two adults. If we remember that we sort of have a $3300 budget, and index funds of large-cap funds have risen at 10% ever since 1926, it all seems pretty safe to bet on. (The uncertainty is probably not the 6% or the $132,000, but rather in how much would be left in the accounts unspent, for what periods of time. That is, whether $132,000 is really enough or whether it must be increased to generate a cushion.) We have no data on how much would have to be devoted to subsidizing the poor, or to paying off the Chinese for Medicare borrowing, but these numbers suggest we could have a stab at even doing some of that. One thing is sure: if we pre-paid for Medicare, it ought to eliminate the present payroll deductions and premiums, which now make up half of Medicare cost. And put a stop to borrowing from foreigners, which makes up the other half.

If you're an optimist, that isn't the end of the reasons for optimism. Nothing is forever, and so projecting this good luck will last forever is bound to be disappointed, somewhere. But surely this discovery of compound investment income on unused premiums can generate $100,00 in savings per person before our luck runs out. That's an awful lot of money for a "failure" when you multiply it by 300 million people. Meanwhile, the candle of hope burns brightly that our medical scientists can eliminate most of our remaining diseases at a reasonable cost. The hope is that scientific research can, in the meantime, eliminate the cost by eliminating the diseases.

The really important issue here is to understand that estimates of extra revenue, to come from investing idle premiums, are pretty strong. Much more difficult is to figure out a workable way to get the money out of the system in order to spend it. Insurance has demonstrated it has great weaknesses as a method to pay for medical care. In particular, it stimulates unnecessary spending by the illusion of getting something free. However, insurance has two big advantages over HSAs, quite aside from the undeserved advantages it has acquired by lobbying Congress. In the first place, insurance automatically achieves pooling among many subscribers for the current expenses of a few. Health Savings Accounts are individually owned and controlled, so everybody has a voice to be heard about pooling. As a consequence, every contingency has to be agreed, in writing in advance. Or else recourse has to be made to the coercive force of government, which gets you back to lobbying. The second advantage of insurance is the ability to move funds around internally, without paying a fee to a counterparty. In this particular case, insurance can take money from the elderly and pay it to the young, or the reverse, and adapt more readily to the countless possibilities that the revenue curve may not precisely match the expense curve, over a period of eighty years. All in all, these two disadvantages are not enough to undermine switching the country away from a course which threatens to lead to bankruptcy. Having been present at the beginning, I know that the inclusion of catastrophic insurance linkage was fortuitous, but it is what makes this new system workable when it is a success, as contrasted to avoiding added nuisance at times when it might fail. Curiously, this may well be of importance in the approaching Constitutional debate. On the one hand, the federal government has a legitimate interest in programs with such huge tax implications. On the other hand, the Tenth Amendment to the Constitution is very explicit about situating non-federal powers in the states, and the McCarran Ferguson Act has additionally defended continued state control of the business of insurance for over sixty years. With good leadership, the political position of Health Savings Accounts could enlist considerable support as a workable compromise between the two regulatory approaches.

If Health Savings Accounts generate more funds than required, the surplus flows over to a regular IRA, where it is available for supplementing retirement income; that's pretty easy. If hospital costs are generated, they are paid by the Catastrophic Health Insurance required to accompany all HSAs. That insurance has a deductible, usually with a fixed upper limit to out-of-pocket assessments. So, it is possible to generate more medical costs than remaining in the HSA account, by a combination of these hospital residuals, as well as outpatient charges. This is more likely to occur in young people before the Account has a chance to accumulate, but it could happen at any age. On the level of theory, it is intended to threaten everyone a little, in order to restrain unnecessary spending. Furthermore, if the subscriber has other sources of savings, it is clearly better to use them than the money in the account, in order to preserve the tax shelter. Increasingly, all insurance is adopting "patient participation" features, so the difference between insurance and HSA is progressively narrowing. Indeed, the nearly universal adoption of high deductibles, co-pay features, and a new feature of Obamacare is likely to generate considerable resistance when it becomes generally applied. That new feature is the "metals" concept of covering only 60% (bronze), 70% (silver) or 80% (gold) of the bills, leaving the patient to pay the increasingly burdensome residual. Paradoxically, this could easily combine into 50% of the health cost operating outside of the insurance, considerably more than most HSAs experience. In time, this will provide an interesting experiment, testing whether coercive measures are more or less effective than the enticement of keeping part of what you save, which is the HSA approach.

Therefore, it is intriguing to conjecture whether lowering effective patient costs might help attract Medicare patients to switch from insurance to individual accounts, substituting savings from prudent health purchasing, for coercive "patient participation in costs". Since Medicare premiums are taken as deductions from Social Security, rebating some of the payroll tax would be simple to add to the check. And eliminating Medicare premiums could have an immediate impact. After a few years, many Medicare patients might have $75,000 in the account. Those who do not would build up the account rather rapidly with the payroll and premium rebates, remembering it would require an investment return of 6% to produce the same benefit as in the example given earlier. Although we have used the "lifetime" convention extensively in this book, it has seemed likely that politicians would scarcely dare mention the possibility of eliminating Medicare, triggering the "third rail" of senior citizen politics. However, the serious disease progressively concentrates into the Medicare age group, relentlessly raising the Medicare budget into the far future. The idea that the Medicare age group would begin to demand the substitution of a cheaper alternative, never occurred to me or many politicians, because it was difficult to imagine an alternative for the old folks which would seem cheaper to them. But a comprehensive approach, eliminating the Medicare premium, and the payroll deduction might just do it. To which, most politicians would reply, we must wait to see. Voluntary, to be sure, and probably very hesitantly, a few who were pleased with HSA during working years might want to continue it after they retire, using rebate of their payroll deductions, and possibly adding to it somewhat.

Originally published: Sunday, September 07, 2014; most-recently modified: Tuesday, May 14, 2019