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This book was primarily written to explain the difference between regular Health Savings Accounts and Lifetime Health Savings Accounts. The first is available right now although in somewhat crippled form, and the second requires enabling legislation to become available in a year or two. Naturally, the emphasis is on differences between them. They have several features in common however, based on obscure quirks in law which are vital for the reader to understand. So at the risk of a little repetition, let's review the DRG, the Flexible Spending Account, and the income tax deduction.
The Income Tax Deduction, for Employees Only. Seventy or more years ago, wartime wage freezes interfered with moving steel workers to the West Coast, so as a temporary war measure, fringe benefits were not considered taxable income. Big business and big labor never allowed this situation to be rectified, so in time it became the principle basis for employer-based health insurance. Employees got a tax deduction but self-employed and unemployed people did not. Much was made of this unfairness, but it never was changed.
Meanwhile, no one called attention to the fact that big business was getting an income tax deduction, too, which amounted to fifty percent in state and federal corporate income tax. Added to the fifteen to thirty percent deduction for the employee, this indefensible inequity became the main financing method for the American health system. And it was the main pressure behind the Clinton Health Plan, as well as the Affordable Care Act, or Obamacare. Like a smiling Cheshire cat, big business hardly said a word about it.
The DRG Diagnosis-Related Groups were a group of two hundred payment groups, used to pay for Medicare's hospital in-patient costs, and widely imitated because Medicare payments are half of the hospital revenue. They replaced nearly a million specific diagnoses, so they were extremely crude approximations. More important, they replaced fee-for-service billing. It no longer mattered how long you remained in the hospital or what services you received, hospitals were paid by the DRG. Being essentially meaningless lumps of diagnoses, their translation into money was easily manipulated, eventually resulting in a 2% profit margin, spread around rather unevenly. Many hospitals lost money, which was easy to do in a 2% inflation. Consequently, hospitals shifted their costs internally to exaggerate the effect that the Emergency room generated a 15% profit, and the out-patient area, formerly the domain of physician offices, became an extension of the hospital and had a 30% profit. The distorting effect and the consequent uproar is easily imagined.
The Flexible Spending Account. Essentially the same as an HSA or Health Savings Account, the FSA had one major difference. At the end of the year, any unspent money was returned, in what was soon called "Use it or Lose it." A large number of health-related luxuries, like prescription sunglasses, were consequently purchased in order to get some value out of the system; many people dropped the policy. However, they were heavily sponsored by Employers and Health Insurers, so were widely adopted. If the law could be changed to permit unused surplus to be "rolled over" to future years, essentially millions of employees would find themselves with what amounted to Health Savings Accounts. This would appear to be a gift by employers to employees, but gradually the terms of agreements changed. Much of the money sacrificed at the end of the year is effectively now the employees' own money, as a result of employee participation in the premiums, and in co-payments for the benefits.
There are many other quirks and unfairnesses in the existing employer-based system, particularly as they disadvantage non-employees. But in a very simple paragraph of reforms to these three, the Health Savings Account would emerge as a major reform, whether the one-year term or lifetime. A cleanup of the diagnostic code underlying DRG is badly needed, income taxes should be leveled for everyone regardless of the type of employer, and rolling over the year-end surplus of Flexible Spending Accounts would give a big boost to HSA enrollment.
That's all, the rest is in this book. Making healthcare cheaper is a bigger project, so let's return to where we were. We were about to talk about passive investment.
Originally published: Thursday, October 16, 2014; most-recently modified: Sunday, July 21, 2019