Philadelphia Reflections

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Expanded Health Savings Accounts

Congressional Hearing: Health Savings Accounts

Thank you for asking me to describe Health Savings Accounts. In five minutes, I will try to make four points.


Thirty years ago, John McClaughry of Vermont and I devised the Health Savings Accounts you may be familiar with, and millions of people have tried them with satisfaction. It has been reported that they can reduce healthcare costs by as much as 30%.

They consist of two ways to pay for Healthcare. Essentially, one is an individual investment account, rather like an IRA, or Individual Retirement Account. The subscriber usually uses a special bank credit card and receives an income tax deduction if the money is spent on healthcare. The account is individually owned, as an incentive to be frugal and shop wisely, because whatever money is left over he may keep in a regular IRA. He needs to deposit into the account, only such money as he requires for healthcare, depositing less if he has been frugal in the past. If he deposits more than he spends, he gets it back with interest. These healthcare expenditures are usually office or outpatient expenses, subject to shopping around as vigorously as he chooses.

The second form of payment comes from a high-deductible health insurance policy. This policy is ordinarily used for hospital inpatient expenses where the patient has very little ability to choose or to shop, and where payments are usually lump-sums derived from a system called DRG (Diagnosis Related Groups). This has proved to be an effective cost restraint.

Right now, if you don't have an old-style HSA, you probably can't get one. Recent regulations forbid new accounts for persons over the age of thirty, the accounts are only partly tax-deductible, and existing accounts end when Medicare begins. These are artificial, and I hope temporary, barriers which could be swept away in an afternoon of Congress.

HEALTH SAVINGS ACCOUNTS, NEW STYLE. (Lifetime Health Savings Accounts)

To these two original building blocks, I now propose to add two new ones. They both probably require legislation, and they may even need to be considered in separate committees of Congress..

One new feature to Health Savings Accounts is a lifetime, or whole-life, policies substituted for present one-year term formats. Not only would that save marketing costs, and permit permanent funding. Obviously, lifetime policies must somehow be portable between states.Lifetime health savings accounts have the surprising ability on paper at least, to pay for most of the healthcare costs by themselves. True, the McCarran Ferguson Act is in the way, and maybe even the Tenth Amendment. But major reductions of healthcare costs are too important to ignore, without first examining work-arounds.

The second is passive investing , a Wall Street term for eliminating churning and stock picking by using total-market index funds. This system promises to return 12% per year to the investor, but I quote John Bogle that the financial system extracts 85% of the return before the investor gets it, just as it does in many 401(k) plans. This battle of fees needs to be fought out because, in the case of healthcare, thirty extra years of longevity have greatly increased the return available for disorders of old age, which predominate. In thirty years at only 7%, money will have three doublings, or multiply eight times. You could lose half of it in a stock market crash, and still, have 400% of what you started with.

Originally published: Friday, November 14, 2014; most-recently modified: Wednesday, May 15, 2019