Healthcare Reform:Saving For a Rainy Day
Lifetime Health Savings Accounts
Some ruminations about health financing, written while we wait for the Supreme Court to announce its decision on King v.Burwell.
Useful features are buried in the spending-rule idea. A portfolio would never go to zero if spending is held below a certain level; an endowment on auto-pilot. This magic number was once 3%, now is thought to be 4%. In trust funds for irresponsible "trust fund babies", spending rules are particularly common. In taxable circumstances, it is a vexing complication for non-profit institutions that federal tax rules require minimum annual distributions of 5%, somewhat more than a taxable account can sustain indefinitely, at least according to present theory, and assuming present costs. Every effort should be made to reduce middle-man costs, and the present rate of progress is encouraging. As long as medical progress continues to depend on a top level of talent, efforts to attack the cost of care itself may prove counter-productive.
In my opinion, a spending rule is pretty much the same as a budget, and the same goals can be accomplished with an escrow account, permitting no expenditures at all until a certain date, and then only for a stated purpose. And furthermore, there can be several spending rules, just as there are several lines in a budget. There surely ought to be both a discretionary spending rule and an inflation spending rule, for example, since inflation is beyond citizen control. As a practical matter, planning will generally mean 5% discretionary, and 3% inflation, for a total of 8%. Until recently, it was generally assumed if the Federal Reserve instituted, or Congress mandated, an inflation target of 2%, it would mean 2% was dependable because the Fed had unlimited power to print money. However, in 2015 the inflation rate is 1.5%, in spite of heroic efforts to use "Quantitative Easing" to bring it to 2% by buying two or more trillion dollars worth of bonds. Inflation has remained at 1.5%, resulting in much wringing of hands. So spending rules help establish responsibility for deviations.
It is not useful to engage in political arguments over why this is so, it must be adjusted for. The consequence is we have an Inflation Spending Rule of 3% and actual inflation of 1.5%, leading to a national inflation surplus of 1.5%. If a Health Savings Account has an Inflation Spending Rule of 3% only because that is what we have seen in the past century, our inflation is 1.5% under budget, which could easily be misinterpreted as an extra 1.5% to spend. When we figure out what this means, we can puzzle what to do with it, but until that happens, no spending allowed. Another precaution would be to have two spending rules, totaling 8%, only 5% of which is actually spendable. If we create special escrow funds for buying out Medicare or passing to our grandchildren -- the same thing.
If you don't limit yourself, Others will limit you.
In the case of Health Savings Accounts, a spending rule of 6.5% within an investment yielding a net of 9%, is a special case, but a good one. The central purpose of the whole HSA idea is to lower the effective cost of medical care, by generating funds to pay for it. The more income generated, the lower the effective price of medical care, so why impose a spending rule? In fact, a spending rule for an HSA does not reduce the income, it only delays the spending of it, because either the funding account gets exhausted by the time of death, or it is rolled over into an IRA. Either way, there is no final end to HSA spending, only postponements. When spending is postponed, it eventually earns more income; the ultimate effect is more availability for health care. If a cash shortage forces the HSA to curtail health spending, the bills must be paid from other sources, usually taxable ones. So even in this situation, there is more health spending power ultimately generated, but it is generated by not spending tax-sheltered money. It could even be argued that diseases later in life tend to be more serious. Indeed, if a spending rule is under consideration for an HSA, it could be voluntary as long as there is no way to game it. Unfortunately, that can lead to coercion for someone's own good, always a dubious idea.
If a portfolio generates 8% but only spends 5%, there's a safety factor of 3%, almost exactly matching the long-term effect of inflation. We hope moreover, the inflation issue is addressed by using the theory that inflation of expenses should match inflation of revenue, but you never can be sure of it. It is, in fact, more likely they won't match. A spending rule increases the power to shift surplus revenue to years of high medical cost, which will be later years, and will, by compounding, actually increase the total amount of it. This consequence is not necessarily obvious. The spending rule guards another easily forgotten thought: the purpose of an HSA is not to pay for every cent of health care. It is meant to pay for as much of it, as it can. It is likely, to invent an example, to encourage skipping cosmetic surgery, so there will be money enough for cancer surgery at a later time.
The purpose of this soliloquy is to justify the establishment of escrow accounts within Savings Accounts, to keep the fund from wandering from its purposes, or at least to recognize it early if it does. There should be a Medicare buy-out escrow fund, with a suggested budget calculated to make it come out right. And a Grandparent's escrow fund, and Permanent Investment Escrow fund, budgeted to pay for a future lifetime of care, alerting the owner how much it is below budget. These escrow funds are intended to be flexible but intended to serve their purpose. HSA Account managers are encouraged to use them and to explain them. By making certain escrows mandatory and uniform, big data monitoring is facilitated. Other government access should be minimized.