Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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Finding the Sweet Spot

Every tennis racquet has a "sweet spot", a place within the stringed area that hits the ball just exactly right with minimum effort, and for that matter, does so with a minimum of noise. If your aim is good, the shot is much improved by whacking it with the sweet spot. In health savings accounts, the sweet spot is that combination of fixed choices over which you have no control, like your age, and independent choices over which you do have some control, like the amount you deposit into the account, or the shrewdness with which you choose your agent. There's a somewhat different sweet spot for males and females, and it will vary with the state of the stock market, or international warfare, during the era in which you had the highest earning potential. In other words, the cost of sickness is the only chance catastrophe we are aiming to protect against. For that narrow purpose, the uncontrollable factor which makes the most difference is

The age at which you started your spending account. Compound interest requires time to work; persons who start their accounts late in life no longer have to pay for their earlier expenses, but they must have some traditional insurance protection during the transition to full dependence on the account, or else some other form of savings. That's why you need catastrophic insurance coverage, but in the early stages of getting established, even that could be inadequate, and nothing can be offered unless the government offers to subsidize it. In order to find a way to capture twenty extra years of compound interest, it is tempting to begin depositing at birth, which is presently prevented by the HSA rule that you must be working to start an HSA. But children have health costs to be managed. In particular, 3% of all health costs are reported to occur in the first year of life. If Congress will allow it, we have a plan in later sections for doing it expeditiously.

Subsidies for the Unemployable, Such as Children. Please do not compare subsidy with lack of subsidy, because the subsidy is always cheaper in the short run. . Furthermore, subsidies are created by the government, and are therefore under pressure to demonstrate equity. Protection in extreme cases must rely on reasoning which placates the "Equal Protection" clause of the Fourteenth Amendment. All forms of insurance contain some incentive not to invest but to squander, and channeling that choice is part of insurance design. Here it attempts to balance a singular opportunity to select the best possible investment opportunity, with the unique ability to spend the proceeds on anything you choose after your health cost has been met. Unfortunately, we have already gone so far with borrowing for health, that many people are of a mind to believe balance can't be achieved. We could go on with this, but a quick summary is there are thousands of possible sweet spots, most of which are partly beyond anyone's control or ability to predict. There are even some circumstances where an individual would be better off putting reliance on Obamacare, trusting the government to bail him out with subsidies; if the nation decided to give equal subsidies for every payment alternative, however, most of these short-term advantages would disappear. The best we can suggest for people who dislike both HSA and Obamacare is, go see your congressman. In this book, we merely suggest that most people would be better off with HSA.

Trying not to be repetitious, there's nothing you can do about your age and sex, or previous state of health. You should have stopped smoking twenty years ago, but you can't help it now if you didn't. Twelve million people already have HSAs; if you aren't one of them, the best you can do is start one now. It's very difficult to imagine a situation in which a late start would inflict harm which subsidy couldn't help. On the other hand, if you make a bad choice of agency, make sure you are allowed to switch to a better one if you can find it. Some brokers charge too much, some of them pick poor investments to get a kickback. Some demand too large a front-end investment, although that may do you a favor in the long run. Essentially, your own choices affect the result, and your main recourse is to invest more than you planned. For the most part, the more you invest the better. If you invest as much as you can and it still isn't enough, you made an investment mistake. It's only a real catastrophe if you then get sick, and Congress didn't provide for those few who inevitably make such a double blunder. In that case, it will have required three misjudgments for a serious mistake to emerge, because even this mishap will be adjusted by aggregate subsidies costing less than the program is able to diminish overall costs -- a very likely outcome.

Interest Rates. Unless you are within a few years of death, or within a few weeks of a stock market crash, in the long run, you are generally better off with stocks than with bonds or money market funds. According to Ibbotson who published the results of all asset classes for a century, the stock market has averaged 11-12% total return for the past century. However, if you maintain internal reserves against a depression, you will probably only receive about 8% as an investor, of which 3% is due to inflation, so figure on a steady 5% after-tax, after-inflation return over the long haul. Use 8% as your shopping guide, resign yourself to 3% inflation loss, and content yourself with complaining about the 4% attrition seemingly imposed by the financial industry. You will find our charts use 5% tax-free as a standard, but show a family of curves up to 12%, just in case someone figures out a better system for harvesting the return. For 3-5 year depressions ("black swans" occur about every thirty years), we show curves of lower returns. Notice endowments and professional investors also figure on 5% overall from a 60/40 mixture of stocks and bonds, because they have a payroll to meet, but you may not. A conservative investor can feel comfortable with a 5% "spending rule", but that assumes a long horizon and the need to make expenditures. Some people have a short horizon and may be able to gamble on a pure stock portfolio because they have some other way to meet medical expenses up to the deductible on their catastrophic high-deductible insurance. But they better know they are gambling, and may, therefore, encounter a black swan they can't cope with. Such people probably need financial advice, because it is also possible to be too conservative if your deductible is comfortably covered. Fear of underfunding may cause the account to become overfunded, but that is scarcely a tragedy because you can withdraw your money without penalty after age 66. In fact, a policy of deliberately overfunding the account at all times never has any great downside, and lets everyone sleep better.

Age at Beginning an Account. If you begin to use an HSA during late working years, you have the consolation that you no longer need to plan for paying for the first forty or fifty years of your own health. However, the years of heavier medical expenses begin around age 45, by which time you have already paid for most of your Medicare payroll deduction, which is about a quarter of Medicare costs. The older you get, the more you have paid with a payroll deduction, but fewer years are left for compound interest to accumulate within the account. Balanced against this is the likelihood you are entering your highest earning years, which carried too far, may tempt you into unwise early retirement. You may need some accounting advice about what is best and still feasible. And you may need legal advice if the laws change.

Younger working people have contributed less to payroll deductions but have longer to earn compound interest in their HSA. People seem to have figured this out, and the largest group of new subscribers are in their twenties and thirties. This is the group with most to gain by proposing a buy-out of Medicare. A quarter of Medicare is paid for with payroll deductions, another quarter by Medicare premiums after you reach 66. If Congress could be persuaded to drop these contributions, what would be left is the half the government pays by borrowing from foreign sources. If you, in turn, agreed to pay off this indebtedness, the government might be tempted to match it by foregoing part or all of your payroll deductions and premiums. Since one about balances the other, the compound interest you earn on your deposits is pure profit. From the government's viewpoint, it might seem a great relief to know the debt would stop growing. Older people are generally so deeply committed to Medicare they would resist, but younger people -- and the Treasury Department -- would find it quite a bargain. Once again, financial advice from somebody good at math is highly advised. When the politics of this matter settle down, it should become possible to state a particular age, below which a Medicare buy-out is safely advisable for anyone. It's almost always in the Government's favor, so independent advice is only prudent. In summary, starting an HSA at almost any age is safe and wise. A Medicare buy-out is wise below a certain age, yet to be determined. In other circumstances, a buy-out is wise if personal finances are comfortable, but right now it would take financial advice to do it. And, of course, a friendly politician to convince Congress to make it legal.

There are two more steps to this transition. But before getting to them, it seems best to run dual systems while you phase one out and phase the other in. It may even prove to be best to run two systems indefinitely. Three principles emerge:

I. It would be pretty hard to run dual systems without also running subsidies for both. This would be part of Equal Justice Under the Law. It's hard to run dual subsidies until you know what the final rules would be. Some subsidies may be difficult to match, and require equivalent subsidies, which are harder to devise.

II. Dual systems and patchwork fixes always provide loopholes for someone seeking to take advantage. Some agency must be designated to keep this in line, using the principle of each system being charged with watching the other one. When you deal with one-seventh of the GDP, tremendous scams are entirely possible. A system of balanced whistle-blowing could effect great savings without the same surveillance costs.

III It isn't necessary to pay for everything. The reader will, of course, have noticed that paying for all of the medical care would save perfectly stupendous amounts of money. But paying for half of it would also save stupendous amounts. And even paying for only a quarter or a third of everything medical would save the economy two or three percent of Gross Domestic Product. That wouldn't be a failure, it would be a tremendous success. In fact, it might be all the change the economy could withstand for a few years.

The Intergenerational Roll-Over.

The Coming Shift From InPatient to Outpatient Care.

Originally published: Saturday, April 25, 2015; most-recently modified: Friday, May 17, 2019