Philadelphia Reflections

Health Savings Account in a Nutshell

There are now reported to be 15 million subscribers to Health Savings Accounts, growing at about a million new subscribers a year, with hardly any advertising. It' s really a very simple concept, consisting of two parts. The Savings Account is pretty much like any other savings account, and I understand one New York Bank has 700,000 accounts. You are allowed to make deposits up to $2350 a year, terminating when Medicare begins, at age 66. At that point, any balance in the account is turned into an IRA, and may be used for any purpose after paying income tax. When you make withdrawals for other purposes there is a penalty tax of 20%. They may be used for legitimate healthcare purposes, without taxation. The statutory basis for this is that deposits are tax-deductible, and withdrawals for health are tax-sheltered; the rest of the rules are regulation. Most accounts are linked to a debit card for medical purchases.

Two working parts:(1) Tax-exempt savings fund (2) Catastrophic (high deductible) health insurance.

HSA in Essence

In order to make deposits, the subscriber must link the account to a high-deductible health insurance policy. It is often difficult to obtain a public quote on price, which must mean the price is highly competitive and variable. Changes in the environment make for price changes which are almost not worth printing in a pamphlet. Many account managers insist on linking to a specific brokerage account, either subsidiaries, or linked by fee arrangements; such details are to be frowned upon. The new investor should be aware that most index funds of the entire domestic market return slightly less than 12%, but the manager of a fund subtracts overhead and passes on a variable amount to the customer. The amount of this return on investment is critical, and the ability to move accounts to a new manager if dissatisfied is an important feature but an optional one. It is also important for the catastrophic insurer to have made price arrangements with local hospitals which are competitive. A price of one and a quarter times the Medicare rate is on the high end.

Most investment manager are not fiduciaries, they are brokers. That is, they have no legal obligation to put the customer's interest ahead of their own. It is reported that most new subscribers are between the age of 30 and 45. That is, old enough to have some savings, young enough to gather meaningful income before being used. Actuaries report the average yearly cost is about 30% less than conventional health insurance, but price quotes are difficult to get on anything but an individual basis, and there may be some tacit underwriting.

Originally published: Wednesday, August 05, 2015; most-recently modified: Tuesday, May 21, 2019