Philadelphia Reflections

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

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Pearls on a String:Further Extending Health (and Retirement) Savings Accounts
Pearls on a String: Further Extending Health (and Retirement) Savings Accounts. HSAs are the string. Retirement saving, Privatizing Medicare, and Shifting Childhood Costs-- are the Pearls. Other Pearls to follow.

Co-ordinating Obamacare With Health Savings Accounts

HSA becomes HRSA, Then Emerges as the String that Threads the Pearls

The book before you is not a list of dooms and glooms, it turns into a proposal. A proposal to preserve a functioning society by regarding child, parent, and grandparent as different stages of the same person's life, with united interest in the same goal. The same goal, even for a newborn, is a comfortable retirement. While it speaks exclusively to paying for healthcare, the same principles apply to any useful but expensive commodity. That is, as much as possible, individuals subsidizing themselves at different ages rather than members of three different classes of strangers. We build upon the idea of a Health Savings Account, one account per person throughout one lifetime, as a financial way to emphasize the underlying social point. If you spend too much too early, you won't have much left for later. That sounds far less obvious when it appears within separate compartments, with separate sources of funding. Separate sources have their own budgets coming first in their minds. They compete with each other for the same money, if they can.

This unification proposal -- Pearls on a String -- is voluntary, you don't have to do it, or even part of it, but in some ways, that's another advantage. True, there is no escaping the use of insurance for unexpected catastrophes, but really, only an insurance salesman would argue for unlimited insurance for everyone, all the time. Only someone who knows very little about insurance would believe insurance is a way of printing money for the customer. Compulsory also means uniform, government-issue. Voluntary, by contrast, isn't a one-size-fits-all commitment and doesn't dump 340 million subscribers onto inadequately tested systems, all at once.

Whether voluntary or mandatory, however, some facts are just part of life. Almost completely, the working generation must subsidize its older and younger generations, but it would do it better with a focus on the same individual at different ages, instead of by whole categories of strangers. For a final twist, we unexpectedly propose to empower solutions by leveraging a new problem we scarcely noticed we had (prolonged longevity and retirement). It isn't a trick; in retrospect, everything looks as though it might have been predicted.

Three New Potentials. Curiously, the Health Savings Account had to be tested before it could be fully understood even by its originators. A bit of history may help explain the delay. The basic concept of Health Savings Accounts was developed in 1981 by John McClaughry and me, while John was Senior Policy Advisor in the Reagan White House. Derived from the IRA concept developed by Senator Bill Roth of Delaware, it started as a Christmas Savings Account, to save up for the approaching deductible of (high-deductible) Catastrophic health insurance -- which was to be linked to it. So from its beginning, there were two linked features: (1) high-deductible health insurance, and (2) a medical variant of an Individual Retirement Account (IRA). For those unfamiliar with insurance jargon, a high "front-end" deductible policy connotes the insurance company only ensures that part of a medical bill which is greater than the stated deductible amount.

Since this automatically means the higher the deductible, the lower the annual insurance premium; high deductible policies are the cheapest you can buy. When the Affordable Care Act was passed, all health insurance was required to have a "high" deductible, so the HSA idea then seemed moot. But a high deductible by itself isn't enough. Without the savings account attached to it, the client can't easily separate risk protection from pre-payment, or for that matter inpatient costs from outpatient ones. Ideally, the level of the chosen deductible is the result of tension between a high level to please the insurance company, and a low level to attract the customer. Call it luck or call it planning, a high deductible separates inpatient from outpatient, market prices versus fixed ones, optional costs from unavoidable ones, prevention from treatment, and risk protection from pre-payment. Out of these segregations, remarkable things can be achieved. The one danger is that the deductible might fail to change with circumstances. The divisions are set by the market balance between customer and provider and are rough ones. If either side succeeds in freezing the deductible, its underlying significance could disappear.

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The higher the deductible, the lower the yearly insurance premium. {bottom quote}
After experience in action, a totally new realization dawned that -- once the two parts became semi-independent -- the real deductible just becomes the unpaid portion of it. The unpaid portion of the deductible is now situated in the account, ultimately becoming zero -- but now the insurance premium no longer rises as the remaining deductible declines. Not at first but eventually, the HSA emerges looking like "first-dollar coverage" for the same low price as high-deductible insurance. The truth is, you have two insurance policies, one owned by the insurance company, and the deductible, which is self-insured, owned by yourself.

You can be as frivolous or as frugal as you please, within the self-insured deductible. The insurance could care less which it is. A great many people have no medical expenses for a whole year, so they get to keep all of it. Someone else could spend it all. Another way of saying this is, saving for the deductible has shifted into the customer's own hands without shifting any extra burden onto an insurance company. A mandatory expense now transforms into part of his disposable income. Frivolous (ie small) expenses are self-insured; necessary ones (ie expensive ones) are insurance-insured. It wasn't exactly the deductible that saved money, it was the new-found ability to exclude non-essential expenses if you chose to.

A second realization emerges from the tendency of non-insurance HSA managers to use debit cards for medical reimbursement, instead of insurance claims forms. (This freedom may well be a consequence of concentrating frivolous expenses into the deductible.) Although in the absence of strict scrutiny there might well be more temptation to cheat, a debit-card system depends on the client to howl if he suspects his money is being mis-spent. Otherwise, it will be lost. (When you spend a third party's money, there's less concern than in spending your own.) A decline of policing cost might even be said to expose a lack of overall effectiveness of the third-party approach to policing of claims. Since it is obviously more costly to police than not to police, that particular hidden cost of using third parties only emerges after it gets eliminated. (This same reasoning applies to a diagnosis-based payment for helpless hospital inpatients, a related issue which is now segregated into the insurance compartment of HSAs, but crippled by the crudeness of its DRG coding system.)

The foregoing describes two potentials, broader coverage, and less administrative cost, but an even more gratifying development might be a decline in elective claims, despite the reduced cost-containment effort. This is harder to prove, but highly likely. At first, this likely saving seemed attributable to the ("adverse") selection of unusually frugal applicants. But over time, a more likely incentive emerged: added provisions of the HSA act permitted any surplus remaining at age 65 to be turned into an Individual Retirement Account. That is, an incentive was created to save health money for retirement, by substituting personal responsibility for insurance company vigilance. All in all, it would not be a bad outcome. So far as I know, it is the only form of health insurance which has this feature, which every one of them ought to use, by means of attaching their "bead" to the "string". All other health insurance returns a surplus to lowering the costs for others; that only works if you never change companies, and even then, the temptation of management to skim it is undeniable.

The second implication of this third zinger in the system took even longer to sink in because nobody wanted to believe it. It suggested our path might never lead us out of the financial hole we were in. Not eventually, but never. The situation was this: As improved health care spread among the elderly, the elderly lived longer. Gradually and grudgingly, it was acknowledged extended longevity was a hidden cost of Medicare, unanticipated perhaps, but universal. Its pain first started to hurt beyond the insurance boundary, accounting for the delay in recognition of the link. There was Social Security, of course, left in the dust of thirty years of longevity added since 1900. Increased longevity was first discovered as destroying the attractiveness of defined-benefit retirements. But as it became acknowledged that good health and longer longevity were two manifestations of the same effort, the doubled cost began to be seen as insupportable. What's worse, the future cost of retirement is even harder to specify that the future cost of health care, because everyone has his own definition of a "decent" retirement. Underfunded retirement is an even stronger incentive to watch your pennies than a specified one because there is absolutely no one, not even that demonized one percent of rich folks, who can be certain there will be enough money left at the end, to last out his lifetime. Wasn't that combined incentive enough to get everybody's attention?

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HSAs are the only health insurance with the incentive to save for retirement whatever you don't spend for healthcare. {bottom quote}
The Driving Force. For the purposes of this book, the power of that unfunded retirement incentive was the HSA's most important new insight. Almost anybody could tell at a glance the high cost of Medicare was what stopped "single payer" in its tracks, what paralyzed Congress on healthcare, and defied solutions from any other direction. Medicare was the "third rail" of politics -- touch it and you're dead. But with a retirement entitlement looming behind it almost making Medicare costs seem laughable, it was a new ball game. Once retirement begins, retirement savings get steadily depleted, whereas serious health costs are usually episodic. Both begin at the same time.

Six conclusions emerge:

1. The Health Savings Account, as is, is quite adequate (if funded, of course) to cover healthcare costs in replacement of existing health insurance. It's surely cheaper, although possibly not as much as the 30% reported in early trials. There are several reasons why that should always remain the case, although it does require more management by the customer. It is entirely suitable for intermittent use as employers and government programs change.

2. The HSA already contains the mechanism of the customer funding up to its present $3400 yearly limit, with annual cost of living adjustments but excluding the cost of the attached health insurance, gathering investment income for decades, and turning it over at age 65 as an IRA retirement fund. In honor of this feature, it is proposed to rename HSA to HRSA (Health, and Retirement, Savings Account.) As such, it would supplement any other retirement source but could stand alone. Its main flaw is easily corrected; the law limits coverage to employed people. No children, no supplements after age 65, but that would be simple to fix. There is a political risk in allowing the annual deposit limits to be at the mercy of changing political administrations.

3. New means of investment, such as passive investment of total market index funds, seem as safe as most investments now offered. Cheaper ways to increase effective returns should be explored, particularly in dividing returns between HSA management and their customers. I suggest published "fee-only" arrangements would give the public a chance to shop around. Later on, ways might be explored to balance voting power in health companies against the medical prices reflected in the price of their stock. Demonstration projects might be in order. Present owners of HSAs will probably be shocked to hear the total market has averaged 11% returns during the Obama eight years; how many HSAs paid customers more than 3%?

4. With minor legal adjustments, the HSA could serve as the investment conduit for: surplus generated by Medicare, a proposed Childhood Transfer System, an end of life reinsurance system (to be described), and any other health program which changes its proposals to transfer surpluses to retirement, as an incentive to become a frugal shopper. For the time being, however, it is intended to remain entirely independent of the Affordable Care Act until politics clarify.

5. The ultimate goal is to construct a lifetime framework for HSAa, to serve as a financial vehicle for connecting all health plans around a common investment and retirement framework. It might easily include such things as bounties for below-average health expenditures and rewards for superior performance of other sorts.

6. The longer-term goal is to re-arrange pieces of this network to increase investment returns, starting with Medicare (see below), Last Four Years of Life Reinsurance and First Twenty-five Years Gift Transfers, with the rest of life added, accordion-style. These terms should become clearer after later discussion.

In the existing environment, third-party reimbursement of healthcare now stands in the road of everybody's retirement, by being disjointed. That's not to suggest unifying whole programs, an overwhelming task, but merely to unify their transfers and their retirement termination, as well as the age and employment limitations of individual pieces. So long as left-overs ultimately belong to the individual, and the separate pieces are all available for compound interest along the way, the affiliations can be quite loose. On the other hand, if further program integration seems cost-effective, nothing stands in its way.

Medicare's financing problems might even become a symbol the problem was not just a lobbying benefit to be defended blindly by its current beneficiaries. Increased retirement cost was, in short, an overlooked cost of health care all along, and anyone who stood in the way of coordinating things has misjudged the ultimate necessities. Standing closest to retirement, Medicare is in fact the very first program you must change. But you better do it very carefully. And by the way, you better do it pretty soon.

Originally published: Wednesday, July 13, 2016; most-recently modified: Tuesday, May 21, 2019