Philadelphia Reflections

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

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Medicare: Begins, Not Ends, Reform
The elderly consume a disproportionate share of total health expense. That soon forces Medicare, the "Third Rail of Politics", to get first attention in any lifetime health plan -- even Lifelong Health Savings Accounts, our central proposal.

Expanded Health Savings Accounts

Why is a Health Savings Account Useful to Almost Everyone?

Health Savings Accounts, HSA, have so many hidden features it's hard to imagine anyone without one. It's a Savings Account, but it is also an insurance policy. It's a high-deductible insurance policy with an attached savings account. The more you describe it, the more complicated it sounds, but it's really very simple. Instead of regarding its two components as opposites, it combines them, but it can be treated as two separate ideas if you prefer. A nice Quaker lady seemed to grasp the idea all at once, after a period of puzzlement. "Why," she exclaimed, "That's nothing but a Christmas Saving Plan for Healthcare." Yes, you could say that.

Banks and casualty insurance companies have been in competition for savings dollars for so long, that an amazing number of people have grown to thinking they were enemies, or against the law, or something. When in fact they are two different savings vehicles with separate advantages which most people will eventually find useful. It's an example of specializing in one or the other until you forget they both have their place, and for everyone. Remember, insurance has its place. A hospital bill can run into thousands of dollars. It doesn't happen often, but someone would be foolish not to have some fail-safe insurance. The higher the deductible, the saying goes, the lower the premium. If you have both features you don't lose anything, and in fact neither the local bank nor the local insurance broker need care one whit whether you have both of them at once.They are governed by different regulatory agencies, but I can't see any harm in combining them, and considerable advantage to doing so.

Let's start with health insurance. Just about anyone can see it's cumbersome to insure small health problems, because the resulting administrative costs make it too expensive to bother; any health problem which covers less than a thousand dollars of "losses" is too cumbersome to use, so long ago insurance began to have a "front end" deductible of at least a thousand dollars, and nowadays five thousand is more likely. At least half of health insurance is given to employees as a group policy by the employer for tax reasons, and the employers regard the whole thing as a distraction from their own central activity. They just do it because everyone else does it if he can, and employees would be angry if they didn't. But a few years ago someone spent an awful lot of money experimentally proving what should be obvious--front end deductibles are cheaper. Well, wouldn't you know. But it required a President to make deductibles compulsory before they became standard. Right then and there, it should have been made compulsory to link them to a savings account, but no one cared enough to do it. Besides, the employer pays the bill, savings accounts are something banks do, and health care is left to the company union and the management to work out. But let's just examine the matter for a moment.

In the first place, placing the deductible in a Health Savings Account gives it three tax exemptions. It is tax deductible when you deposit the money, it is invested without taxation while you leave it there, and there is no tax when you withdraw it. So it just has to be cheaper than paying money to the HSA company instead of the bank, regardless of whether you use it to pay for health. In fact, if you have some other money somewhere, it is foolish to withdraw this medical money for health, or for anything else when it is such a good investment without it.

Secondly, when you have deposited the amount of your health insurance deductible, you have "first dollar coverage" in effect if not in name. If the insurance company raises the deductible, you still have first dollar coverage, but the insurance premium doesn't go up. With a $3800 annual deposit limit, it takes about two years to fill it all up, but after that, you have first dollar coverage for high-deductible prices. In fact, you have another option of putting in the full limit of your annual deposit at about 20% less cost. Show me another investment which practically guarantees 20% annual investment returns. It really doesn't matter whether you are rich or poor, this is a good deal for anyone. In fact, it is such a good deal that some vendors just don't pay very much investment income at all, in spite of the fact that the stock market has gone up 12% per year for the past century, wars, depressions, elections, notwithstanding. Surely it could give the customer 7% return, after inflation and taxes have been taken into account, but many customers are so content with 20% they don't feel like fighting for 27%. If you don't feel like quibbling, you could "take delivery" of the index fund certificate and put it in your own safe deposit box for custodial purposes. Remember, money at 7% will double in value in ten years. Believe me, this is a really good deal, and we haven't even started to talk about its value in health care.

The feature which has been slipped into it, is what happens when you turn 65. Never mind quibbling about the rising age threshold for Medicare, or the lowered age limit for 9 million disabled persons. For all practical purposes, the designers of Health Savings Accounts in 1981 regarded Medicare as the end of all your health worries. We'll deal with that fallacy at another time, because as things now stand, every HSA turns into an IRA when you get Medicare. It's our belief the whole medical system could be paid for by extending the option to convert at any time up to death, but right now it's the only healthcare payment system which lets you have the surplus for retirement.

The population is rapidly aging, because longevity has increased thirty years to age 84, in the past century. Unless old folks find some remunerative occupation, most of them won't be able to afford to retire. Thirty or forty years is a long time to play golf or tennis, or to go fishing, watch TV or whittle. That isn't the central issue at the moment, but at least we can redesign our health insurance to redirect surplus healthcare money, into helping to pay for retirement. Meanwhile, there's an even simpler thing to do: run don't walk to a place which sells HSAs, and pays you a dividend around 7%. They can be found, but they aren't exactly running after you, as long as so many people will accept lower income returns.

Originally published: Monday, June 12, 2017; most-recently modified: Wednesday, June 05, 2019