Philadelphia Reflections

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

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Expanded Health Savings Accounts

Seven-point Summary of New HSA Contents

The following is an executive skeleton of Revised Health Savings Accounts. Expansions grew from 1980 concepts discovered by John McClaughry and me, among them that combining an IRA for Health, with Catastrophic (High deductible) Health Insurance, transforms simple interest into extended compound interest. That maneuver usually reduces administrative costs of both, particularly when the two age groups come to face retirement. After all, retirement insurance is just health insurance which doesn't specify the cause or location of death, and its risk is nearly 100%. Young people usually have small health costs, while old folks often have bigger costs; for both age groups health is a gamble they can"t control. But it's still a cost.

Since 1980 we added five new features building on the first two, depending on luck and inclination. That's seven in all.

1.-2. In 1980 we started by combining "the HSA for Health" with "catastrophic health insurance", canceling out some costs of both by unifying them. Young people don't have much health expense, so the HSA provides extra retirement income to the person who earned it, with the appropriate tax deduction. An older employee can spend the surplus on retirement, which he surely can use, plus a surprise tax deduction for the accumulation. Or he can just spend the money if he happens to prefer it. It's like magic, and it's legal. For decades insurance companies have profited from improved longevity; this system shifts some profit to the patient.

3. These two points are reasonably familiar, so let's just skip to a third point. Let's add optional new insurance features as needed, like "Beads on a string." Supplemental co-payments and co-insurance, for example. Or not, if you prefer to spend the money on something else. The easiest option is to split and combine the two costs into Last year of life coverage . As much as half of lifetime Medicare costs fall into the last year of someone's life; the money is already spent. There's no point in quibbling, so just pay off and save much of the administrative cost by reducing it to sample monitoring. By a combination of saving costs and shifting them to Social Security, the burden on Medicare premiums is immediately reduced. By making it optional, you reduce the transition costs, which are mainly Rube Goldberg attempts to adjust for the inevitable age of death variation.

4. The fourth point is seemingly unrelated. We have gone off the gold standard, found no substitute. Inflation-targeting worked for a while, then quit working. Someday, economists will explain this, but the leading contestant at the moment is destruction of investing cost by index funds and other computer innovation. That adds five or more percent to investment earnings, triggering a virtuous deflationary cycle, probably more than canceling inflation. You don"t have to understand this to take advantage of it. We had a near-death experience with inflation and escaped by luck. Yes, it will "trickle down", and yes it will hurt some people.

5. For a fifth addition add compound interest, which Aristotle called the "Eighth wonder of the world". It means interest gets bigger with time. 'Way bigger, so it's usually bigger than you expect. By adding one insurance to the end of another, you extend the duration. Since compound interest curves upward at its far end, it's much more effective than you might guess. And it's tax-free until you spend it, so it's a more powerful stimulus to spendable income. Trust funds need useful alternatives, and HSA with Congressional sanction, could provide one, by a flexible extension of the duration of perpetuities over two generations, taking advantage of compound interest rising by increasing its length.

6. Let's be patient and try that first, to see how clever lawyers discover unsuspected loopholes. The American public clearly yearns for universal free medical care of the highest quality. But even if we could afford that, which we probably can't, most of us don't trust politicians to resist public pressure to borrow, then worry about ruinous costs after it's too late to fix them. Hasty legislation always creates loopholes, as Cyprus, Greece, and England discovered in one way, and a sudden cure for cancer or Alzheimers would create in another. It surely requires testing during several Congressional revisions to get it right, long after unmanageable sums slam the exits. Ours is the only Constitution to survive two hundred years, and we still don't entirely understand why it has. Don't change it suddenly.

7. A seventh feature is a warning. A flexible savings account is not a Health Savings Account. Anyone who deliberately tries to confuse the two is potentially a fraud trying to restore lost income. Lots of people have an FSA, believing they have an HSA. Avoid such people, dis-elect anyone of any party who proposes such a substitute, and don"t return to salesmen who propose it.

There's more, but these seven points are enough.

Originally published: Wednesday, February 20, 2019; most-recently modified: Wednesday, June 05, 2019


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