SECTION FIVE: Multi-Year, the Future of HSA
We've spent a lot of time on the 1980 version of Health Savings Accounts. It's already rolling along in action, with only a couple of suggested additions to make it better. The new 2015 version is also before you. But lifetime Health Savings Accounts are only a dream, to be worked on for months or years, because they invade so many turfs, and will require extensive legislation to become a reality.
Some ruminations about health financing, written while we wait for the Supreme Court to announce its decision on King v.Burwell.
One of the important advantages of Health Savings Accounts over historical health insurance lies in the contrasting sacrifices you must make if you can't afford everything. Traditional health insurance ("first dollar coverage") paid for the small things, but if you ran out of money, you had to sacrifice some big things. The Health Savings approach is to provide money for the big things first, and sacrifice little things if you must. That's the essential philosophy, and it has become exaggerated by increased longevity. We need to add a simple way to by-pass small expenses and save money for later. That's the reasoning behind adding escrow accounts to high-deductible insurance.
Think about it: when a subscriber faces a medical expense costing more than his account balance, he has three choices. He could forego the medical service, he could pay cash out of pocket, or he could borrow the money. Sometimes he will have enough money in the account, but saves it for some later purpose; in that case, he might be both a borrower and an investor at the same time. When it comes time to pay off his loans, that obligation should have a higher priority than investing new money, since otherwise the subscriber is investing on margin. Margin investing is generally a bad idea, but it can be made less risky through using an escrow account. That's a designated-purpose account, which is more difficult to invade. So, he may divide his account into three escrow accounts, and the managers may decide they need even more. It becomes inflexible if it can never be invaded, but it shouldn't be easy, and paying cash or tax-unsheltered money is always better if you can.
Borrowing Escrow. It's wise to to pay off debts early, so the program should require its permission to do anything else with a new deposit. Not all managers of HSA will advance overdrafts, but some will, probably at rather high interest rates. More commonly other subscribers will have surplus money they would like to lend like a credit union, because deposits up to their annual limit are tax deductible, and they would be reluctant to pay the taxes to redeem them.
If you will need it later, Set it Aside, Now.
It's possible to imagine gaming such arrangements of differing tax liability, so Congress must decide what circumstances permit it. With insurance, considerable pooling of resources happens without tax consequences, but when bank accounts are individually owned, pooling is not allowed without legal provision. Depositing unencumbered money in the escrow account is the same as investing it, except its presence indicates availability for loans in certain circumstances. Nevertheless, it is inevitable that gaps between the two curves, revenue and expense, will develop, even though the hills eventually exceed the valleys.
My suggestion is to limit structural borrowing at low interest rates to smoothing out the valleys characteristic of entire age levels, rather than provide individual banking arrangements between subscribers. Over time, these variations will standardize. And since the accounts will collectively grow, the quirks will eventually stabilize the investment accounts, possibly even augmenting income. However, if a surplus or deficit is exhausted, it should not be perpetuated with outside financing. The accounts operate under the principle that they come out right at the end. It therefore ought to be possible to adjust age-determined structural imbalances in bulk, while attempts by subscribers to game such variations should be countered by modifying interest rates.Wholesale buyouts have their advantages, but piecemeal buy-outs are better.
Proposal 5: Congress is urged to permit pooling (at low interest) between the accounts of an age group in consistent surplus, -- and other age groups in consistently deficit status,-- occasioned by persistent divergences between revenue and medical withdrawals at differing ages. If there are other imbalances created by differential depositing, they should be corrected by adjusting internal interest rates. (2735)Medicare Escrow. There are a number of reasons why some people would want to buy their way out of Medicare, whereas others would become terrified at any mention of changes in their Medicare plan. The incentive for the government to permit Medicare buy-outs would lie in ridding itself of its deficit financing, with secondary borrowing from foreign nations. And the advantage for the plan itself is providing a cushion for transition to lifetime accounts, ultimately a better cushion for revenue misjudgments.
By noting the average annual cost of Medicare, the number of Medicare beneficiaries, and the average longevity of subscribers, the average lifetime Medicare costs of Medicare can be calculated. Assuming inflation to affect both revenue and healthcare expenses equally, inflation is ignored. Then, with various compound investment assumptions, a range of future income can be estimated. All of this can be estimated as requiring a lump-sum payment of $60,000 at the 65th birthday in order to make a fair exchange for the Medicare entitlement, and guessed at $80,000, if accrued debts are serviced. However, the individual would have paid about half of that with previous payroll deductions during his working life (a quarter of the total), and by buying out of it at age 65, would be relieved of Medicare premiums which amount to another half of what is left, or quarter of the total cost. However, that complexity of description eventually leaves half of the total to be made up by Federal subsidy from the taxpayers because loans must be repaid. It's complicated, because every revenue source available has been tapped.
The biggest issue is foreign debt to be paid back for financing Medicare deficits in past years. Consequently, in order to put a stop to further borrowing, the buyout price must be raised. Obviously, if past debt is serviced, more contribution is needed. Unfortunately, information about prior indebtedness is not readily available, so the entirety is here guessed to require a single-payment premium of $80,000 at the 65th birthday, for a full Medicare buyout. If the entire Medicare program, past and present, is to be paid off, there very likely will have to be a tradeoff between increased revenue from HSA deposits and diminished service of foreign debts. As a guess, the elasticity of HSA revenue of $3350 per year, from age 26 to 66, has already more than reached its limit. For the moment, we have accepted the present Congressional limit, which was presumably rather arbitrary. While it is possible to imagine this arbitrary limit could be made to stretch to cover lifetime health costs, more likely it will only cover a portion. But to cover the Medicare unfunded debts of half the past century in addition to current costs, will require some new concept, as yet undevised, and a good deal more information than is presently public.
"All-other" Escrow. It is difficult to foresee which escrows will prove so popular they will require limits, and which others will be so unattractive they will require minimums. Moreover, it can be anticipated some people will wish to use account surplus as an estate-planning tool, while others will have no estate. A provision in law directing the uses of account surplus at death may thus appeal to the majority of subscribers, but actually may be highly unsuitable for the majority. Therefore, while it seems harmless to provide a vehicle for such individualization, too much should not be expected of it.
To most readers, these sums will seem prodigious, and indeed they are. Few people at present are in a position to consider them. We can pray for some relief from scientists, from the economy, and from demographics, because downsizing Medicare is a growing requirement, provoking even more drastic remedies if we sweep it under the rug. We need, first, to make Medicare more modular, so it can be downsized in pieces, instead of all-or-none. In time, we need to downsize it and use the pieces to fund protracted retirement costs. The long-term goal, for the scientists, the politicians, and the patients, is to make it unnecessary to spend so much money on health. Beyond that, the funding of retirement has no logical limit. This long-term vision of our future must first become a commonplace in our culture, so we will seize every chance opportunity to advance it in fact.