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Musings of a Philadelphia Physician who has served the community for six decades

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Health and Retirement Savings Accounts: Current Issues and Possible Remedies
If you read it fast, this is a one-page, five-minute summary of Health Savings Accounts.

Health Savings Accounts: Bare-bones Brief Summary

Health Savings Accounts

Enacted 2003. Subscribers as of Jan.1, 2015: 17 million.

Provisions: Briefly stated, a high-deductible indemnity health insurance plan, linked to a tax-deductible savings account for the accumulation of the deductible. Deposits are limited to $3350 tax-deductible annually, and are not taxable on withdrawal. The account turns into a regular IRA at the time the subscriber begins Medicare coverage. In this sense, an overfunded account earns interest until age 66 and funds unused for health care may be used for retirement. There is a 20% penalty for funds used for non-medical purposes until that time.

Suggested technical amendments: 1. Permit the account portion to pay the premiums for the insurance portion, making the entire Health Savings Account tax exempt. 2. Improve flexibility by making age limits optional instead of fixed. 3. Relax the deposit limits with a COLA and switch from annual limits to lifetime limits.

Suggesed regulatory changes: 1. Limit long-term costs and charges for deposits, withdrawals, and investment income to 1%, applying the rest to the customer's account. 2. Permit subscribers the option to purchase index funds and take delivery on the certificates into an escrow account for all or some of the deposits escrowed for longer than a year. The test would be money passively invested for more than a year for whatever reason would be exposed to limited management costs.

Suggested Areas for Future Expansion:

1. First/Last Years-of-Life Re-insurance. (To shorten the transition but extend the period for compounding interest, plus 25% reduction of Medicare cost.) These two years consume more than 25% of medical costs. They are seldom paid by the patient himself, and affect 100% of the population. The present system is largely a transfer system to these two years, paid for by people who are not themselves sick.

2. Study how the savings from future cures of diseases could be applied to retirement (rather than mis-applied to battleships, etc) by flowing the savings into HSAs. This would require extensive redesign of the program. The planning should contemplate eliminating Medicare gradually as its need disappears, a feature seldom included in the design of entitlements.

3. Study the Dis-intermediation of HSA investing. Privatization creates complicated agency problems. often with excessive costs. Huge savings are possible from investing rather than borrowing, but the savings should reflect the risks better. The problem is how to invest several percent of GDP without using price controls.

4. Decentralize.Centralization of medical care has led to running it by businessmen at great cost, unlike most businesses which become cheaper if centralized. Old people have most of the disease and thus do most of the medical commuting. The most effective way to restore physician control is to decentralize from urban silos to suburban retirement communities. To do it gracefully takes protracted planning. Begin with the Maricopa case.

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