Philadelphia Reflections

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

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SECTION THREE: Classical Health Savings Accounts: Many Surprises
One of the originators of Health Savings Accounts describes their advantages over existing health insurance. Improvements are suggested for the regular HSA. More dramatic cost improvement emerges from a lifetime HSA version, substituting whole-life approaches for pay-as-you-go. Most of this requires legislation, but could reduce health costs dramatically.

Right Angle Club: 2016
In progress.

HRSA preferable to 401(k)?

A recent article in the Wall Street Journal announced to the world that Health Savings Accounts were a better bargain for the investor than were 401(k). That's certainly true if you spend the money in an account for approved medical expenses, or if you roll it over into an IRA at the time you receive Medicare. But it's also even arguable if you spend it in any other circumstance.

Let's put it this way: If you had an IRA or 401(k) but not a Health Savings Account how would you justify it? The HSA gives a double tax exemption for health services, but you are no worse off if you remain healthy. Of course you are better off with an HRSA. Of course, that may change, but then the oceans might some day pour over Chicago.

Well, you can't have an HRSA if you are under 21, over 65, or covered by a health insurance policy that doesn't have a high deductible. The Affordable Care Act mandates high deductibles for everybody, but there are still occasional loopholes, probably soon to be closed. If your policy has co-insurance features, that's actually probably an argument to switch out of it. You can't have an HSA if you are also covered by some other government plan. All three plans are sometimes subverted by self-serving intermediary fees, but you just have to shop around for the ability to choose your own investments. That may cause you to pick an inferior health insurance plan, so keep looking. Eventually, some people will reach their limits and need more than one retirement plan, but that's different. Although Health Saving Accounts are spreading nicely, there must be a hundred million people who have no reasonable answer to the question of why they have a 401(k) but not an HRSA, so please read on.

Most of the arguments for having an HSA rather than a 401(k) boil down to saying they are the same thing, but HSA gives you some health options in addition, so why not have them. However, it is possible that your employer has selected a poor 401(k) vendor, one who adds unnecessary fees and requires investments which themselves have poor performance because they are loaded with more fees. So, if you are dissatisfied with 401(k) results through your employer, you may wish to shop around for a better deal, and you might as well pick one with some health benefits attached. After all, the Affordable Care Act mandates high-deductible insurance, so that part of the requirement is likely to be fulfilled already. Since you picked it because of disappointment with your employer's 401(k) investment results, you may encounter some resistance from the Human Relations Department. All in all, there is little value in switching until the employer mandate issue is settled -- except the value of the uproar you create, trying to get treated more fairly. However, there are a few other issues if you have an agreeable employer.

Claims Adjusting for Trivial Claims. In the first place, the HSA wanted to make it possible to skip the middle-man cost and oversight, and simply pay bills with a debit card. So an "allowable" medical expense is more broadly defined than what a health insurer might allow, or at the very least it dispenses with the cost (and delay) of insurance review prior to payment. Since the Account part of the HSA was mainly intended to pay for deductibles, it didn't seem cost-effective to subject extra costs to fruitless but expensive insurance scrutiny. It also eliminated the delay occasioned by remaining on the desk of the hospital billing department for several weeks before someone submits it to the insurer to pay -- when the debit card could just as well have paid it immediately. Just how much these thoughtless design features actually add to the cost is uncertain, because it's used as an excuse for delays which may have other causes.

Skipping Insurance Claims Entirely for Small Claims. As things have turned out, forty percent of HSA accounts have never submitted a claim. Maybe they don't get sick, but more likely the client calculates it is cheaper for him in the long run to pay his small out-patient charges in cash, while letting the Account gather compound interest. Aristotle is said to have complained that most debtors don't realize how compound interest is itself compounded, and rises with time. But maybe debtors are now smarter than Greeks in a toga. A debit card directly adds 2% to the cost, while interest rates vary with the economy. Incurring costs greater than the net is a waste of money, largely growing out of a supposition the employer is paying for this as a gift, and taking a tax deduction at higher corporate rates. That's only true half the time, but the other half haven't marshaled their lobbyists to equalize the tax exemption. Apparently, Congress believes the self-employed don't deserve this tax exemption as much as employees of major corporations do. Or possibly eighty years isn't long enough for Washington to fix the flaw. Let's go on with this, a bit.

Non-trivial Returns From Saving Small Scraps. We were saying HRSAs were a better investment than 401(k). To go forward with the logic, the client is effectively taking out a loan from his 401(k) when he pays his medical bills from it, or in cash, if the purpose is to preserve the preferable interest-bearing account. Assuming both accounts pay the same (you didn't get sick), the result is a wash. But as time goes on, the effective compound interest rate will steadily rise; so the extra profit was made without incurring any extra risk. That may not seem like much, until you employ the old maxim that money at 7% will double in ten years. Two, four, eight, sixteen, thirty-two -- it rises 3200% in fifty years. The stock market may rise or fall during those fifty years, and the client may get any one of a thousand diseases. Inflation may intervene, wars are likely to break out. But the relentless superiority of this riskless choice will persist. And get this: at the conclusion of the exercise, the client who gets sick pays no tax, while the one who was scared to do it, pays the higher progressive tax rate he attains later in life. The hypotheticals have to be carefully chosen to reach any other conclusion. But remember to get started young, because to wait ten years will reduce the multiplier from 32 to 16. The millennial generation complains the tax laws are stacked against them, but I don't see it. They are offered the chance of a lifetime, but they will only get one bite at the apple.

Is that all? Well, no, but there are competitors. The deposits in a Health and Retirement Savings Account, just as surely as the deposits in a 401(k), are occasionally subject to rather extreme middle-man costs. The stock market has steadily risen by 11% for the past century. Never mind that it's true past results can be unsound future predictions, just recall that even the "buy and hold" philosophy has seldom presented the investing customer with more than 5% net-of-inflation return. That's because inflation took away 3%, and hedging against "black swan" crashes (by putting 40% of the portfolio into bonds) has taken away 2% more. That leaves about 1% for the customer and the broker to fight about. More than anything else, this slim working margin has driven the investor to choose "buy and hold" over "market-timing". The evidence continues to accumulate that "buy and hold" is at least as successful as "market-timing", but people continue to market-time when they are desperate for the occasional big winner, never mind that big losers outnumber them. To me, the conclusion is clear the public will increasingly squeeze their friendly advisors for a wider slice of the pie. And in this, our central theme is repeated; the HRSA will out-perform the 401(k). Because the shopper for an HSA manager is the customer, whereas the choice of a 401(k) manager is made by the employer. Pass all the laws you wish about kickbacks; allowing the customer to select the manager will usually beat letting the employer do it for him. There's often nothing so expensive as getting something free.


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