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Surmounting Health Costs to Retire: Health (and Retirement) Savings Accounts

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.

To Sum Up: Health and Retirement Savings Accounts: Immediately, and A Peek at Future Advances

As an earlier section outlined, Health Savings Accounts were developed by John McClaughry and me in 1981, as a bare-bones health insurance scheme for financially struggling people. The package consisted of the cheapest insurance we could imagine (a high-deductible Catastrophic indemnity plan with no co-pay features), attached to what others have aptly described as a tax-sheltered Christmas Savings Fund. What was this duet supposed to accomplish? The Account part was originally intended for folks who must accept a high deductible to lower the cost of health insurance, but then struggle to assemble the deductible. A combined package thus became the cheapest healthcare coverage we knew how to devise -- the higher the deductible, the lower the premium. As deposits built up in the account, the remaining deductible fell toward zero, but the premium of the insurance did not rise. At that point, you could describe it as "first-dollar coverage for a rock-bottom premium." Stepping through the process should demonstrate to anyone, how expensive it had been to include the deductible costs within the insurance . It certainly compares well with so-called "Cadillac" plans, where the underlying motivation was to include as many benefits as possible, money no object, with someone else paying for it and writing off its cost against high corporate tax rates. If the government elected to subsidize our plan to provide it even more cheaply to poorer people, subsidies could easily be included for seriously poor people, just as the Affordable Care Act does. HSA is itself absolutely the cheapest, but neither it nor the Affordable Care Act is free, so additional features like charity must be supported by additional revenue from somewhere. Cheaper is simpler, simple is easy to understand.


First-dollar coverage by any mechanism generates the danger of spending health money unwisely. That undesirable feature was neutralized by letting subscribers keep what is left over at age 65, thereby generating retirement income. Retirement income is generally in short supply, and there may exist a future danger well-meaning attempts to supply generous retirements would destroy this incentive to be frugal. But right now it isn't a worry.

Other Incentives. One thing we didn't immediately verbalize was, making it a bargain entices people to save, even when they are sort of inclined to consume. We didn't think to include regular paycheck withdrawals, but that's another common savings incentive with proven effectiveness. Having loose cash does seem to create a vague itch to spend. But the HSA specifies an invitation to save for health care, using any surplus for retirement, a much more tangible appeal. With that addition, it becomes a more attractive program, while possibly appealing to a larger segment of the population without reducing its appeal to the original ones. Our reaction was that everyone was complaining about high health costs, so the more people HRSA appealed to, the better.

The real game-changer was this: When a subscriber later acquires Medicare coverage, anything left in the fund is automatically turned into a tax-exempt retirement fund, an IRA. As enrollments in HSAs began to boom, it was realized this provision creates an unmatchable retirement fund if someone puts extra money into the account. I wish I knew whose idea that was. So you might as well say the basic package has three parts: a high-deductible health insurance, a spill-over retirement fund, and a Christmas savings fund to multiply savings with compound interest. It is a savings vehicle for two sequential stages of life, with the tax advantages of the first stage getting it on its feet. The separation of the account from its re-insurance, also separated the incentive to save from the desire to share the risk. Adding compound interest adds particular attractiveness for the later stage of life, because compounding takes a long time before it means much. It connects two benefits end-to-end, lengthening the time for compound interest to become meaningful for the second one, as it would not if it waited for retirement to begin. We eventually realized the deductible-funding and retirement-funding Christmas savings account package was the most attractive investment vehicle most ordinary folks could find; beating it as a retirement fund was therefore nearly impossible.

Hence the overall strong incentive to save, sadly missing from every other form of health insurance. We strongly suggest adding this feature to Medicare, which badly needs some such incentive, although retirement would be in parallel, not sequential. Experience shows this unique set of incentives to buy HSA were effective, so a 30% reduction in premiums for total health insurance began to be demonstrated among pioneer clients, not merely claimed in theory. The recognition of all these advantages led millions of frugal people to sign up without an expensive marketing effort. Everything seemed to fall in place, making us quite satisfied with the result. Even though mandated extension might have speeded up acceptance, slower adoption avoided the early catastrophes of taking on more than could be handled.

So that's where HSA stands today -- the best little health insurance idea available anywhere, unless someone monkeys with it. Even the remote possibility of getting very sick, very often, was covered by adding the feature of a top-limit to out-of-pocket costs, paid for by dipping into a small portion of savings generated by other features. Anyone who thinks of a better health insurance plan than this one, is welcome to offer it. Let's whisper a reminder: the policy is owned by the individual rather than his employer, so it doesn't suddenly stop when you change employers. To a different audience we could whisper, it could bring another feature closer to an end, the business of paying for Medicare with debts which have to be borrowed from foreigners. The Account gathers interest, instead of costing interest charges. The best part is: it induces the subscriber to hold back from using the account, saving it for more distant requirements, which otherwise come without warning. Paying for your old age is wonderful, but starting to save while young is vital, and more likely to work. Most plans now maintain an upper limit to the subscriber's out-of-pocket costs, protecting against a second illness with its second deductible. When we say, "That's all there is to it," we really mean that's all the advantages which have so far emerged. It's ready to be renamed HRSA, the Health (and Retirement) Savings Account.

Technical Amendments, Needed at Present.

Now, let's pick the nits, noticing how hard it gets to improve on it. If Congress could pass a few amendments, the following flaws could be more or less immediately repaired:

1. Full Tax-Deductibility. Attractive as it is, HSA still isn't as fully tax-deductible as the health insurance many employed people are given at work. The savings and retirement portions are indeed tax-sheltered, but unlike some of its competitors, the high-deductible health insurance itself stands outside the funds (as what insurance experts might call re-insurance) and isn't covered. Employers get around this difficulty for their employees by buying the insurance themselves and "giving" it to the employees. Without monkeying around with this rather dubious maneuver, we propose the premiums for the Catastrophic health portion of the HRSA might instantly become tax-exempt if the Savings Account paid the premium. That would appear cheaper to the Treasury, than proposing to make the whole package deductible. Because the other parts are already tax-exempted.

To permit something like that would require a one-line amendment to the HSA enabling act, but would restore fairness to the system, and bring out how much cheaper the Health Savings Account really is. Making it cheaper means more people could afford to buy it, thus relieving the Treasury of the need to include those people under the Affordable Care Act. That compensates for some of the loss of revenue to the IRS of making the Catastrophic Health Insurance tax-exempt. Regardless of how the CBO scores this complexity, it should be remembered that poverty is not a lifelong condition for most poor people; after a temporary period of poverty, many if not most of them rise toward becoming full tax-payers. Equal treatment under the law is itself worth something; it could alternatively be provided by lowering the corporate income tax. But that's not self-evident, and politically hard to explain. If the Congressional Budget Office would extend its dynamic scoring to include retirement taxation on the HSA's eventual compound interest (instead of limiting its horizon to ten years), it would prove to be better to chose the alternative of letting the Accounts buy the re-insurance.

2. A better Cost of Living Adjustment for HSA deposit limits. There is presently an annual limit of $3350 for deposits in Health Savings Accounts, whose limits have seldom been raised. This new COLA should be formalized into a continuing cost-of-living adjustment which is somehow related to the current rate of inflation in the economy, and perhaps takes account of the transition to HRSA by people over age 60. These late arrivals simply cannot catch up within the present deposit limits, even if they possess the savings to do so.

3. Age Limits for HSAs It is a quirk of compound interest (originally noticed by Aristotle) that interest rates increase with the duration of investment. Consequently, much or most of the revenue appears after forty years, and consequently the HSA gets progressively more valuable with advancing age. To put it another way, young people contribute more time for interest to grow, old people must contribute more money. At present, the HSA age limits are set to match employment, but the HSA will inevitably focus increasingly on funding retirement. Removing all age limits might go a little too far, but would substantially increase the amount of investment income generated, at almost no extra cost to the government. It might also supplement the platform for funding childhood health costs, a problem age group which stubbornly resists improvement. It might greatly enhance revenue for older subscribers as well, the surplus from which could be used at their death for grandchildren.


Extending the age limits would potentially also serve as a platform for re-adjusting dangerous imbalances in the healthcare financing system. We are fast approaching a demography of thirty years of childhood and education, followed by thirty years of working life, followed by thirty years of retirement. But substantially all of the revenue comes from the middle third, while the remaining two thirds of the population contain most of the health costs. To some extent, this is unavoidable, but the whole health financing system becomes a dangerously unbalanced transfer system for well people to subsidize sick ones. It is possible to foresee the beginnings of class warfare, based on age alone. Consequently, society would be well served to create the more stable system of subsidy between yourself as the donor and yourself as the beneficiary. The alternative is to continue the process of having one demographic group collectively subsidize two other groups of strangers who generate most of the cost. Eventually this might lead to the well people dumping the burdensome sick people. I hope I am unduly concerned, but to extend the age limits for individual self-financing seems a very cheap way to begin stepping out of that particular mud puddle.

Finally, there is the conflict with inheritance laws. By extending the age limits for the funds to the legal boundary of perpetuity (one lifetime, plus 21 years), the ability to transfer funds between generations is enhanced without the perplexities of inheritance. It would be particularly useful to permit the fund to remain active until a grandfather's death, or even extend to the birth of his designated grandchild's 25th birthday. Like a trust fund, it would gather interest after the death of the owner, and leave his selection of heir to the last possible moment, if he chooses.

To return to the subject narrowly at hand, it is easy to see that so many small projects are made possible, you end up with an aggregate of goodies which eventually sink the lifeboat. Something must be chosen, something must be dropped, and the choice should be delayed as long as possible, left to individual choice as much as possible. It can be commented in advance that retirement costs potentially dwarf other costs, and small single payments held at interest for long stretches have the greatest efficiency. There seems little choice but to constrain retirements to what the individual can manage independently, rather than permit retirements to absorb all the benefit of a new windfall. The theme is, and should be, one step at a time.

As an aside, it's true the subscriber to a Health Savings Account is not fully covered in his first few years, until the account builds up to the deductible. At first, that was a concern, but it has proved largely unnecessary to provide for it among young healthy subscribers. Apparently, by the age hospital-level illness becomes common, ability to meet the deductible has mostly been achieved. Nor has it proved necessary to resort to sliding-scale deductibles hidden in the slogan, "the higher the deductible, the lower the premium" -- probably because conversely, lower premiums lead to more money for saving. These features might be reviewed when self-selected frugal applicants taper off, since HSA enrollment has favored younger enrollees, so far. For the moment, sales incentives seem adequate; everything else may be indirectly changed by HSAs, but very little is directly changed.

Future Expansions.

How far these three short amendments would extend retirement solvency, is hard to predict into the future, but it would be considerable. Aside from any improvement never seeming like enough, it is almost impossible to guess the future timing of health costs, even if you can see them coming. But while the amendments might assure a comfortable future for Health and Retirement Savings Accounts, they do seem unlikely to address the full costs of retirement, which are usually undefined and often overly ambitious. So the problem for many, many afternoons' deliberation, would be to expand the potential of HSAs until they become objectionable for competing concerns. For that, I have four additional proposals which might work, but inevitably collide with professions who would be quick to suggest narrower limits. Let's describe them, while waiting to assess objections from those they would discomfit:

1. A re-insurance scheme (insurance company to insurance company), called First and Last Year-of-Life Re-Insurance.In the far distant future, health insurance will surely concentrate into the these two years, so we get our directions approximately right if we start there. It's superimposed on but untangles many cross-subsidies, and extends the duration of compounding within the present system. A ninety-year transition period for lifetime HSAs is too long and must be shortened somehow before whole-life can be feasible. In retrospect, it is difficult to understand how the insurance industry managed to establish whole-life insurance; certainly, it could not have been based on actual experience. The present proposal is a reinsurance system, invisibly supplementing present procedure-based payment systems but extending their duration of compound interest for a full lifetime-- we suppose, but cannot prove except by waiting..

In summary, a small escrowed sum at birth--possibly three hundred dollars-- grows undisturbed to astonishing size in eighty to a hundred years. At death, the fund would easily reimburse Medicare for its demonstrated expenses during the terminal year of life, essentially providing a quarter of Medicare expense at a total cost of three hundred dollars. A somewhat larger deposit, perhaps another hundred dollars, might also produce enough surplus after reimbursing Medicare, to take care of the first year of life of one grandchild or equivalent, although there appears to be so much surplus from last-year, that the two approaches could proceed from both ends at the same time, to shorten the transition. Available figures for obstetrical costs are not available, but the approach might be improved by considering obstetrics as a cost to the baby. The main problem with this transition issue is not its cost, but its extended duration. Finally, it is possible to be casual about some of these projections, when a contingency fund of about $100,000 can be provided by an initial investment of $300, providing it follows the same compounding path as the investment itself.

By placing these funds in escrowed individual Health Accounts, the suspicion is addressed that the money might be spent on battleships or otherwise diverted during its long period out of sight. About a quarter of health costs would be replaced, and essentially removed; although the accordion principle might adjust it larger or smaller. Birth and death years are the two most expensive in human life. Almost no one pays his own costs for them. And they affect 100% of the population. The Health Insurance Industry, now precariously balanced on questionable cost-shifting between demographic groups of strangers, would never be the same. Particularly since private industry would expect to finance the reinsurance out of reduced write-offs from corporate taxation.

2. Medicare should be modularized but without other basic change, so recipients can buy pieces they do not need, using the invested proceeds for retirement. Sometime during the next fifty years it can be predicted at least one of the five most expensive diseases (Alzheimers, diabetes, cancer, psychosis, and Parkinsons) will be inexpensively cured, once the initial cost increase is absorbed. We need a way to fine-tune the transfer of such medical savings into retirement income, understanding many competitors will hope to divert the windfall. Redirecting the Medicare withholding tax makes an excellent way to channel the funding, as would reductions of Medicare premiums. Scientifically, Medicare is eventually destined to shrink as we find cures, but funding the resulting longevity must be given first call on the savings.


3, The investment component of Health Savings Accounts should be dis-intermediated.The stock market has produced--for a century--10%-11% long-term returns on large-cap stocks, 3% inflation, and less steadily 4-5% on bonds. The volatility is much less than most people imagine, and there is every reason to suppose Index funds of these entities should perform better with less volatility at far less cost, perhaps 0.1-0.3%. The days fast fade, when the public will continue to surrender the present level of stockmarket transfer costs and fees, which now sometimes erode investor return to as low as 1%. The fast-growing and simpler system is "passive" investing with index funds, and its goal should be an average return to the retail customer of at least 6.5% after inflation and costs. The struggle will be a fierce one, but the retail finance industry must re-examine who is at risk, and who is rewarded for taking that risk.

4. The center of medical care should migrate from medical centers to shopping centers attached to retirement villages. Architects report it will always be cheaper to build horizontally than vertically. Since we seem destined to spend thirty years in retirement, and the principal occupation of retired people is taking care of their own medical needs -- the wrong people are doing the medical commuting. Teaching hospitals were located close to the poor, in order to use them for teaching material. But now "meds and eds" are fast becoming the principal occupations of high-rise cities. If there is ever a good time to place medical care closer to the patients, this is it.

And if ever there is a way to put the doctor back in charge of medical care, decentralization is the way to do it smoothly. We will always need tertiary care, but we don't need indirect overhead, skyscraper construction, or multiple layers of overcompensated administration. Even continuing education is becoming a revenue center. No one can claim the present centralization made things cheaper, and the disadvantages of medical silos certainly call the quality issue into question. The Supreme Court failed us in the Maricopa Decision; so let's see what Congress can do with reconciling the Sherman Act with the Hippocratic Oath.

Questions about Health Savings Accounts

Pertinent Questions: Three Current Tweaks to HSA.

1. Tax Equity. An alternative way to achieve this is to reduce corporate income tax rates, since the tax deduction for donated employee health insurance is the main cause of making health benefits cheaper for the employer than wages would be. And health benefits are the main reason corporations pay so little of the published tax rate. Once benefits are equal they can be reduced, as eighty years have demonstrated. Tax equity first, then reduction, is the only way to reduce taxes.

2. The transition-to-a-cheaper-system needs help, time, and more brackets for those who are already close to retirement. The private sector is inherently more flexible than the public one in dealing with inflation, stock market volatility, and changing occupations. However, the public sector could be readily streamlined a great deal.

3. Longer durations for compound interest adds flexibility and far greater returns without added cost to the government or client. In long durations, 6.5% returns rise far more rapidly than 3% inflation. This spread is an inherent feature of compound interest. The spread between the curves at 11%/3% is astounding -- and costless.

Pertinent Questions: Four Future Deep-Rooted Changes For Health Care, using HSA.

1. Although the whole-life insurance industry managed to do it, a 90-year transition period is very difficult to plan for. The last-year of life proposal cuts the transition period to a manageable size, while providing funding from the start. The first-year of life addresses the otherwise almost impossible task of pre-funding the year of your birth. The present extended period of education before employment is being addressed by a declining birth rate. National defense alone argues this is an unwise policy to pursue. Luckily, the anti-perpetuity laws allow inheritance up to one life-span plus 21 years, an adequate period. The great danger in this is a revenue-starved government. Unfortunately, if public sector revenue became 100%, they would still claim to be starved.

2. The public does not realize that Medicare is 50% subsidized, and therefore a single payer system aspires for the same treatment. We are already borrowing from the Chinese to pay for Medicare. As long as we have nation states, this is too dangerous to continue. Although Medicare is regarded as sacrosanct, anything which cannot continue will stop, one way or another.

3. The balance between the harmful effects of having a rentier class must be balanced against the harmful effect (of overtaxing them) on the incentives of elderly rich people. So the proper balance probably varies with the state of the economy. When two thirds of the population are to some degree rentiers, the situation must be approached with care. More retired people must be employed at home, while the finance industry must make more effort to prove its worth.

4. The business school and the law school are fast replacing the medical school as the preferred route to control medical care. The computer industry is not yet ready to join them. Controlling the hours and conditions of the workplace is not an acceptable route to control of a service industry, and in the long run is self-defeating. The only way to gain respect of a professional is to be able to do what the professional does, only better. Just how you accomplish that without going to medical school has not yet been explained, and "price fixing" is not an adequate description of its essence. The Professional Standards Review Organization (PSRO) devised by Senator Wallace Bennett of Utah comes pretty close, and although the AMA narrowly rejected it, reconsideration is recommended.

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.

Traps, Pitfalls and Fallacies in Insurance Alternatives

Let me make a general statement about insurance: it's a little surprising any of it works as well as it does. Most of us know the story line of Shakespeare's Merchant of Venice . It boils down to describing how a fairly decent merchant got into big trouble by pledging his life (in effect) to fulfilling the terms of his maritime insurance, which of course he never should have signed. There have always been terms of insurance no one should agree to, and no court should enforce; this was certainly one of them. However, there has long been a real need for maritime insurance, so over a period of several centuries an honorable, profitable and workable scheme was gradually patched together. Today it is possible for a shipowner with doubtful finances to make enforceable arrangements with insurers thousands of miles away, under terms of a contract written by shrewd lawyers, to pledge substantial sums derived in turn from investors who know very little about insurance, ships or navigation, to cover ships sailed by captains over whom they have no physical control, commanding crews who are often of the worst sort. It actually seems to work, if everybody involved is very careful. And the same thing is true of health insurance. A workable system can be constructed, but many schemes forget their premises.

Regulations vs. Incentives. There was once a time for example, when the State Insurance commissioner was expected to protect the customer from claims an insolvent insurance company was unable to pay. Insurer insolvency is a main risk in buying any insurance. In recent years, however, insurance commissioners have appeared who have the main goal of protecting the customers from being overcharged. The two goals are in conflict, one pushing premiums up, the other pushing premiums down. The accounting procedures have grown arcane, dual systems of cost accounting are imposed, reserves are hidden. Many states require solvent companies to bail out an insolvent one, so an occasional slick operator escapes with a quick profit before the surviving competitors can protest. And so forth. When the state Medicaid program becomes the worst abuser it is extra difficult to trust the state insurance commissioner to protect anybody. This resembles the environment which existed before the business community organized the non-profit Blue Cross plans. The deficiencies of service benefits and rising costs then seemed a small price to pay for a workable system. After a century, of course, the employer-based system has trouble defending them.

Dread Diseases And there once was a time when newsmedia agitated worries about certain diseases, so Dread Disease policies quickly appeared, insuring against polio or cancer, or whatever else was in the news. When hysteria subsided, people dropped these policies, and the insurance company could legally walk away with the unpaid claim reserves. As a matter of fact, almost all of the profitability of term life insurance even today resides in the expired policies of those who drop their policies; like exercise clubs for the flabby who could never actually accommodate the number of well intentioned subscribers they enlist.

What Has This to Do with Health Insurance? Health insurance, being of more consequence to survival than exercise is, badly needs a system of multi-year coverage to protect customers from this hustle among others, and nowadays, against the same sort of dangers from government as it crowds itself into the health field, with eminent domain, escheat laws, devalued currency and just plain corruption. Unfortunately health costs are still too unpredictable to permit cost predictions over long time periods. We would greatly like to go from term health and retirement savings accounts, to multi-year ("whole life") ones, but the prospect of predicting health costs a century ahead, is too daunting for a major corporation which actually intends to pay its bills.

On the other hand, it raises a big question whether even employer-based health insurance would be dropped by many well persons who get into non-medical financial difficulties -- except they mostly don't own their policies. Forget the tax dodge, forget the inequity with smaller employers, prevention of employees dropping term insurance is most likely the underlying purpose of businesses giving health insurance to employees. They wanted to make sure their employees were treated for illness before the business itself got disrupted by absenteeism. Employees who own their policies might very well drop them, so the potential value of having insured employees with improved health must be balanced against its evident cost. But as costs rise, at some point almost any IRS agent would question the imbalance of purposes. What seems to have tipped the balance was the discovery that tax exemption without loss of control could be created by giving it to employees as a gift, while the higher tax rate for corporations actually created higher tax exemptions for the employer than the employee. Times and attitudes change, but the argument that volume purchasing and other features secondarily made the health insurance cheaper for the employee seems to have been persuasive. The fact that non-union employees of competitors were treated unfairly, was highly unpersuasive until job mobility significantly increased. And converting high corporation taxes into high corporate tax deductions is increasingly seen to be short-term sophistry. The time is increasingly moving toward corporate willingness to surrender the tax inequity, with only unions holding out strongly against it. The easiest way to accomplish it would be for HSAs to be able to purchase it, since the rest of HSA is tax-exempt. Employers would probably prefer to use it as a bargaining chip in general tax reform legislation. At this point it scarcely matters which approach is adopted, either giving tax exemption to everyone, or denying it to everyone. In the present climate, giving it to everyone probably has the edge. Equity between those with employer-based insurance and the rest of the population can either be achieved by removing it from one group or extending it to all others. The price of not extending the tax shelter to the catastrophic insurance portion of an HSA, is an unnecessary price for everyone who signs up for an HSA. The cost in Treasury revenue now begins to be less of a consideration than restoring fair play to the basic economy. Revenue can be restored by other means, but regaining a general atmosphere of equity is much more difficult.

Aside from this issue, catastrophic indemnity insurance continues to be confused with dread disease insurance. Let's insure cancer, but not indigestion, would be the general idea. One alternative is: Let's insure illness, regardless of cause. But our goals have become confused; we should be advocating insurance against major health costs, regardless of medical cause as long as it was not collusive. When you come right down to it, the only reason to do all this medical investigation of claims, is in preventing providers and patients from milking the insurance company. And a better way to do that is to have the patient pay cash and be at subsequent risk seeking re-imbursement for his payment. The relative cost of the two approaches needs to be re-studied. In particular, it would be important to seek ways to separate direct from indirect costs, since the system of burying research in indirect overhead makes research and teaching into beneficiaries of any reimbursement abuse. In the outpatient area, the experience of HSAs has been, the issue is not an important one.

Disability Insurance Has been praised by some as an alternative to funding health insurance, and amounts to concentrating funding to diseases which entail extended disability. It is true the really astounding health costs have usually included a big dose of disability rehabilitation, and in fact the organized health groups have concentrated considerable attention to it. However, these efforts have largely been subsidized experiments, and they have yet to demonstrate overall cost-effectiveness, themselves. When teams of six to eight professionals devote up to two months to a stroke patient, the cost can be overpowering at any income level, and only 4% of stroke victims currently receive fibrinolytic therapy. Extending the same generosity to 96% of stroke patients would be ruinous to this approach. Important standard of care conclusions can only be reached when 80-90% are treated, at least in a few regions, followed by 80-90% rehabilitation, followed by observation of the cost effectiveness for some time afterward.

When the net benefit to the patient is often meager, the question is whether the rehabilitation approach must change or disappear when the research subsidy does. Extending it to helicopter and police rescue, we do not have even preliminary data to encourage this essentially rehab approach as a cost saver, but it certainly sounds expensive within the present state of the art. The current price of ambulance service suggests this is an area of considerable abuse. At a recent medical symposium on the topic, the audience was asked how many would prefer the disabled outcome in 30%, to dying of the disease, and very few hands were raised. These investigations must be conducted before final decisions can be made, but the early results are a warning. The advanced age of most stroke victims suggests this noble effort at best will not cause much economic improvement, unless the rehab becomes much less elaborate. We hope treatment advances will appear quickly, but national cost effectiveness changes are so far, only partially encouraging.

Home Health Care is also quite expensive, but most people would prefer it to institutional care. At the moment, home health care insurance encounters its main problems from government caprice. If Medicare cannot be depended on, or if a benefit can be removed at the stroke of a bureaucrat's pen, the finances of this sort of insurance will remain precarious. The retirement village is probably a more viable approach, because most of them are located in suburbs, and could also serve the suburb as a partial substitute for hospitals, with doctors' offices, laboratories and radiology serving a dual community. They are not cheap, but are probably cheaper than holding on to oversize underused homes, inconveniently located for medical service. By far the greatest problem with out-of hospital settings is the instability of rulings by insurance companies and governments.

The Subsidy Issue: Crossing the Line Between Private Sector and Public Sector

Although they seem to have the same design, employer groups don't fit the ACA plan very well. You will notice in current reports of 20% boosts in the individual contracts because of the Affordable Care Act, there was no mention of employer groups. Their rates are negotiated privately, and usually at lower rates. They usually pay a different share of subsidies, too. In fact, it can be easier to deal with a plan with no subsidy at all, than with one which requires fitting partial pieces together. Employer groups are often further subsidized by state and federal income tax deductions, with puzzling circular dependence. Employers make young employees subsidize older ones, while the ACA has rich ones subsidizing poor ones. (Young employees are seldom richer than older ones, so there's a mismatch.) Young employees think pf buying protection against unexpected illness, while older employees think of buying necessities at what they hope is a discount. Some employed subscribers then find they are better off switching to Medicaid, while others conclude their health risks cost less than the penalties for having no insurance at all. Some genius may be able to reconcile these issues, but perhaps it would be better to start over.

In the case of the Affordable Care Act, a fear is raised, migration away of either subsidized or low-cost clients would raise the premiums of those who remain. The suggested compromise emerges that if government subsidies are resorted to, they should be unwrapped from the service delivery package, and funded independently. So long as the subsidy is distributed by the same criteria for everybody, it might pass muster. To emphasize: mixing the subsidy with the service package always causes trouble.

Since Health Savings Accounts were begun independently of subsidies, they sometimes face the unjustified taunt they "do nothing for the poor man." If equal subsidies were distributed, the subsidy issue could become independent of health care. It's too bad this wasn't examined from the beginning, since it definitely hampers the Affordable Care Act more than it helps it.

Our culture is unwilling to subsidize poverty, for fear of encouraging it. We are somewhat more willing to subsidize poverty because of addiction, but prefer to subsidize it less than poverty caused by other diseases, like blindness. But hierarchy doesn't always stop with different diseases; we might prefer to subsidize one race, one region, or a whole host of other conflicting preferences. Nevertheless, it seems definitely superior to subsidize individual poverty -- as such -- than to get into quarrels about the relative shamefulness of causes for health poverty, or the politics of their funding. My present conclusion is: if you want to extend the same health subsidy to the HSA as is extended to ACA, go ahead, but stop using the addition of subsidy as a reason to prefer one payment system to the other, because subsidies are OPM (Other People's Money).

Perhaps, more constructively, poverty could be treated as economists are beginning to treat unemployment -- the net absence of affluence, comparable to unemployment as the net absence of employment. This would have the distinct advantage of regarding either employment or affluence as in two huge temporary states of flux, rather than as four permanent population subgroups. The numbers are not exactly comparable (4.6% in the case of net unemployment) but would remove the confounding effect of sickness causing poverty for varying lengths of time, and poverty creating illness. A small demonstration program in several states might clarify whether this approach could lead to some improved method of subsidy, or even a better method of management. That's about all I wish to say on this matter.

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