Philadelphia Reflections

Lifetime HSA and Whole Life Insurance: A Basic Difference

Over the years, much experience and lore have accumulated about running a life insurance company. Because the managers ordinarily are responsible to others who have risked private capital, more latitude can be extended to them than to taxpayer-owned entities. Consequently, it may be wise to obtain experienced counsel to suggest some business limits and latitudes which need to be authorized by law. The following is meant to suggest some areas which may need attention. And a lifetime Health Savings Account has at least one unique difference with whole-life insurance. A moment's thought about Lifetime Health Savings Accounts immediately highlights it. Life insurance has only one benefit claim, the death benefit. Once the flow of premiums begins, only one liability by a life insurer has to be made, the length and risk of individual longevity. The relationship goes on autopilot and a rough match can be made between the pool of bonds and the pool of policies at any time, adjusting only for policy additions and subtractions, or for fluctuations in the bond market. A Health Savings Account, on the other hand, must anticipate a possibly constant stream of deposits and withdrawals.

It is probably true, more money will be deposited in whole-life insurance in response to a fixed annual premium billing, than if deposits are optional in date and amount, so it probably would be wise for the manager of a lifetime Health Savings Account to calculate annually what deposit is needed, for each client to meet his goal, judged by his age and past progress. He should send reminder notices for the "suggested" amount. The purpose of health insurance is to provide money for healthcare when absolutely needed, building up a fund for potentially even more urgent future emergencies. We have partially surrendered the right to mandate the amount, in favor of creating incentives to save it. Consequently, there will be a more constant drain on the investment reserves, matched by a somewhat greater inflow needed from outside sources. The Law of Large Numbers will smooth this out as it does with bank balances, but some volatility is unavoidable.

Since the general inclination is to limit the Catastrophic health coverage to hospitalizations, the attrition to their independent reserves in the account balance should be constrained (not limited) to paying at least one deductible, by adding one deductible to the escrow section, to reassure the hospital it is available. The non-escrowed balance would then more closely reflect the growing retirement savings earned by the arrangement. Since the Catastrophic Insurer is ordinarily an independent company, coordination is essential for long-term coverage. We can get more specific, but for now, the risks to be managed are outpatient costs, less frequent but larger inpatient deductibles, and what for now we can call "all other". All three could usefully use reasonably independent escrows, which repeated display would encourage.

Overdrawn Claims. Since any client might be hit by a truck within a week of establishing an account, new customers present the biggest problem with getting escrowed reserves established. A large front-end payment can be required, and eligibility for benefits can be delayed. Lines of credit may have a place. Otherwise, established customers must fund and be compensated for the risk of early claims. Most organizations will probably elect some combination of the several approaches, with some combination of selecting which phase of the combined insurance should or should not subsidize the others, and how it should be repaid, and at what age. Bond issues are a possibility.

Overestimated Reserves. In the long run, solvency will depend on deliberate over-reserving, gradually reduced as experience accumulates. The basic premise is young people are comparatively healthy, whereas most of the heavy sickness costs will appear as the client approaches and attains retirement, many years later. Compound investment income will grow over time. There may be periods of mismatch between accumulating and invading reserves, so there should also be a provision for intergenerational borrowing and repayment, the size of which will be established at the onset. Every effort should be made to reduce these shortfalls by overestimating the need for them, possibly based on archived statistics from the term-insurance era. Nevertheless, future shortfalls and future bubbles will both be steadily predictable, and unexpectedly volatile, so over-reserving must be seen as permanently advisable. The consequence of all this is a continuing need for some allowable non-medical use of surpluses, such as conversion to retirement accounts, in order to generate reluctance to invade the reserves. The importance of this easily overlooked necessity is very great.

Proposal 8: Congress should state the principle that necessary Health Savings Account reserves should be somewhat overestimated at all times, linked to the incentive that individual non-medical uses of surpluses should be permitted at times when they are generally unneeded for health purposes.

Underestimated Reserves. And almost of equal importance is the need for early warning when reserves are threatening to become inadequate, in spite of every effort to overestimate them. Some sophisticated body must be created to oversee the growth of aggregated reserves, mandating increased contribution rates from subscribers. Since some subscribers could discover an increased contribution rate is a hardship, the oversight body must have the right to reduce benefits to uncooperative subscribers. That is, instead of reimbursing at 100% of the cost, they may have to impose a seldom-used rate of less than that. In order to perform this unpopular task, the oversight body must have access to better information than the public does, to be in a position to impose small steps rather than big steps. Under all these unpleasant circumstances, Congress could make the upper limit for contributions more flexible. At the moment, it is $3300 a year. However, while that amount now seems adequate enough, the figure is entirely arbitrary, probably set to prevent speculators from abusing the tax exemption. Therefore, if the upper limit is raised to address underestimated reserves, money might well be forthcoming to address the underestimate, which by then might have proved to be no underestimate at all.

Proposal 9: Congress should authorize the Executive Branch to raise the upper annual limit for deposits to Health Savings Accounts, whenever (and for such time as) average HSA reserves fall below an advisable level.

Originally published: Wednesday, October 15, 2014; most-recently modified: Sunday, July 21, 2019