Philadelphia Reflections

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

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Health Savings Accounts: Classical Model
New topic 2015-09-03 22:42:59 description

Classical Heath Savings Accounts (C-HSA), Brought Up to Date

We begin this second edition with a shortened description of the Classical variety of Health Savings Accounts. There had been over fifteen million subscribers to this idea by the time of writing the First Edition, and since then many more people have joined. HSAs are no longer a novelty, requiring a great deal of explanation.

However, newcomers may need some basic information, and after all, there are three hundred million other people who remain to be enlisted. For them, we probably need to explain that the classical Health Savings Account was first conceived by John McClaury and me in 1981, endorsed by the American Medical Association a year or two later (I was a member of their House of Delegates at the time), widely publicized by John Goodman in his book, Patient Power, and taken up by the Cato Foundation, among many other friends. It was enacted as a pilot program under the title of Medical Savings Accounts in 1996 and finally enacted permanently as Health Savings Accounts in 2003. Bill Archer, Chairman of the House Ways and Means Committee's Subcommittee on Health is generally given credit for maneuvering the law through Congress, but a great many others helped a lot.

The actual content of the law is very simple, containing only two main parts. The first of these is a tax-exempt saving fund, and the second is a linkage to a high-deductible indemnity health insurance. Anyone between the ages of 21 and 66 is entitled to join, and after age 66 any remaining balance of the HSA changes into an IRA (Individual Retirement Account). The distinction is, expenditures from the HSA are entitled to a second tax deduction, provided they are spent on legitimate medical expenses. For the whole duration of the period of eligibility, HSA is the only "qualified "retirement account entitled to two tax deductions, the first when money is deposited, and a second if it is spent on medical care. This configuration of double-deduction is common in Canada, but in the US it is unique. The underlying reasoning was that Medicare would replace it at that age, and in addition, there were laws prohibiting payments between two federal programs for the same purpose. It later turned out these age limitations interfered with suggested expansions of the program described later in this book, so one of the modifications now suggested is some appropriate amendment of them.

It is useful however to remind people that Health Savings Accounts are quite different from Health Spending Accounts, which are entirely different. These other accounts contain a "use it, or lose it" spending limitation to the current year, leading to surges of unnecessary spending on prescription sunglasses, etc. at year-end. These spending accounts are definitely not the same thing as savings accounts, but they would come close if the "use it or lose it "feature was removed.

Furthermore, the various vendors of Health Savings Accounts have proved to be ingenious in providing alternatives within the rules. There is even a website displaying five examples of typical variations, and no doubt more will appear. Generally, those variations respond to changes in the economic scene, since many investors remember the high-interest rates of a decade ago, whereas others focus on the negligible rates currently available, but look ahead to a return of high ones. No doubt short sales against anticipated falls in short-term funds rates will appear, and all of the complexities of Wall Street may eventually make an appearance. Investors in small towns are particularly warned to consult a wider range of vendors by reviewing the choices on the internet, reading some national journals devoted to the subject, and similar means of looking beyond limited choices. The original idea was certainly to permit the subscriber to shop around for what suited him best

We, therefore, venture a recommendation, with the usual warning that past performance does not guarantee future results: we favor the purchase of low-cost index funds mirroring the entire American stock market. For a price of fewer than ten dollars a trade, widespread diversification can be obtained and maintained in what John Bogle calls "passive investing". That market has maintained a gross return of 11-12% for a century, and even after inflation is very likely to net 6% or 7% to the investor who adopts a "buy and hold" strategy. Few brokers will assume any risk for small investments unless the customer commits for long periods of time. One available strategy is to over-deposit when the account is opened, but even there the law currently limits deposits to $3300 a year, and many brokers have a $10,000 minimum. These limits, like the age limits, are becoming obsolete, and in any case, should be expanded to a lifetime limit rather than an annual one. Furthermore, it seems useful if some impartial body were given the authority to re-examine all such issues annually, particularly emphasizing the customer's ability to change agents when dissatisfied. Remember that investment agents are not required to put the customer's interest ahead of their own; they are not "fiduciaries". So be cordial, but act with care.

Originally published: Thursday, October 08, 2015; most-recently modified: Wednesday, May 15, 2019