Philadelphia Reflections

Health Savings Accounts: Visions for New Prosperity

Yes, it's true, I have written and published a book, to be released November 1, 2015, as a review copy. It's called Health Savings Accounts: Visions for Prosperity, with general distribution to follow as soon as the printer arranges it. As the title suggests, it has new slants on a program I helped invent in 1981, plus revised visions for the future. It was not written as a political pamphlet, although six candidates for President have endorsed HSA as their healthcare platform, so it's inevitable it will receive partisan treatment.

SYNOPSIS. As John McClaury of Vermont and I originally envisioned it, the Health Savings Account was to have two parts: A tax-exempt savings account, plus a high-deductible ("Catastrophic") health insurance policy. Its purpose was to extend income tax deduction to that half of insured subscribers who were not employees of companies which gifted the insurance to employees. Seventeen million people have subscribed up to January 1, 2015, and about a million more are added every year, so far depositing 24 billion dollars. But it's still not fully tax exempt.

In the early years, I suspect tax-free investing in high-interest savings was the attraction for many. (HSA happens to be the only retirement fund, tax-deductible both when you make a deposit, and when you make a withdrawal.) When interest rates declined from the 18% level, I suspect attraction shifted to its convertibility at age 66, to an IRA (Individual Retirement Account), so you might then overfund it to an annual limit of $3350. You can then use the augmented surplus for retirement income, unless you get sick and die, first. HSA doesn't give subsidies to poor people, but then neither does the Affordable Care Act. The ACA merely takes tax money and distributes it to poor people. Health Savings Accounts could easily do the same if the government would relax its monopoly of charity care. High-deductible health insurance is required but is not tax-exempted, as it would be, if HSAs were permitted to pay the premiums on behalf of the owner. That feature lacks only a one-line amendment to the HSA enabling act. Perhaps deductible-flexibility would be another good addition. A friend of mine has a $25,000 deductible policy for a $460 premium. That illustrates: the higher its deductible, the lower its premium.

That describes Classical HSA. In the book, I propose several additions for new needs in a New HSA. Life expectancy was 47 years in 1900; today it's 84. Compound interest has longer to work; investment techniques are far cheaper. For a century, long term investments in the stock market have yielded 11%. Subtracting 3% inflation, the net return for passive investment in total-market index funds is 8%. To be safe, we estimate 6.5% returns, which make it double every ten years, so you can do the math in your head. From age zero to 90, it doubles nine times, to 289 times its original size (2, 4, 8, 16, 32,etc). While past experience won't guarantee future performance, this sounds as safe as you can get. If the stock market drops 50%, you're still far ahead. The investment potential of Health Savings Accounts produces new dimensions of safety and yield. Throw in health insurance, and you get yourself quite a deal.

Increased longevity offers other surprises. Grandparents become a reality instead of a legend in their families, sickness migrates from workers to retirees. That's not entirely good, because the sick can't earn, while those earning money increasingly don't get sick. That's a remnant of 1930 employer-basing. Health insurance has become a huge transfer system, top-heavy and politically vulnerable. When one-third funds the other two-thirds of anything, look out for revolts. I propose Health Savings Accounts as a vehicle to transfer funds between ages without pooling them, either from grandparents to babies, or babies to grandpa. Savings accounts retain individual ownership while earning income. Compound interest curiously rises over time, assisting forward transfers. Transferring backward from older to younger requires skipping forward in generations. It's too involved to explain in a brief synopsis, but that's the idea. Three hundred fifty dollars at birth could become $350,000 at age 90. If Obamacare would pay for itself, Savings Accounts could take care of everybody else for $175 at birth. If you don't privatize Medicare, it only costs $87.50. Linking pieces together, the individual can transfer money from one stage of life, into another where he spends it. It's his money, and only the government can allow it or prevent it.

There are two flies in this ointment. Financial middle-men will resist being displaced. And employers will regret not being Santa Claus. Some adjustments must keep us from shooting ourselves in the foot. There's even a larger goal than this, possibly too much to take on just yet. We might start consolidating the pieces into Lifetime Health Savings Accounts, based on the whole-life insurance model. That industry finds the model greatly superior to term life insurance, and more profitable. Its design is similar to that of a consolidated health payment industry but might take decades to perfect. But it's a goal, and not a political one unless we make it so. In a population of 350 million, the potential savings, and other effects are pretty staggering.

Originally published: Monday, October 19, 2015; most-recently modified: Tuesday, May 21, 2019