Philadelphia Reflections

Imperfect Agency: HSA Administrators

Particularly if Congress amends the HSA act to broaden its scope, some serious thought should be given to establishing the rules for selling and administering the Health Savings Account itself. Just about all likely candidates have some conflict of interest which cautions us about distributing monopoly positions, or pay to play, as it is sometimes called or nepotism as the form it sometimes takes. Nevertheless, when there are monopolies, kick-backs, formal or (usually) informal, proliferate at the expense of the customer, who then must "pay rent" for non-monopoly (arms-length or fiducial) behavior. It would be nice, for example, to feel if the customer detects churning or front-running, the customer would have recourse to some court, and not necessarily to have the issue foreclosed by involuntary arbitration agreements. A change in culture is always to be preferred to an imposed system of control.

The present structure traces back to the Constitution's Tenth Amendment, essentially telling the Federals they can deliver the mail, issue the currency, and police the borders, but anything else is to be conducted by state governments. In the early Nineteenth century, when corporations took their present form, that meant every new corporation had to have an individual state law, enabling and defining its rules. When it became obvious the proliferation of corporate charters made this system unworkable, states mostly converted to Uniform Corporation Acts, defining the rules for all for-profit and nonprofit corporations within the state.

By the end of the Nineteenth century, even this move toward uniformity became cumbersome for interstate corporations, and the push was on for uniform national laws, the Tenth Amendment be damned. The Civil War had discredited states rights enough to make nationalized corporations a viable entity. The first railroad, the Camden and Amboy RR in New Jersey, was given a perpetual monopoly on railroads in that strategically located state, and it took most of a century to untangle this complexity. Federal agencies slowly filled the gap for big corporations, but almost all corporations continue to start out small and state-regulated. So the result is informal flouting of the Tenth Amendment by the Courts, reaching out for a one-size-fits-all solution. Strangely, the State of Delaware moved into this chaos with its Court of Chancery, to decide controversies where there is an obvious injustice, but no law exactly fits it. This history would seem to suggest that agents for Health Savings Accounts will have to be state-regulated, even though they grow from Federal law. But if they are to be evaded, eventually another way will have to be found to make interstate HSAs viable and efficient. One thing standing in the way is the McCarran Ferguson Act, which lays out that no state need to be hampered by the orders of any federal agency, concerning the "business of insurance." It does not improve the rest of the world's opinion of us, to be observed flouting our own Constitution.

We'll leave untangling this mess to others in the future, and concede that as long as HSA administration remains a small business, its regulation would speed along faster in fifty state legislatures, providing big corporations leave it alone and their lawyers ignore McCarran Ferguson. The consequence of all this is to relegate Vanguard, Fidelity and the rest of Wall Street, to the status of vendors to small businesses who in turn mainly respond to available services and fees without flagrant kickbacks to Wall Street, placing the customer's interest ahead of their own. If our arithmetic is accurate, the volume of business should grow into custodial accounts in aggregate of billions of dollars worth of stock certificates. But they would essentially remain small businesses, eventually requiring some nation-wide consistency governed by the House Ways and Means Committee and the Senate Finance Committee. And yes, some Federal agency to oversee the paperwork.

The structure outlined above has the effect of leaving the packaging of the index and other securities to Wall Street, but the recommendation of which one the customer should buy should be delegated to local small businesses or professionals. At present, computerized consolidation of stocks into an index stock, conducting an IPO, etc., are complex tasks requiring professionals, whereas the advice as to the best one to buy for a situation, is a mom and pop custodial function, requiring a small staff, a large lock-box at the bank, and a knowledge of customer needs. By and large, it requires no great talent to select among products (indexing took care of that), but in time it will require the talents of an accountant, and the integrity of a saint. Over time, these mom-and-pop small businesses will grow through franchises and other mechanisms familiar to business in general, and perhaps require a different system of regulation, with a re-examination of the forces at work.

This overview of the probable business future argues for as much choice as possible. At the moment, we are being treated to the spectacle of brokerage houses violently resisting fee-only arrangements, so it is up to them to suggest a better resolution for the customer. Their eventual capitulation is not a foregone conclusion, they could drag out the change for quite a long time. Nevertheless, this business ought to explode if the middle-men took less of a cut from their monopoly, and customers could approach a 7% investment return with more confidence. Turning in the opposite direction, I find a doctor friend of mine is unable to retire because a stockbroker churned the trust fund account of her mentally retarded brother into extinction. The court question, of what sort of court should set similar things right for the HSA, should be settled early during the period when the decision between state or federal overall control, still remains fluid.

As a footnote, a reversal of fiducial requirement was slipped into the 2016 lame-duck period, so this issue must be quickly addressed.

Originally published: Thursday, November 03, 2016; most-recently modified: Tuesday, May 21, 2019