Dear Valued Client, 

Health care has been much in the news of late. Given all the attention that is being paid to the legislative process, we thought it would be useful in the first article below to step back and take a look at some of the underlying challenges we face in our current health care system.

The financial planning tip of the month is health care oriented as well, and focuses on Health Savings Accounts, or HSAs. We're big fans of HSAs - Jennifer and I have one ourselves - and as I outline below, in some instances, they can be very advantageous. Lastly, in the question of the month, we examine the impact of portfolio withdrawals to pay down debt or make outside investments.

As always, feel free to forward this newsletter on to those who you think might find it useful, and if you have family or friends who are in need of planning services, don't hesitate to send them our way. 

Micah Porter, CFA

One of the debates I've been following is over health care reform. The debate is becoming increasingly heated, but tellingly, although there are myriad proposals for reforming the system, neither party is suggesting that everything is just fine. Although their solutions differ in fundamental ways, both Republicans and Democrats recognize that there are serious problems with healthcare access and cost.

In considering the problem with access, it's useful to take a step back and consider the broader framework within which health care insurance is provided in the U.S. Health care insurance, and insurance in general, is regulated at the state level. Further, there are two broad types of coverage, group coverage and individual coverage, and regulators set different rules for each. Thus, for example, in the state of Georgia, health insurance providers that sell group coverage to companies - who in turn provide that coverage to their employees - cannot deny coverage to any employee, and pre-existing condition exclusions on individual employees can only be maintained for a short period of time*.

The rules are different for individuals applying for coverage in Georgia. They can be denied coverage altogether, or alternatively, the healthcare insurance provider can exclude pre-existing conditions permanently, shifting the potential liability entirely to the insured. A practice of even greater concern for individual policyholders is recission, in which the insurance carrier unilaterally terminates the individual's policy.

In the past, recission was limited to cases in which the insured had engaged in fraud or deception regarding their health history, but increasingly, insurers are rescinding policies for individuals who develop costly illnesses even if no fraud was shown. In one particularly egregious case, a woman was denied coverage for breast cancer because she had been treated for acne in the past and failed to disclose this on her application. In an appearance before a House committee in June, three high ranking insurance executives were asked if they would end the practice of recission except in the case of fraud, and each responded with a firm "no".

Access issues aside, it's worth examining what we spend on health care. According to the Organization for Economic Cooperation and Development (OECD), the U.S. spends over 15% of its GDP on health care. The only country that spends more as a percentage of the GDP is the Marshall Islands, and average spending among OECD countries is roughly 9%. Per the most recent projections from the Congressional Budget Office, without "significant changes in policy", spending for health care will rise to 31% of GDP by 2035 and 46% by 2080.

For many still in the workforce, the rising cost of health care is at least partially obscured given that a good deal of cost is borne by their employer. But as the chart from Kaiser shows, costs have been rising for both workers and employers, more than doubling since 1999. One of the more unusual features of the last several years has been the fact that non-supervisory wages have been largely flat. Given the increased spending on health care, it seems plausible that one reason wages were flat and employees felt increasingly squeezed was because employers were spending more on health care even as costs rose for employees as well. 

Medicare provides perhaps the most cushion against rising costs, but not surprisingly, costs to the Medicare system are rising as well. As the chart below shows, current forecasts by the Chief Actuary shows that Medicare funds will be depleted by 2017, so clearly, adjustments will have to be made.

The point of all this isn't to take sides in the debate as to how health care should be reformed, but rather to point out that the current system we have is financially unsustainable. Whether any legislation gets passed in the upcoming session is an open question, and whether that legislation actually addresses costs (which at this point doesn't look likely) is an even larger question. Still, given that the health care system plays such a large role in each of our lives, we'll watch developments closely and provide our analysis as warranted.