Gambling with Oh Shit money

By Dave Anderson:

Last week, I took part in a focus group for a local health insurer that is interested in pushing its high deductible plan in conjunction with an HSA.  I like to bloviate, so when I was offered a chance to eat for free and get paid to bloviate, I volunteered. 

A high deductible health plan is exactly that.  The deductible is high ($1,200 to $10,000) before any insurance company money is used to pay claims.  Usually there is some co-insurance level, so total out of pocket expenses in a serious illness or injury is higher than the deductible.  Until the deductible is met, the health insurer primarily functions as a gate-keeper and a consumer discount club card. 

A Health Savings Account (HSA) is a tax-advantaged savings vehicle where someone with a high deductible plan can throw money into it.  That money can be used to pay the high deductible.  The first $500 in the HSA is placed into an FDIC savings account with an
interest rate below .25%.  Anything above $500 in the HSA can be
allocated to mutual funds and other non-guaranteed investment vehicles. 
Ideally, pre-tax cash accumulates for several years before an expensive medical incident occurs. 

The insurer was really pushing a message that highlighted the ability of HSA owners to play the stock-market with their medical savings.  The message was that the stock market could beat savings and lead to lower initial capital expenditures than either FDIC accounts or bond investments. 

This sounded crazy to me.  To me, an HSA is oh-shit money.  If I need the money in the HSA, I need it to be there for absolutely no tail risk of having seen it lose 20% of its value in the past month.  There is a wide body of research that shows active fund management typically underperforms the market indexes once fees are included, and an even wider body of research that individual investors are the suckers in the market who buy tops and sell bottoms.  Furthermore, as the New York Times noted this weekend, the stock-market has sucked as a place for long term gains in the past fifteen years:

The Dow Jones industrial average started the decade around 11,500 but
closed on Friday at 10,213. �People have lost a lot of money over the
last 10 years in the stock market, while there has been a bull market in
bonds,� he said. �In the financial markets, there is one truism: flow
follows performance.�

Add in the fact that the US stock markets still have high price to earning ratios and low dividend yields, there is little probability that the US stock markets will take off on another bender in the near term.  There is little upside to investing funds that may need to be both very liquid and very sure in value in stocks. 

The stock market fetishization is bizarre and unhealthy when the funds are potentially needed in less than a generation or two.  Yet this is the current focus of both the marketing effort of the local health insurer and the Republican Party; expose more people to uncontrollable market, liquidity and systemic risk while not having significant upside.  Strange.