The musings of a Philadelphia Physician who has served the community for six decades

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An originator of Health Savings Accounts describes their advantages over existing health insurance. Several improvements are suggested for the regular HSA. A more dramatic cost improvement emerges from a lifetime HSA version, which substitutes whole-life approaches for pay-as-you-go. This newer version requires legislation, but could reduce health costs dramatically.

Reflections on Impending Obamacare
Reform was surely needed to remove distortions imposed on medical care by its financing. The next big questions are what the Affordable Care Act really reforms; and, whether the result will be affordable for the whole nation. Here are some proposals, just in case.

Health Savings Accounts, Regular, and Lifetime
We explain the distinction between Health Savings Accounts, Flexible Spending Accounts, and Lifetime Health Savings Accounts. Sometimes abbreviated as HSA, FSA, and L-HSA. Congress should make it easier to switch between them. All three are superior to "pay as you go", health insurance now in common use, only slightly modified by Obamacare. It's like term life insurance compared to whole-life. (

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Right Angle Club: 2014
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Massive Investing by Unsophisticated Investors

Burton G. Malkiel published A Random Walk Down Wall Street in 1973, and John Bogle founded Vanguard Group in 1974. Without getting into academic quarrels over who was first with what ideas, the timing makes it hard for an outsider to judge who thought of something, first. It could better be said there are two concepts mixed together to make a more general concept called passive investing a reality. Professor Malkiel is associated with the idea that the stock market contains all the information publicly known about corporations, so therefore random selection of stocks will result in the same yield as stock analysis will, but involving less trouble and expense. Jack Bogle is in the stock brokerage business, and offers a more critical view of his colleagues. In his view, whatever extra profit there might be in stock-picking by experts, is eaten up by the experts themselves in the form of fees and salary overhead, so why bother with it.

Ultimate Goals of the Approach.Those are two different opinions, but they result in the same conclusion, that the investor will come out better through certain kinds of random stock selection, than by stock-picking with the help of experts. You might add some other factors, like the overhead cost saving through using computers for the "back room" shuffling of orders and payments, and the narrowing of buy-sell margins by the greatly increased volume of transactions. In any event, it is the stockbroker John Bogle's insight into how to take practical advantage of these ideas which produces index funds and their close relative, ETF, or stock-traded units of index funds. Taken all together, these features make up the concept of "passive investing", which reaps the advantages of buy-and-hold over more frequent trading, the considerable reduction of advisory fees, broad diversification, and taking advantage of the payments float. It makes some difference which factor most explains the improved performance of passive investing, because they will reach limits of penetration at different times. Index investing, for example, is increasing by trillions of dollars a year, but must flatten out eventually when the market segments into those who wish to vote their shares, and those who don't care. John Bogle irritates his colleagues by repeating the financial industry takes 85% of the total return, but even if that is true it must come to an end when the financial industry threatens suicide if it isn't better paid.

Directions of Further Growth of Returns.It does appear that Bogle has won his argument, but eventually one-off things like this always flatten out. It would be my opinion that Roger Ibbotsen's book of the century-long return on various asset classes can be taken to set the final limits of what might be achieved by this approach; to the degree the long-term index funds fall short of this figure, the managers of index funds have some further work to do. The difference between the long-term results of index fund and the price index of the asset class, results in the degree to which the index fund manager is eating up the total returns. Small-cap index funds should approach 12.5 % long-term total (i.e. dividends plus realized and unrealized capital gains) returns. Strangely, companies you have likely heard of, average only 10%, so the managers of firms of over a billion dollars are extracting a 2.5% premium on the stockholders for something unidentified, which demands to be clarified. Long-term bonds average xxx%, and U.S. Treasury bonds average even less at XXX%. All of these various premiums for "safety" remain to have an adequate description of their actual value, and the premium will surely disappear if they cannot. Inflation averaged 3%. The superior results of David Swensen, the endowment manager at Yale, represent an evaluation of advantages of being a large, immortal, tax-exempt investor buying things like Canadian lumber forests, totally beyond the capability of the average small investor. When someone devises a way to capture these advantages for the small investor, their price advantages can be seen in context.

Buy-and-hold Index Fund Investing. John Bogle of Philadelphia (and Princeton) did invent and popularize index funds; quite an achievement for a man wearing a heart transplant for fifteen years. His main discovery was that if you buy the whole (asset-weighted) stock market and hold it, your portfolio will do about as well as the portfolio of an expert stock-picker (called an "active" investor), and better than at least half of the other experts who earnestly try to tell a good one from a bad one. (That defines you as a "passive" investor. When the broker shares some of the economies of scale with the client (not always the case, Bogle maintains), costs go down, and reach a point where the assistance of an expert cannot equalize it, no matter what you pay him. Such index funds will vary in their returns, and the difference between 0.25% commission and 0.06% is noticeable. But the difference between $7 retail trades (passive) and $300 trades (active) is simply absurd. If an index fund is composed of the stocks of American companies in the same proportion as the stock market, investing in an American index fund becomes the same as investing in America. Investing in a total world index is comprehensive in a different sense, but there is merit to the idea that we owe this success to the American economy, so Americans ought to climb aboard the American lifeboat. If you do, there is reason to argue you will reach a limit of an effort-free 12.5% return on your money. But remember, high corporate taxes have driven many American corporations to Ireland, Cayman Islands and other tax havens. If this gets out of hand, it may be necessary to turn to world index funds. But when the broker gets fancy and makes up an index of his own recommended stocks, the maneuver starts to get too fancy to be called passive. That's a variant of active investing, and it's not what we are talking about.

Professor Roger Ibbotson of Yale has produced a Classic Yearbook, compiling historical returns of the major forms of investment, from 1923 to 2014, and Morningstar shows signs of continuing such yearbooks indefinitely into the future. Covering nearly a century of experience, this data is the most reliable source of historical experience with a bearing on predicting future results. Of course it isn't infallible. Since various asset classes (large capitalization stocks, small cap stocks, Treasury bonds, etc.) quite narrowly followed long term trends for many decades, most readers would agree with Ibbotson that they probably have some predictive value. Looking back over a century, it is remarkable what tiny blips were created by major cataclysms like the 1929 and 2008 crashes, two World Wars and several smaller ones, and at least one episode of dangerous inflation. All of these events, plus several severe recessions and the invention of the computer, seemed like earth-movers at the time, but in retrospect scarcely affected the long-run relative values of various asset classes. Unfortunately, many of John Bogle's insights were not available for long stretches of this experience, so data is not available for precisely the mixtures we wish had been collected. Nevertheless, it seems safe to conclude that U.S. Treasury bills will closely follow U.S. inflation, and that stocks will do better than bonds. But somewhat surprisingly, small stocks (less than a billion dollars) have consistently done 20% better than the large stocks which everyone is more likely to have heard of. It raises a question whether large stocks might be too big for their own good, or whether small-cap stocks are overpriced.

John Bogle was recently on a television program, asserting long-term passive investing will probably average 5% total return for the next decade. Since the stock market is up 20% in the past year alone, this is a nice way of saying he expects a major decline in stocks of 25% fairly soon, from which there would be a recovery of 30%, leaving a 5% gain for the whole cycle. (He might well squirm at this interpretation of his remarks, which definitely were not that specific.) At his age, with his heart problem, he probably regards 10 years as long-term, while this book is looking at an 80-year horizon of 10%. In that sense, all of us could mean the same thing. I am urging the belief that if the market closely followed 10% for a century, it will probably return to 10% for the next century. Of course, it might turn out that it follows 5% for half a century, then follows 15% for the last half of a century; that would have mathematical truth, but would be essentially worthless information for everyone who dies in the next fifty years. Those people would be like the inhabitants of Asian Ankhor Wat, or the Mexican Yucatan, dreaming of past glory for a while, but eventually just forgetting it in a parade of ancient kingdoms. But since I am willing to concede 5% for the next century is a possibility, it is necessary to wish for some leadership in the war of civilizations, not just national economies, or the transient achievements of a single stock market. But that's not what this book is about, nor what is ordinarily expected of bean counters in a bureaucracy. Somewhat must devote himself to such issues, but not quite yet. About the best we can hope for is to include in our planning some national agency to monitor the economic environment. That agency should feel obliged to warn Congress and the nation that we must apparently reduce our goals for the program. We might need to develop some other plan for paying off foreign debt for Medicare, for example. Or the Health Savings Accounts might only be able to pay 50% of our bills. Or we might need to require a 50% larger annual deposit in the HSA accounts. Or we might need to float some bonds for the duration of some unexpected national emergency. All because it becomes apparent in the future that some national or international upheaval has changed the basic terms of trade. Trust, as Ronald Reagan has said, but verify.

Turning in another direction, since every investment activity requires a certain amount of cash to conduct its business, it seems prudent to invest in small (10% ?) long-term mixtures of Treasury Bill indexes, with indexes of common stock made up of either America's or the entire world's list of corporations. After experience accumulates, the amount of liquid cash required will become better appreciated, and after that, it should gradually emerge what proportion of longer-term bonds (if any) are desirable to provide for stability. And after that, it might be possible for a huge immortal fund to consider including timber forests and other extremely illiquid assets, in the manner popularized by Swenson at Yale. In time, the precisely optimum proportions should become more obvious, but at first it may be necessary to depend on the judgment of seasoned investment advisors, our current Wizards of Oz. The reader is invited to review Ibbotson's handbook for himself, but what emerges is a strong suggestion that a 90/10 mixture of common stock to Treasury bills would be a good place to begin, and the mixture of stocks should reflect the mixture of corporations in existence. After extensive experience, commercial index funds have learned they can count on a steady flow of new funds, and substitute that virtual new cash for cash actually in the portfolio. Running one of these funds is not child's play, even though individual stock-picking is superseded. The only reason for investing amateurs to play with such numbers is to get a feel for what size of total return should be expected, in the light of what others are doing. The reader is invited to study Ibbotson's yearbook, and see for himself whether he agrees that a 10% total return seems safe to bank on, but that the whole permanent staff devoted to management of the fund needs to be replaced. Best of all might be to invest in several private funds, and reward the ones that do best for you. To go just a little further, Congress might even consider whether a management which consistently produces less than the long-run return of a related index is eligible to be replaced. To be totally reliant on such approaches alone, however, is unlikely to be successful. One only needs to watch how quickly an investment committee clusters around the consultant they have hired, glowingly eager to ask him for investment tips, and totally ignoring the business at hand.

The take-away points are that the better funds can and should produce total returns which are superior to what an ordinary citizen can produce for himself, and some way to measure it is mandatory. And also, that there is no point to getting into this, unless Congress establishes -- and monitors -- policies which deliver on the promise.

To repeat, a disconcerting Television interview with John Bogle portrays him predicting passive investment of index funds will average a total return of about 5% for the next ten years. If that proves to be true, it would make a significant difference in investment strategy whether such results reflect the severity of the 2008 recession, or whether they reflect a general decline in the yield of equity stock investment. Although a decline of that severity, maintained for that long, would be unprecedented even by the 1929 crash. The advent of World War II might have shortened its preceding recession, while globalization of manufacture might be prolonging the present one, with the result that a ten-year period of 5% returns would eventually prove to be temporary. Alternatively, some other structural change would make 5% into the new normal. So far, the predicted 10-year period of 5% returns hasn't even started. So, Bogle will be long dead before the matter is settled. Most of the conclusions of this book would survive intact, but some of the architecture based on 10% returns would have to be revised, since there is no doubt the safety of 5% is appreciably less than that of 10%. I respect John Bogle's ideas more than almost any other man's, but take comfort in remembering a Wall Street maxim: The stock market always climbs a wall of worry. The bet here is with Ibbotson, that the stock market will regain its historic 10% path, long before the next eighty years have elapsed, although it might experience some devastating inflation to get there.

Well, where does that get us? According to the Congressional Budget Office, Medicare currently spends (see Chapter xxx) about $500 billion a year, or 3% of the gross domestic product, paying for 50 million persons over age 65. If we expect a fund yielding 10% to pay for it, the fund must contain $5 trillion dollars, and even more if total returns are low, or stock market declines are prolonged. (By the way, $5 trillion is about twice as large as the largest mutual fund now in existence, so it is not possible to know everything about its potential problems in advance. Managing such amounts would certainly would require hundreds, if not thousands, of employees, several large buildings, and considerable planning we won't go into. It probably should not be located in Washington DC, which is already outgrowing its transportation capability, and lacks a pool of talent in the required fields of expertise. A greater level of detail about future technology changes in finance, is beyond the scope of this book.)

But from this much alone it can be estimated that our 350 million citizens would have to contribute, or have contributed for them, about $1500 a year just to pay for a year's worth of Medicare coverage for those age 65-83. That's unreasonable, so let's say at the very most -- the 175 million of working age (25-75) would on average contribute $4000 a year during their working lives if they are fully and continuously employed, which at least 25% wouldn't be. Since we are proposing compounded income instead of "pay as you go", it's a relief to calculate these accumulated contributions would total $700,000 at the 65th birthday, or $500,000 more than is presently foreseen to be needed for Medicare. Therefore, if we reduce or stop deducting their Medicare premiums from their Social Security checks to the beneficiaries the old folks would get increased income, and there also ought to be enough extra money left to pay for healthcare from birth to age 65. That's our theory in a nutshell. We could then turn to our critics, who assume 10% income return is too generous, or $4000 a year is too burdensome, or that some decimal point is misplaced. Fine. We are still left with the challenge that this approach would pay for a big chunk of lifetime medical care, even if it might not pay for it all. That's our war cry, and that's all we claim. If the compounded income only generates 5% total return, we couldn't be so generous, but the reduced amount is still more than we derive at present. And there is still an equal sum available in the payroll deductions for a longer time interval, which at present we must set aside for the transitional costs. This isn't just salesmanship, it is a rough calculation of how much room there is for error. In my own opinion, the greatest danger is that to give people something free, is to invite them to abuse it. At the moment, we are very conscious of the discomfort of getting into debt. Remove that for a generation, and we will observe a nation of spendthrift drunken sailors.

There are seven times as many working people as retired ones, but if we wait too long, that ratio will probably get more unfavorable. There will certainly be adjustments equal to inflation, and maybe net increases due to the rising costs of improved medical care. That's just for the last 20 years of life; we must find the money to pay for healthcare from birth to 65 as well. And longevity is increasing; the fastest growing age group in America consists of people older than a hundred. There's no need to go on with this, the conclusion was always clear. We are never going to pay for this unless we get some new sources of revenue. Reducing medical costs is fine, but turning out the lights won't be enough. We need more net revenue, and I don't mean taxes, which merely shift revenue from the private sector into the public one.

The power of compounding is brought out by starting really young, possibly even at birth. At 10%, money doubles in seven years; at 7%, it doubles in ten. In 65 years there are eight doublings at 10%, six doublings at 7%. Working backwards from $80,000 at age 65, you need to start with only $60 at birth with 10% working for you, or $600 at birth with 7%. You can even get all of Medicare for $60, now that's really a bargain. Even $600 is still a trivial price for a retirement with unlimited health care. But life turns out to be a series of episodes, often unrelated ones. For illustration, we take it in two jumps, from birth to 65, and then 65 to death. And to be truthful, there is a deceptiveness about the cost of Medicare, because we are so heavily indebted already, and must find some way to pay off that debt. There's one big problem with borrowing; you are expected to pay it back. (See below).
Think back on what has already been said, and is already mostly self-evident. We started by showing it would be comparatively painless to assemble $80,000 by the 65th birthday, and that much money on average, would likely pay for Medicare. Remember, Medicare is spending $10,000 a year on the average Medicare recipient, for roughly 20 years, or roughly $200,000 during a 20-year lifetime after 65. If you start with a nest egg, sickness will slowly wear it down. At the same time, you make a certain return on your nest egg. The goal is to build it up when you are working, so you have something to spare between the interest you make on your nest egg, and the annual cost of the illness. Eventually, the sicknesses win the race, but your task was to stretch things out as long as you can.

We estimate compounding will add more revenue, roughly matching the costs of robust stragglers who live from 85 to 91. We assume a fair number of them will be healthy during most of the extra longevity, with terminal care costs merely shifted to 91 instead of 85. We started at age 65 with 65 years of health costs already paid; we paid down the estimated costs of twenty years, and the interest on the remainder pays five more. We get there with money left over, we haven't collected the premiums from Medicare, and we still have to pay for that last year of life, except we let Medicare calculate the average cost from the people who decline this gamble, and the fund reimburses the hospital or whatever, for average terminal care costs during what is then recognized to have been the last year of life. If the money from fund surplus isn't enough, the agency can look at raiding the payroll deduction pool. And there can always be recourse to liberalizing or restricting enrollments, to age groups which experience shows will either enhance or restrict the growth of the fund, as predictions come closer to actual costs. And finally, the last recourse is to have the patient pay for some of his own costs, himself, by re-instituting Medicare premiums. Those who feel that paying for all of healthcare with investment income was always a pipe-dream, will feel vindicated. But all this book ever claimed was it would reduce these costs by an unknowable amount, which is nevertheless a worthwhile amount.

Whoops, Medicare is Subsidized. A major explanation for this astounding bargain can be traced to a 50% subsidy of Medicare by the Federal government, which is then borrowed from foreigners with no serious provision for ever paying it back. Medicare is :
about half paid for by recipients,
about a quarter paid for by payroll deductions from younger working people, and
about a quarter paid for by premium payments from Medicare beneficiaries, collected by reducing their Social Security checks.

A quarter paid in advance, a quarter paid at the time of service, and half of it a subsidy from the taxpayers at large. No wonder Medicare is popular; everybody likes to get a dollar for fifty cents.

So I'm sorry but if you want to pay your bills, it might easily cost $80,000 on your 65th birthday, based on the assumption that you want to pay the nation's debts run up by your ancestors. And to go back further, it will take $200 a year, starting on your 25th birthday, even making the rather optimistic estimate of 10% return, so you might as well call it $500, just to be safe from other rounding errors, and to allow enough time for hesitation about doing such a radical thing. No one says you have to do it my way, but this is how you reach a rough approximation of what it will cost, to do what has to be done, including paying off our debts.

That's indeed how much it will cost if you do it all by raising revenue. You can also do some of it by cutting costs, where fortunately we are well along on the good ol' American way to do things. No one else has the money to do it our way, so everyone else tries to cut costs by turning out the lightbulbs. But without anyone saying a word, notice how we have united in what the rest of the world thinks is madness. Starting about fifty years ago, we began pouring outlandish amounts of money into medical research. In fifty years, we have extended life expectancy by thirty years, through eliminating dozens of diseases, and the cost of caring for them. Just think of the money we have saved in the treatment of tuberculosis alone, by tearing down all those TB hospitals which were seen in every city during my student days. Infectious diseases, particularly typhoid and syphilis, consumed much of the time of a medical student, and much of the budget of every municipality. One of my professors once said we only had two big challenges left: cancer and arteriosclerosis. He was an optimist, because we still have cancer. And the three main mental disorders, schizophrenia, Alzheimers and manic-depressive disorder. But add five more to that list, and do it in twenty years. After that, our main problem would no longer be a matter of dying too soon. Our main problem would be, to outlive our incomes. Financially, these are the same two problems, except one is paying for Social Security and the other is paying for Medicare.

Consider for just a moment, how difficult it is to say how much medical care costs. Remember, a dollar in 1913 is now called a penny, and a dollar today is very likely to be called only a penny in 2114. We long ago went off the gold standard, and money is only a computer notation. Looking back over the past century, it is remarkable how smoothly we glided along, deliberately inflating the currency 2% a year, and listening to assurances that this was the optimum way to handle monetary aggregates.

But we now have more than a million people over the age of 100. They got cough drops as a baby for a penny, and now hardly blink when a bottle of cough medicine costs several dollars. But instead of that, they are likely to get an antibiotic which was not even invented in 1913, cost perhaps forty dollars when it was invented, and now can be bought for less than a dollar. If they got pneumonia in 1935, they probably died of it, no matter how much was spent for the 1935 medicine, so how do you figure that? Or someone who got tuberculosis and spent five years in a sanatorium, who today would be given fifty dollars worth of antibiotics. The problems a statistician is faced with are impossibly daunting.

The current practice, which reaches the calculation of $325,000 for lifetime medical costs, is to take today's health costs and today's health predictions, and adjust the average health care experience for it, both backwards and forwards. Every step of this process can be defended in detail. But the fact is, average lifetime health cost of someone born today is only the wildest of guesses, no matter what kind of insurance he has, or who happens to be President of the United States. The cost of drugs and equipment go through a cycle of high at first, then cheaper, then they vanish as useless. But adjusting the overall cost of materials and services when only a faint guess can be made about healthcare content, can be utterly hopeless, or it can be quite precise. Unfortunately, even its probable future precision is a wild guess. It's a wonderful century to be living in, unless you are a healthcare analyst. The only safe way to make a prediction is to make a guess that is too high, and count on public gratitude that it actually wasn't much higher than you predicted. But to guarantee a particular average outcome, which an insurance actuary is asked to do, will be impossible for quite a few decades.


However, it is a fact of life that someone who could only afford $100 a year is likely to be so unsophisticated he could not invest at optimum returns. Nevertheless, it would only require an escrowed deposit of $100 per year from age 25 to age 65, in order to pay the anticipated cost of Medicare for the rest of his life. Even escrowing the full amount without added income would give him Medicare for life. Therefore, he might thus buy himself out of Medicare for $40,000 if the goverment. Since we propose compound investment of total market index funds, tax exempt if you spend it on health care, it can be shown that $40,000 will get you from age 65 to a life expectancy of 86 -- with a fund of $325,000 if you never get sick, but more likely spending the $325,000. by the day you die. These numbers are only back-of-the envelope estimates, but they seem to justify the guess that annual contributions far less than a typical health insurance premium, perhaps $1000 a year (from age 25 to 65) could more than cover average lifetime medical costs in an HSA. I wouldn't advise sixty or eighty years of advance planning on autopilot, because too many things can happen to inflation, to medical care, and to the stock market. But the general approach is to start with 'way more funding than you think you need, and whittle it down as you get closer to the events in question. To do that, someone has to set up a monitoring system of the whole nation's health costs, and using Hadoop and Big Data, tell us what mid-course adjustments must be made. It would seem like a prudent thing to monitor the accumulations of deposits, income and administrative costs, as well. I oversimplify, of course, but general concept is pretty simple, once you understand that plenty of safety padding is built in, and that any surpluses belong to the voting public, who will soon discover they have many competitors for it.

That's enough introduction to a basically simple idea

Of course, of course

But the investment may need some explaining

the finance the whole smooth transition to it at any age by "buying in" at lifetime average costs from that age forward, rather than covering one year at a time out of funds that happen to be in your account. And secondly, it pools several average lifetimes into one virtual pool, thus capturing eighty years of inflation, and at least staying even with it. That's putting it succinctly, and I will try to make it more understandable later, because the first obstacle is to reassure the reader that this is not magic, nor is it hocus-pocus. Quite naturally, a newcomer to this idea asks the suspicious question, "Where does all this money come from?" That's a polite way of saying, "Y


A Random Walk Down Wall Street: Author: A Random Walk Down Wall Street ISBN-13: 978-0393340747 Amazon


This book was intended as part of a larger volume about the Affordable Care Act of 2010, commonly called Obamacare. However, that whole episode is still vexed with unexpected developments, so I set the longer version aside before it could get any longer. This slimmer one concentrates on what I would offer in place of the ACA. I fully expect any criticism of an American President's plan to be greeted with, "OK, wise guy, what would you suggest that's better? " So, here it is.

It's the Health Savings Account, in two forms. The 1981 version did pretty well, but the passage of time shows the need for a dozen or so tweaks, which are explained here, individually. The original version has demonstrated a 30% cost reduction among the several million early-adopters. So perhaps if we polish a few rough spots, the 30% savings will spread the idea further, and just a little faster. .

Meanwhile, in searching for a way to cut cost, I discovered a much less expensive variation of Health Savings Accounts can be developed as a lifetime model, based on combining several advances like: whole-life insurance, passive investing, direct-pay insurance, and some Constitutional reconsiderations. Although the extra complexity worries me, many people will quit trying to understand it, and just adopt it because it works. As it gets more complicated, it just has to get more paternalistic, and that seems to be an advantage. On the other hand, there are enough Americans who won't accept anything unless they understand every word of it, so their approach will keep it slowed down; it won't upset too many apple carts. .

No doubt the two versions of Health Savings Accounts could be described in twenty pages. But then no one would believe HSAs would work, and few would believe they are necessary, without a much deeper description of how we got into the mess in the first place. Presenting an alternative without a critique leaves the reader uncertain whether I believe the Affordable Care Reform goes too far, or not far enough. (In fact, both things are true, because it seems so likely both government and business employers will abandon the patient in pursuit of other agendas. At the same time, the present system seems unsustainable.) It needs better balance between benevolence and fiscal prudence, and it needs more restraint to both sides protesting the other will ruin us. Of course we must do what we can for the poor. But we also need to stop promising more than we can deliver. In the very long run, it won't be politicians, it will be scientists who reduce the cost of disease for everyone, by eliminating diseases. Until that happy day arrives, we need to maintain a lowered tension of attitudes. When government and business operate as partners, that's nice, but somehow it doesn't sound as if the approach would last very long.

The Affordable Care Act contains at least two innovative ideas which I certainly endorse. The idea of direct payment of insurance (to replace employers as absentee brokers), is one, since it reduces the temptation of financial intermediaries to abuse the role of umpires. Sadly, we may never know the limits of direct payment, because the fumbling displayed at the introduction of computerized insurance exchanges was so shocking, Public reaction could poison direct-pay indefinitely. And secondly, to go on with my diplomatic message, the ACA use of a "cap" on out-of pocket payment seems like a clever way to avoid a costly layer of re-insurance. These two features, translated as -- more business efficiency, and less wandering from the central medical mission -- could easily be allied with Health Savings Accounts, which already bring financial pragmatism to several million Americans, voluntarily. This country responds poorly to almost anything with the word "mandatory" in it.

However, those two points of agreement are not enough innovation to balance the remaining unevenness. I regret how the Affordable Care Act continues to push the square peg of "service benefits" into the round hole of casualty insurance. That is the sort of incompatible mixture which befuddled things for a century, and I look for little good to come of it. Service benefits make rent-seeking entirely too easy for a political system to exploit, because service benefits make boundaries too hard to define. Their primary role should be expanded for helpless inpatients, but eliminated for outpatients, who are generally alert for better bargains. Admittedly, individually owned accounts create some technical difficulty for tax-free cross-subsidy, and I thoroughly understand the nation's attachment to pooled insurance as a way to subsidize the poor and helpless. But technical difficulties can be overcome, whereas pooled insurance under political control will usually impoverish a good-hearted nation. I'm not going to explain further, because it's off the main topic of the book. The main topic is how to save money. No matter how complicated it sounds, it's easy to judge the result.

Regardless of chapter markings, there are only two topics: regular Health Savings Accounts, as they exist today. And Lifetime Health Savings Accounts, as I hope they will evolve, tomorrow.

George Ross Fisher, MD


November, 2014

Pit Stop: Some Features Regular HSA and Lifetime HSA Have in Common

This book was primarily written to explain the difference between regular Health Savings Accounts and Lifetime Health Savings Accounts. The first is available right now although in somewhat crippled form, and the second requires enabling legislation to become available in a year or two. Naturally, the emphasis is on differences between them. They have several features in common however, based on obscure quirks in law which are vital for the reader to understand. So at the risk of a little repetition, let's review the DRG, the Flexible Spending Account, and the income tax deduction.

The Income Tax Deduction, for Employees Only. Seventy or more years ago, wartime wage freezes interfered with moving steel workers to the West Coast, so as a temporary war measure, fringe benefits were not considered taxable income. Big business and big labor never allowed this situation to be rectified, so in time it became the principle basis for employer-based health insurance. Employees got a tax deduction but self-employed and unemployed people did not. Much was made of this unfairness, but it never was changed. Meanwhile, no one called attention to the fact that big business was getting an income tax deduction, too, which amounted to fifty percent in state and federal corporate income tax. Added to the fifteen to thirty percent deduction for the employee, this indefensible inequity became the main financing method for the American health system. And it was the main pressure behind the Clinton Health Plan, as well as the Affordable Care Act, or Obamacare. Like a smiling Cheshire cat, big business hardly said a word about it.

The DRG Diagnosis-Related Groups were a group of two hundred payment groups, used to pay for hospital in-patient costs. They replaced nearly a million specific diagnoses, so they were extremely crude approximations. More important, they replaced fee-for-service billing. It no longer mattered how long you remained in the hospital or what services you received, hospitals were paid by the DRG. Being essentially meaningless lumps of diagnoses, their translation into money was easily manipulated, eventually resulting in a 2% profit margin, spread around rather unevenly. Many hospitals lost money, which was easy to do in a 2% inflation. Consequently, hospitals shifted their costs internally to the effect that the Emergency room made a 15% profit, and the out-patient area, formerly the domain of physician offices, became an extension of the hospital and had a 30% profit. The distorting effect, and the consequent uproar, is easily imagined.

The Flexible Spending Account. Essentially the same as a HSA or Health Savings Account, the FSA had one major difference. At the end of the year, any unspent money was returned, in what was soon called "Use it or Lose it." A large number of health related luxuries, like prescription sunglasses, were consequently purchased in order to get some value out of the system; many people dropped the policy. However, they were heavily sponsored by Employers and Health Insurers, so they were widely adopted. If the law could be changed to permit unused surplus to be "rolled over" to future years, essentially millions of employees would find themselves with Health Savings Accounts. This would appear to be a gift by employers to employees, but gradually the terms of agreements changed. Most of the money sacrificed at the end of the year is effectively now the employees' own money, as a result of employee participation in the premiums, and in co-payments for the benefits.

There are many other quirks and unfairnesses in the existing employer-based system, particularly as they disadvantage non-employees. But in a very simple paragraph of reforms to these three, the Health Savings Account would emerge as a major reform, whether one-year term, or lifetime. A cleanup of the diagnostic code underlying DRG is badly needed, income taxes should be leveled for everyone regardless of type of employer, and rolling over the year-end surplus of Flexible Spending Accounts would give a big boost to HSA enrollment.

That's all, the rest is in this book. Making healthcare cheaper is a bigger project, so let's return to where we were. We were about to talk about passive investment.

Investments Pay the Bill: Obstetrics Lengthens Duration, Deductible Reserve is the Kernel.

There seems no reason to pussy-foot; after next putting them on steroids, we urge absolutely everyone who can, to start a Health Savings Account immediately, whether there is other health insurance or not. Different people would look at HSAs in different ways. Here, HSAs will be described, as amounting to a piggy-bank from birth until you attain Medicare eligibility, when you can turn it into an IRA and spend what you please. For the moment we won't go further into retirement, except to mention that if you haven't spent anything, nobody else is going to spend any of your HSA either, so you can have it all back with investment income added as you start your retirement. In a way, an HSA can be seen as a savings vehicle, to which accumulating savings is the only available alternative until age 59.5, with optional medical spending permitted at any time. Is that so bad?

True, you are only permitted to start an HSA if you link it to high-deductible health insurance, which you must buy. But Obamacare has mandated that everyone must have health insurance, and almost all the permitted alternatives have a $1250 deductible or greater. Whatever you may think of Obamacare, it provides a pretty substantial incentive to maintain a $1250 reserve, and an HSA is a wonderful place to keep such a reserve. If you have avoided spending it, it's returnable to you as a regular IRA, with accumulations, when you retire. Calculating a 10% investment return, it would then amount to up to $90,000 taxable, depending on your age when you start it, or it starts paying you retirement income of over $5000 a year.That's pretty good for an investment of $1250. Obviously, if you are older than 28 when you start it, it will pay less at 65. The main uncertainty you should have revolves around the ability to get 10% investment return, which is therefore our next discussion issue. There are two issues: whether such a return can be safe and consistent; and whether hidden fees will undermine the return.

It happens that Roger G. Ibbotson, Professor of Finance at Yale School of Management has published a book with Rex A. Sinquefield called Stocks, Bonds, Bills and Inflation. It's a book of data, displaying the return of each major investment class since 1926, the first year enough data was available. A diversified portfolio of small stocks would have returned 12.5% from 1926 to 2014, about ninety years. A portfolio of large American companies would have returned 10.2% through a period with two major stock market crashes, a dozen small crashes, two World Wars and half a dozen smaller wars involving the USA. The total American stock market experience, large, medium and small, is not displayed by Ibbotson, but can be estimated as yielding about 11% total return. Past experience is not a guarantee of future performance, but it's the best predictor anyone can ask for.

During that particular period, we had a lot of crisis events, which normally bump the stock market up and down. A standard deviation is the amount it jumps around; and one standard deviation plus or minus, includes by definition two thirds of all variation. During the past ninety years, the standard deviation has been xx percent. As statisticians would say, the total return has been 11%, plus or minus xx%. Throughout this book, we will repeatedly describe it as 10%, for the simple reason that money compounded at 10% will double every seven years, while money at 7% will take ten years to double. Using that quick formula, it is possible to satisfy yourself what 11% can do if you hold it long enough. Since no one knows what will happen in the next 100 years, it is futile to be more precise than that. We may have an atomic war, or we may discover a cheap cure for cancer. But 10% is about what you can reasonably expect, doubling in seven years if you can restrain yourself from selling it during short periods when it can deviate less or more. The most uncertain time is immediately after you buy it, before it has time to accumulate a "cushion".

Expecting it and getting it, are two different things however. Most of the expenses for a management company also come in its first few years, on the first few dollars. Wide experience with a cagey public therefore teaches experienced managers to get their costs back as soon as they can. Until most managers get to know their customers, in this trade, charging fees which amount to 0.4% annually is considered normal for funds of $10 million, so charging 1-2% for accounts under a thousand dollars is common practice. But our goal as customers is to negotiate fees approaching those of Vanguard, which has fees of about 0.07% on funds amounting to trillions of dollars. This magic can only be had by purchasing index funds from a broker who aggregates them, and also develops a smooth-running standardized service with minimal marketing costs to cover the debit card, help desk, hospital negotiating, and banking costs. Remember, stock brokers are not fiduciaries; that means they are not expected to put the customer's interest ahead of their own. One of the better-known brokerage houses advertises charges of $18 a year for accounts over $10,000, but only after it reaches that size will it permit the customer to select a low-fee famous index fund. You really can't blame them at all, but your immediate incentive is obviously to get the account to be over $10,000, as fast as you possibly can. To many people, those sound like staggeringly large amounts, but they are entirely realistic at this stage of the market.

There should be an added layer of investment in government securities, to provide liquidity. In the case of Obamacare insurance, the first purchase in the fund might well be $1250 in indexed Treasury Bills, reverting to total stock market index, thereafter. Other liquidity needs are an individual matter, always remembering that cash reserves lower the overall return of the fund and slow its growth. At the moment, interest rates are so artificially low, leaving the reserve in cash is nearly as good.

The investment alternative of purchasing in-house stock-picking funds, or funds with a concealed kick-back to your broker, is probably the riskiest of all alternatives available, and to be avoided. The real goal here is to get your 10% long-term return as cheaply as you can, or else as soon as you can. With an index, 50% of the customers do better than the average, and 50% do worse. For health costs, just be sure you aren't in the bottom 50%, and the rest becomes fairly easy. There is one other common hazard: the tendency of all investors, small and large, to buy high and sell low. Just don't ever sell.

First Example, single payment of relatively small deductible. The smallest deductible in the Obamacare Insurance Exchanges is $1250. If a deposit in the HSA is made at age 26 to cover this contingency, but never used, it should rise to $10,000 if invested in U.S. Treasury Bills at 3.7% -- at age 85. That won't get you where you want to go.

Second Example, single payment of $6300.The largest deductible in the Obamacare Exchanges is $6300. A single deposit of this size at age 26 will reach $10,000 at age 40. At that point, we can hope that 10% is available, and will reach $24,000 at age 65. An IRA of $24,000 will start paying pensions at the minimum distribution rate of $960 a year. In a sense, that's not a bad investment of $6300, but everything has to go right (in health as well as finances) for 39 years to achieve it. The point of these first two examples is to demonstrate that HSA is probably not able to overcome current abnormally low short-term interest rates enough to be used solely as a place to park small deductible reserves. At $10,000, it becomes feasible, and when interest rates return to normal levels, it may be again feasible for small savers.

Third Example, single payment of $10,000 (deductible reserve of $6300, plus $3700 cash). This cash contribution at birth will not only match the $10,000 minimum demanded by brokers for unrestricted investment (i.e. for eligibility for 10% long-term investment return), with an added bonus of reducing premiums for paying a higher deductible. At one time, a $25,000 deductible was available for an annual premium of $100, but for now this aspect is ignored. This deposit in an IRA at age 26 at a 10% income rate, would generate a fund of $411,000 at age 65, making possible an annual pension of $15,000. Quite a contrast! In fact, some enterprising insurance company could easily produce the same policy with a $10,000 deductible, which would reduce the premium still further, and improve an already exhilarating experience. That's what banks normally do by maintaining a constant pool of funds coming in and going out, but essentially the rest of the pool is undisturbed. Let's forget that, and stick with what is currently available on the market. It's true that a second major illness would wipe out the deductible. In that unhappy event, the cost of the package would rise to $16,300, still a dandy investment for a $15,000 pension. After that, the logic begins to peter out. You would have to have ten major illnesses to begin to doubt the wisdom of it, but people who have ten major illnesses are not likely to be worrying much about their pensions. This analysis quickly loses traction as medical disasters become unusually frequent, and gets you into reinsurance issues. But the example is mainly offered to illustrate the destructive effect of brokerage fees, which must be minimized in any way available. Besides, more is to come, which improves the projection.

Fourth Example, the addition of Maternal/Childhood Coverage Adds 26 Years of Compunding. This is a book about healthcare finance, with every incentive to avoid thorny society problems. However, a collision occurs when we attempt to include the rather considerable costs of obstetrics and/or abortion, and the comparatively minor medical costs of children under the age of 26. The goal is not so much to protect against these costs, as to add 26 years of compounded investment income to the calculations, and the problem is that our society has not completely decided whose financial responsibility such costs belong to. Judges make expedient decisions in divorces and illegitimacy; but issues like this, for them to stick, must really be made by society in general. For purposes of long-term prediction, we will therefore assume that a child is responsible for his own birth and subsequent medical costs, and that someone else in the family is responsible for reimbursing the child. Treating costs as the infant's responsibility is something of a fiction, like pretending each child has a trust fund to pay everybody back at age 26; but it will have to serve.

At the moment, everybody does have some mechanism for paying Obstetrical costs, even if that mechanism is only to rely on charity, the costs have already been assigned to someone. For the most part, Obstetrics is part of the parents' health insurance policy. It must be admitted that the true costs are not readily available, since the whole matter is tangled in internal cost-shifting by hospitals and insurance policies. However, they are determinable by someone, and eight thousand dollars seems adequate. Two hundred dollars a year seems right for average childhood costs from birth to age 26 but obviously, better data would improve the precision. We take a guess at $8200 for obstetrics and pediatrics combined, or $5200 for pediatrics alone. At 10% investment income, the fund would overtake the pediatrics in 26 years, and possibly allowi the fund to break even on the Obstetrical costs over the 26 years. For awhile at least, policies like this should allow the managers to gain experience; if the investment pays the medical costs, then enough of the obstetrics will be double-paid by existing sources to make the whole experiment escape insolvency A pilot study of four or five years, in four or five states, ought to clarify the issues. After that, it should be possible to establish profitable levels for the package. Somewhere mixed up in this are the inordinately concentrated malpractice costs of obstetricians. We look longingly toward the Chief Justice and the Judicial Council to rationalize this wasteful situation, and then for the ensuing savings at 10% for 26 years to get most Health Savings Accounts off to a profitable level by age 26. This complicated sentence structure may seem a round-about way to streamline transaction costs for HSA brokers, but something like that will have to be done to reduce transaction costs, which are probably roughly equitable in the first and second examples. But nevertheless costs must be reduced, because the tremendous jump in gains in the third example are too good to be ignored. In summary, in this discussion we regard the initial high obstetrical costs and the low pediatric costs which follow, as a wash. We can come back later and tinker with details. But the important point at the moment is to stress that we can garner 26 years at 10% compounded investment income, by simply declaring them to be manageable break-even costs.

Fifth Example: Deductible Reserve, Generous Returns, for Twenty-Six Additional Years. We start with the stockbroker's hard-nosed assessment that he can't make a profit with this idea, unless he starts with a $10,000 nest egg, or else charges hidden fees. The first $6300 gets provided by Obamacare's discovery they can't make health insurance work without a $6300 deductible. Added to all that is my own assertion that no one should risk using $6300 deductibles, unless he can see some source, whether it is a government subsidy or his own personal savings, of enough ready cash to cover one year's deductible. Even so, we have to find another $3700 to get to the safe harbor of ten percent. If such a thing as $10,000 deductible became available, it would close this gap without borrowing, because higher deductibles make lower premiums possible, and eventually you break even. But right now, the individual has to borrow $3700 to make this work. Because the new father or mother is young, they are going to have to pay a higher interest rate, and we might as well assume a loan-rate of 10%. But it's 10% on $3700 of it, which makes the whole fund eligible for 10% return. In round numbers, that's $1000 minus $370, or a net gain of $630 a year; reducing the loan balance to $3100 the second year, $2500 the next, etc., You would have to be working with real Obstetrical costs to know how much it would cost, but this is the general idea behind calling the initial cost a wash.. Now, where does that leave us, with essentially $10,000 to prime the pump, and starting with a growing income of $1000?

Well, it leaves us with $80,000 at age 26, and literally millions when we are aged 65. The numbers are so extravagant we see no need for precision. We can now see a clear path from a cash contribution you must make, to quite enough money to pay all average lifetime medical costs by the age of 65. All medical costs, so no 6% payroll deduction, no premiums, become a possibility. And with enough extra cash emerging from the calculation to make it unnecessary to use a calculator to be reassuring. Only by getting another 26 years of income does it become possible, but it does make it unnecessary to have quite so many assets when you start being a capitalist at birth.

As a footnote, we find it unnecessary to tell bankers how to smooth out repayment of $10,000 from people who are pretty much guaranteed to have millions before they die; it's what bankers do for a living and they are good at it. But there is one other risk inherent in this discussion: the risk that any particular individual could get very sick several times. In some circles the solution to that contingency would be called "re-insurance", and in other circles it implies "subsidy". But, otherwise, this system has only one remaining difficulty. It would take 80 years to prove itself. That might seem like a great handicap, until it gets compared with the risk of taking on too many complex tasks, too rapidly. One of the great advantages of taking this approach is that its several steps force major readjustments to be gradual.

The Math of Predicting the Future

The accuracy of predicting future longevity, future health costs, and future stock markets -- is individually very low, so aggregated numbers can be (at least) equally misleading. However, they are the best available guides to the future. The purpose of deriving them (Mostly from CCS data) is to surmise whether it is safe to proceed with a trial of concepts. The differences are so great their general direction is nevertheless pretty clear: Substituting the HSA would surely save a great deal of money, compared with Obamacare, or compared with Medicare. Why not substitute it for both Obamacare and Medicare? Transition costs are not estimated, and no doubt they would be considerable, even if one plan replaced two others. The overall HSA cost is inversely related to the investment income earned; three levels are presented, but a conservative conclusion is argued. In short: HSA could comfortably replace ASA and Medicare, but could only marginally reduce accumulated Medicare debts if a higher investment income is realized. Some other funding source would probably be needed to eliminate the existing Medicare debt, but at least savings to the consumer for the combined ASA and Medicare replacement would be returned to the subscriber as eliminated payroll deductions and premiums, (i.e.,about half of the Medicare cost.) Savings from replacing Obamacare would be even greater, but here such savings are all poured into rescuing Medicare. That's ironic, because it is the reverse of what the elderly were fearing. Even Obamacare advocates should welcome the elimination of Medicare, because its losses are dragging everything else down. Unfortunately, this is not well understood by the public, who love Medicare. Everybody loves to get a dollar for fifty cents. Somebody has to say this can't last, and I guess I'm it.

To be confident that Medicare's costs plus its debts would actually be manageable, the average subscriber would have to contribute $1600 a year for 40 years to the escrow fund at 6% annual income. That's to achieve a total of $246,000 on his 65th birthday, paying his ordinary health debts from 25 to 65 with the other $1700 of his allowed Health Savings Account deposits, to pay average medical expenses for age 25-65. You might subsidize poor people in the name of fairness, but this is how much you have to find, somewhere, to pay present costs. If you please, health expenses would then have to be cut enough to pay for the subsidies, unless the subsidies have to be cut to pay for the health expenses. With that, and a continuation of 6% return as long as the paying subscribers live and the fund remains solvent, we might make it. High income rates like that are only likely to happen if inflation starts to gallop, or some other cataclysm intervenes, with the result that the virtual value of the Medicare debt erodes, and the creditors lose much of their loan in real value. Some individuals might be able to manage their cost, but it's very hard to believe it could be an average performance for the whole nation.

And yet, the nation has already made it officially legal that it is going to spend nearly twice that amount, but only gets Obamacare in return. If the President is right about his side of it, then getting Medicare free in addition, is entirely do-able by this Lifetime Health Savings Account alternative. If not, then both of them have to be scaled back.

It will be noted that with 6% compounded interest income, Health Savings Accounts would have an average lifetime out-of-pocket cost of $58,000, calculated in year 2014 dollars, although present law permits $3300 annual deposits to age 65, or $132,000. There is thus room to spare, here, as well as for increasing 6% return in the direction toward 10%. Depending on the interest rate actually achieved, and the choice between maximum allowable, or less out-of-pocket, lifetime Health Savings Accounts could cost somewhere between 58 and 132 thousand dollars, lifetime total average, in year 2014 dollars. The Medicare escrow part of that would be $10,000, and Catastrophic coverage for 58 years of Medicare life expectancy would add $58,000. The deposit costs for the Obamacre years 25-65 would themselves total $10,000, and estimated Catastrophic insurance would add $16,000, to a total lifetime cost of $26,000. If contributions are raised, there's room for it under the $3300 yearly limit. The hard question is whether we could get $3300 on average for forty years, and I'm not sure we can. Please note: Consumer deposit costs would be limited to the 40 working years 25-65, but investment income would be realized over the entire 58 years. Furthermore, depositing extra money in an HSA is not entirely a bad thing, because if you deposit more than you need for medical care, you will get the excess back, multiplied by tax-free investing. Obviously, the same cannot be said of buying too much insurance.

Compare: the cheapest bronze Obamacare cost (covering 60% of healthcare, age 26 to 65) is $288,000, accumulated and paid for over a 40 year span. Adding Medicare adds $95,400, made up of $23,800 of payroll deductions, $23,800 of premium collections, and $47,700 of debt, accumulated over 18 years, paid for over 40 working years. Obamacare followed by Medicare is what we are officially destined to get. Total average lifetime costs are thus projected to be $383,300, plus the 40% estimate of uncovered ACA costs under the Bronze plan. Considering different inflation assumptions and rounding errors, that's pretty close to the $325, 000 which was calculated by Michigan Blue Cross and confirmed by federal agencies, for year 2000. To repeat, this is what we will get unless it is changed.

This outcome makes me absolutely confident we can do better. The lifetime Health Savings Account would create immense savings, which by rough calculations would be somewhat less confidently stated to be savings of $190,000, in year 2014 dollars, per lifetime. Multiply that number times 300 million citizens, and you get a result in the trillions. Maybe we can do better than that, but it's a start.


Comparisons of Health Savings Accounts Escrow for Medicare Costs (est.)

Lifetime Health Savings Account (68 yrs.)............vs................Medicare alone.

..............$80,000 single payment(40 yr. deposit of $850 =$32,000 cost, 68 yrs.@4% cmp. Interest)..*(+$18,000)

..............$160,000 single p. plus existing-debt service (40 yr. annual deposit of $1700=$68,000 cost, 68 yrs.@4% cmp. Interest)*(+$18,000)..

..............$150,000 both + subsidy (40 yr. annual deposit of $1600=$32,000 cost, 68 yrs.@4% cmp. Interest)*(+$18,000)..

..............$246,000 stretching (40 yr. deposit of $1600=$64,000 cost, 68 yrs.@6% cmp. Interest)*(+$18,000)..

..............$706,000 workplace insurance (40 yr. deposit of $3300=$132,000 cost, 68 yrs.@10% cmp. Interest)*(+$18,000)..

..............*$18,000 (Catastrophic Insurance, est. @$1000/yr for 18 extra years)

--->Total Extra Cost per Individual including Catastrophic for 18 yrs. estimate: $98,000 (18-118,000)<---

--->Present Medicare Pre-payment Costs: $196,200 plus 196,200 in debt.<---



Lifetime Cash:$2600 plus $58,000=$60,600Lifetime Cash:$1600 plus $58,000=$76,600Lifetime Cash:$88,000 plus $58,000=$146,000Lifetime Cash:$132,000 plus $58,000=$190,000

Yearly Personal Expense for Forty Years, Age 25-64 (HSA vs. Obamacare)

Health Savings Account Deposits
@ 10%.....$65 per year (plus $1000 for Catastrophic coverage.)
@6%......$400 per year (plus $1000 for Catastrophic coverage.)
@ 2%......$2200 per year (plus $1000 for Catastrophic coverage.)
....$3300(Maximum Legal Limit)............
Affordable Care Act "Bronze" Premiums: $5500-$7200 (for 60% coverage of Healthcare costs)Lifetime Cash:$220,000-$288,000



Medicare Advance Payments, Age 25-83 Under Two Systems (HSA Escrow vs. Medicare Costs)

Health Savings Account,Escrow Deposit............||||||...................................... Medicare Yearly Program Costs......................................

@10%...............@6%...................@2% ..|||||...............Payroll tax...................Premiums......................Debt............
$45.................$250.00..................$1400...........|||||||............$1320......................$2640 (x18yrs).............$2725 (x18yrs.).............




Total Cost per Individual including Catastrophic for 68 yrs. estimate: $127,500.

Total Cost if health insurance were tax deductible including Catastrophic for 68 yrs. estimate: $88,800.


Limit per Individual, Exclusively used for Medicare Pre-payment: ($3300/yr x40= $132,000, realizing $1,460,000 at age 65 @10%.)............................


Multi-year Health Savings Account (40 yrs.)............vs..............60% of Affordable Care alone.

...............$56,000 (1800-58,000)............................$288,000


Total Cost per Individual, median estimate.


Multi-year Medicare Escrow Deposits (40 yrs.)............vs..............80% of Affordable Care alone.


Multi-year Medicare Escrow Deposits (40 yrs.)............vs..............60% of Affordable Care alone ("Bronze").

...............$80,000.($850/yr @4%, 150/yr @10%, contributing from age 25-65 ). ..........................$288,000

Estimated $18,000 Catastrophic Coverage Escrow (18 yrs.), escrow released at age 65

...............$ 8000 ($200/yr @4%, $40/yr @10%, contributing from age 25-65)

Total Medicare Escrow Cost per Individual, median estimate: $89,600 ($1050/yr @4% investment income, $190/yr @10%)


Lifetime HSA plus Medicare............vs................Affordable Care plus Medicare

.........$120,000 (1800-58,000)............................$484,000 plus 196,000 in debt.

................($166/mo}.......................................................................... Total Savings per Individual, median estimate: $190,000


All costs assuming age 25 to start depositing. Transition costs at later ages are not calculated. ---------------------------------------------------------------------------------------------------------------------------------------

Accumulating the Necessary Money for Lifetime Healthcare

Medicare.Because it's easier to explain, let's begin at the far end of the process, the day after death, and look backward. This proposal didn't start out as a Medicare proposal, but the accumulation of unpaid debt has become so alarming that considering Medicare for Health Savings Accounts could fast become a national priority that seems to have no other solution. In addition, most factual health data come from Medicare, so the reader quickly gets acquainted with the concept by starting there. And so, while the Medicare situation is fraught with political obstacles, we might have to risk it. While the debt overhang from earlier years is so threatening that Health Savings Accounts cannot be confidently promised to rescue Medicare by itself, perhaps the Savings Account idea could put a stop to going deeper into debt. Even a stopgap would have to get started pretty soon, but there is still a small chance it could partially reduce the indebtedness.

At present, Catastrophic coverage is required, but not tax-exempt. To extend HSA for the life expectancy, therefore requires an average 18 years of after-tax premiums. We have split lifetime HSA into two parts and assumed a single-premium for Medicare in exchange for forgiveness of premiums and rebate of payroll taxes. Therefore, it is important not to count the $80,000 twice as a cost. If pre-payment begins at an early age, Medicare costs should be quite modest. Even when we show all the costs, including double payments, using an HSA at conservative rates like 4% will reduce the Medicare cost by 75%. To pay down the existing debt back to 1965, requires more data on how much the debt really is. At present, it is grows by 50% of annual costs, by addition; and an unknown amount by compounding. The amount of debt service is probably going to depend on the national ability to pay it down, regardless of its written terms. The same is likely to be true of subsidies for the poor. Ultimately, both of these decisions are political, limited by ability to pay. Because of the long time periods, comparatively modest interest rates can convert this impending disaster into an inexpensive cost. The outcome of these intersections is that the terms and benefits become largely a matter of political choice.

The transition is greatly eased by the premiums and payroll deductions, which are largely age-distributed, and can therefore be forgiven in a graduated manner for late-comers to the program. Most redistribution of high-cost cases should be handled through the catastrophic insurance, which is well suited for invisible and tax-free redistribution. Because of hospital cost-shifting, inpatients are overpriced, quickly becoming underpriced by gaming of the DRG to shift costs to outpatients. This will affect the relative costs of Catastrophic and Health Savings Accounts, and should be carefully monitored.

Cost Sharing At present costs, statisticians estimate average lifetime healthcare costs at about $325,000 in year 2000 dollars; we could discuss the weaknesses of that estimate, but it's the best that can be produced. Women experience about 10% higher lifetime health costs than men. Roughly speaking, how much the average individual somehow has to accumulate, eventually has to equal how much he spends by the time of death. At this point, we must work around one of the advantages of having separate accounts. On the one hand, individual accounts create an incentive to spend wisely, but it is also true that pooled insurance accounts make cost-sharing easier, almost invisible, and tax-free. Therefore, linking Health Savings Accounts with Catastrophic insurance provides a way to pool heavy outlier expenses, while the incentive for careful money management resides in the outpatient costs most commonly employed (together with a special bank debit card) to pay outpatient costs. Such expenses are much more suitable for bargain-hunting anyway, because dreadfully sick people in a hospital are in no position to bargain or resist.

Furthermore, there is a difference between a mismatch of revenue to expenses which is caused by chance divergence of one age group's revenue and expense, and a mismatch within the same age cohort, much more likely to be due to chance. To put it another way, somebody has to pay off these debts, and surely we must have a plan about who should pay them when revenue is not present in the account. Borrowing between subscribers in the same age cohort should pay modest interest rates, and borrowing between different cohorts for things characteristic of the age (pregnancy, for example) should pay none. Unfortunately, people may abuse such opportunities, and interest must then be charged. Until the frequency of such things becomes better established, this function of loan banking should be part of the function of the oversight body. When it's limits become clearer, it might be delegated to a bank, or even privatized. While it is unnecessary to predict the last dime to be spent on the last day of life, incentives should be identified by the managing organization, separating routine cash shortages from abusive ones. Much of this sort of thing is eliminated by encouraging people to over-deposit in their accounts, possibly paying some medical bills with after-tax money in order to build it up. Such incentives must be contrived, if they do not appear spontaneously. User groups can be very helpful in such situations. People over 65 (that is, those on Medicare) spend at least half of that $325,000 lifetime cash turnover, but just what should be counted as their own debt, can be a matter of argument (see below.)

Proposal: Current law permits an individual to deposit $3300 per year in a Health Savings Account, starting at age 25, and ending when Medicare coverage appears. Probably that amount is more than most young people can afford, so it would help if the rules were relaxed to roll-over that entitlement to later years, spreading the entire $132,000 over the forty-year time period at the discretion of the subscriber.

When Health Savings Accounts were first devised, it never seemed likely that Medicare might supplanted. However, Medicare has grown both highly popular and severely under-funded. The rules should be modified to permit someone who has health insurance through an employer to develop a Health Savings Account which he funds but does not use while he is of working age. The funds would then build up, enabling him to buy out of Medicare on his 65th birthday or thereabout, with a single-premium exchange with Medicare, at present prices exchanging about $100,000 funded by forgiveness of Medicare premiums and some portion of payroll deductions from the past. He would have to purchase Catastrophic coverage. If this approach proved popular, it might supply extra funds for loaning to HSA subscribers in the outlier category. While there is no thought of phasing out Medicare against the subscribers' will, Congress would certainly be relieved to have subscribers drop out of a program which must be 50% subsidized.

Proposal: The present closing age for HSA enrollments at the onset of Medicare should be extended a few years older. And single-premium buy-outs of Medicare coverage, including the possible return of payroll deductions where indicated, should be permitted as an option.

Proposal: Congress should create and fund a permanent Health Savings Account Agency. It should have members representing subscribers and providers of these instruments, with power to hold hearings and make recommendations about technical changes. It should meet jointly with the Senate Finance Committee and the Health Subcomittee of Ways and Means periodically. It should be involved with the appropriate Executive Branch department, to review current activity, detect changing trends, and recommend changes in regulations and laws related to the subject. On a temporary basis, it should oversee inter-cohort and outlier loans, leading to recommendations about the size and scope of this activity.

can certainly change that, especially during the transition period, at least anyone under age 65 could start an account tomorrow and fund it up to date. Hypothetically, if anyone could live to his 65th birthday without spending any of the account, a prudent investor would have accumulated $132,000 in pure deposits on his 65th birthday. He only needs $80,000 to fund Medicare as a single-payment at age 65, however, so he can afford to get sick a little. If he starts later than age 25, he has already paid for Medicare somewhat, with payroll taxes. That could be considered payment toward reduction of the Medicare debt. Please hold your questions, until we finish outlining the plan.

If someone makes a single deposit of $80,000 on his/her 65th birthday, there will accumulate $190,000 in the account over 18 years, the present life expectancy if he spends nothing for health and invests at 5%; and $190,000 is what the average person costs Medicare in a lifetime. Since the average person spends $190,000 during 18 years on Medicare, enough money will accumulate in Medicare to pay its expenses, and after some shifting-around, this should make Medicare solvent, in the sense that at least the debt isn't getting bigger because of him. Furthermore, index funds should be returning 10-12% over the long haul, so there should be some firm discussions with the intermediaries about some degree of dis-intermediation. Please don't do the arithmetic and discover that only $40,000 is needed. That seems plausible, but that's wrong, because the costs remain the same , and previously the government has been borrowing half the money from foreigners. In effect, the subscribers have been paying the government in fifty-cent dollars. There has been an exchange of one form of revenue for another, so the required revenue actually does demand $80,000 for a single deposit stripped of payroll deductions and perhaps premiums. An end would put to further borrowing, but the previous debt remains to be paid. I have no way of knowing how much that amounts to, but it is lots. All government bonds are general obligations, mixed together, and access to Medicare reports back to 1965 is not easily available. What we can more confidently predict is the limit that young working people can afford to put aside for the sole purpose of paying off the Medicare debts of earlier generation. If there are other proposals for paying off this foreign debt, they have not been widely voiced. And the debt is still rapidly growing.

They would have to set aside an average of $850 per year (from age 25 to 64) to achieve $247,000 on the 65th birthday, assuming a 5% compound investment income and relatively little sickness. This might seem like an adequate average, but occasional individuals with chronic illnesses would easily exceed it in health expenditures. It is not easy to estimate the size and frequency of such occurrence in the future, so someone must be designated to watch this balance and institute mid-course adjustments. As an example, simple heart transplants costing $200,000 are already being discussed. To some unknown extent, the cap on out-of-pocket expenses would have to be adjusted to pass these cost over-runs indirectly through the Catastrophic insurance. Insurance does greatly facilitate sharing of outlier expenses, but usually requires a time lag whenever new ones appear.

It does not require much political experience to know that taxpayers greatly resent paying debts that benefitted earlier generations. They complain, but complaining does not pay off the debts of the past. To double required deposits in order to pay off past debts, as well as using forgiveness of payroll deductions and premiums, would require an additional $120,000 per year escrow, for each year's debt accumulation. At present, roughly $ 5300 per beneficiary, per year, is being borrowed, and there are roughly twice as many current beneficiaries as people in the tax-paying group, but only 18 years, as compared with 40 years as a prospective beneficiary. So that comes to liquidating roughly $1300 a year of debt to balance the two populations, or $2600 a year to gain a year. That's for whatever the debt happens to be, which surely someone can calculate. To accomplish it, one would have to project an average of % income return. That's definitely the outer limit of what is possible, and it probably over-reaches a little. Therefore, to be safe, one would have to assume some other sources of income, a change in the demographic patterns, or an adjustment with the creditor. Assuming inflation will increase expenses equally with inflation seems possible. And it also seems about as likely that medical expenses will go down, as that they go up. You would have to be pretty lucky for all these factors to fall in line over an 80-year lifetime. So, although Medical

It is this calculation, however rough, which has made me change my mind. It was my original supposition that multi-year premium investment would only apply up to age 65, and that would be followed by Medicare. In other words, it should only be implemented as a less expensive substitute for the Affordable Care Act. It seemed to me the average politician would be very reluctant to agitate retirees by proposing a plan to eliminate Medicare. They would feel threatened, the opposing party would fan the flames of their fears, and the result would be a high likelihood of undermining the whole idea for any age group, for many years. Better to take the safer route of avoiding Medicare, and confining the proposal to working people, where its economics are overwhelmingly favorable.

But when the calculations show how close this proposal under optimistic projections would come to failure, and when nothing remotely close to it has been proposed by anyone, the opportunity runs the risk of passing us by. So, I changed my mind. The moment of opportunity is too fleeting, and the consequences of missing it entirely are too close, to worry about the political disadvantage of doing the right thing. The transition to a pre-funded lifetime system will take a long time to get mature, and the political obstacle course preceding it is a daunting one.

========================================>/p> So we guess the average life expectancy where things will eventually flatten out will then be about 91. (Be careful, most life expectancy figures are for life expectancy at birth.) But you would have to be lucky in everything: a very favorable investment climate for the right ten-year period, plus a favorable health situation which avoided expensive illnesses just at the age when they would begin to threaten. Using a lower goal of $60,000 and a lower interest rate of 7% is considerably easier to achieve, but the limitation which might be reached first is the $3300 yearly contribution rate, and someone might be forced to pay all medical expenses out of pocket in order to make the investment fund stretch. The individual who came up short would still be considerably ahead, but we are using a precise match of revenue and expense, to simplify the examples. Someone who sells his business at age 63 might have the cash, but still have trouble because of the $3300 per year limit. It seems pointless to squeeze through a narrow window, and much better if the window were enlarged to permit lump-sum deposits up to a $132,000 lifetime limit. With that sort of cushion, plus a stretch of reasonably good health at the right time of life, it would become considerably safer to take the risks. At age 65, a lifetime of health costs is already in the past, but the curve of health expenses starts to curve up at age 50, at a time when college expenses for children may be persisting, and the house isn't quite paid for. It seems a pity to cripple a good idea with pointless contribution limits that almost stretch far enough, but leave people fearful. If Congress develops a serious interest in lifetime insurance, the yearly contribution limit should be revisited.

The simplified goal is therefore to accumulate $60,000 in savings by the 65th birthday, remembering that savings get a lot harder when earned income stops. With current law, you would have to start maximum annual depositing of $3300 by your 50th birthday, to reach $60,000 by age 65, and you would still need generous internal compounding to make it. But notice how easily $100-200 a year would also get you there, starting at age 25 (see below) and less optimistic investment income returns until age 65. Many more frugal people might skin by with looser rules; It could rather easily be subsidized for poor people and hardship cases. If you are going to cover lifetime health costs instead of just Medicare, many more will need $80,000 to do it, and have something left to share with the less fortunate. But to repeat once again, that still compares very favorably with the $325,000 which is often cited as a lifetime cost.

Starting with the Medicare example. Notice that forty years of maximum contributions, would amount to far more than the necessary $40-80,000 by age 65. We haven't forgotten that the individual is at risk for other illnesses in the meantime, so in effect what we need is an individual escrow fund for lifetime funding intended (at first) only to replace Medicare coverage. (We are examining lifetime coverage, piece by piece, trying to accommodate an extended transition period.) Depending on a lot of factors, that goal could cost as little as $100 a year deposited for forty years, or as much as the full $1000 per year. It all depends on what income you receive on the deposits in the interval. In a moment, we will show that 10% return is not impossible, but it is also true that a contribution of $1000 per year would not seem tragic, compared with the present cost of health insurance (now averaging over $6000 a year). I have unrelated doubts about the current $325,000 estimate of average lifetime health costs, but that is what is commonly stated. For the moment, consider these numbers as providing a ballpark worksheet for multi-year funding, using an example familiar to everyone, but not necessarily easy to understand after one quick reading.

The Cost of Pre-funding Medicare. Rates of 10% compound income return would reduce the required contribution to $100 per year from age 25 to 65, but if the income were only 2% would require $700 contributed per year, and at 5% would require $300 per year. Remember, we are here only talking of funding Medicare, as a tangible national example, Obviously, a higher return would provide affordability to many more people than lesser returns. Let's take the issues separately, but don't take these preliminary numbers too literally. They are mainly intended to alert the reader to the enormous power of compound interest. Let's go forward with some equally amazing investment discoveries which are more recent, and vindicated less by logic than empirical results.

I'm overwhelmed. I'm thinking of a one-line poem by William Blake: "Enough or too much" " stragglers who live from 85 to 91." Sorry to be a burden, but soon to be 91 I can still go a couple of rounds without huffing and puffing. You remind me of Dr. Melvin Konner.... professor.... anthropologist..... physician.
Posted by: Martin   |   Sep 27, 2014 5:16 AM
I want to thank you for this wonderful resource. I find it fascinating. May I offer one correction? In the section "Rittenhouse Square Area" there is reference to the Van Rensselaer home at 18th and Walnut Streets and its having a brief fling as a club. I believe in 1942 to about 1974/5 the Penn Athletic Club was located in the mansion. The Penn AC was a good club, a good neighbor and a very good steward of the building - especially the interior. It's my understanding that very unfortunately later occupants gutted much of the very well-preserved original, or close to original, interiors. I suppose by today's standards the Van Rensselaer-Penn Athletic Club relationship could be described as a fairly long marriage. The City of Philadelphia played a large role in my life and that of my family, and your splendid website brings back many happy memories. For me and many others, however, there is also deep sadness concerning the decline of so much of the once great city and the loss of most of its once innumerable commercial institutions. Please keep-up your fine work. Your's is a first-class work.
Posted by: John D. Mealmaker   |   Aug 14, 2014 2:24 AM
Dr. Fisher, The name Philadelphia University was adopted in 1999, as you write, but the institution dates to 1884 and has been on School House Lane since the 1940s. It acquired the former properties of the Lankenau School and Ravenhill Academy, but it did not "merge" with either of them. I hope this helps when you update your site.
Posted by: David Breiner   |   Jun 11, 2014 10:05 PM
Hello Dr. Fisher, I was looking for an e-mail address and this is what I could find. I must tell you my Mother who you treated for years passed away last May. She was so ill with so many problems. I am sure you remember Peggy Marchesani. We often spoke of you and how much we missed you as our Dr. You also treated my daughter Michele who will be 40. I am living in the Doylestown area and have been seeing the Dr's there.. I just had my thyroid removed do to cancer. I have my fingers crossed they get the medicine right. I am not happy with my Endochronologist she refuses to give me Amour. I spoke with my Family Dr who said he will take care of it. I also discovered I have Hemachromatosisand two genetic components. I have a good Hematologist who is monitoring me closely. I must say you would find all of this challenging. Take care and I just wanted to convey this to you . You were way ahead of your time. Thank you, Joyce Gross
Posted by: Joyce Gross   |   Apr 4, 2014 2:06 AM
I come upon these articles from time to time and I always love them. Is the author still alive and available to talk with high school students? Larry Lawrence F. Filippone History Dept. The Lawrenceville School
Posted by: Lawrence Filippone   |   Mar 18, 2014 6:33 PM
Thank you for your articles, with a utilitarian interest, honestly, in your writing on the Wagner Free Institute of Science [partly at "" - with being happy to post that url but the software here not allowing for the full address:)!] I am researching the Institute, partly for an upcoming (and non-paid) presentation and wanted to ask if I might use your article's reproduction for the Thomas Sully portrait of William Wagner, with full credit. Thanks very much for any assistance you can offer here. Josh Silver Philadelphia
Posted by: Josh Silver   |   Jun 2, 2013 1:39 PM
Thank you for your articles, with a utilitarian interest, honestly, in your writing on the Wagner Free Institute of Science [partly at "" - with being happy to post that url but the software here not allowing for the full address:)!] I am researching the Institute, partly for an upcoming (and non-paid) presentation and wanted to ask if I might use your article's reproduction for the Thomas Sully portrait of William Wagner, with full credit. Thanks very much for any assistance you can offer here. Josh Silver Philadelphia
Posted by: Josh Silver   |   Jun 2, 2013 1:39 PM
George, Mary Laney passed away last November. I was one of her pall bearers. She had a bad last year. However, I am glad that you remembered her and her great work. I will post your report at St Christopher's and pass this along to her husband Earl. Best wishes Peter Hunt
Posted by: Peter Hunt   |   Mar 28, 2013 7:12 PM
Hello, my name is Martin. I came across [] and noticed a ton of great resources. I recently had the honor of becoming a part of a new non promotional project on We decided to put together a brief guide about cirrhosis, and the dangers of drinking. We have received a lot of positive feedback and I wanted to suggest that we get listed on the above mentioned page under The National Institutes of Health. Let me know what you think and if you have any further requirements or suggestions.
Posted by: Martin   |   Jan 1, 2013 8:51 AM
Posted by: SUSAN WILSON   |   Aug 12, 2012 12:49 AM

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