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

Return to Home

Related Topics

Some ruminations about health financing, written while we wait for the Supreme Court to announce its decision on King v.Burwell.

Flies in the Ointment

The reader will please excuse my round-about way of explaining the essence of an idea by skipping past one serious issue, and then returning to it. What you have just read is a succinct, perhaps overly succinct, description of the main elements of the lifetime HSA idea. Where I don't have precise data, I approximate it within the ball park, assuming it can be sharpened up later. What has been deliberately omitted from the foregoing description, is the possibility that someone will get sick and spend some money. That's not just possible, it's certain. When you spend money on healthcare, you can replenish the fund, but you can't replace the income it would have earned if you hadn't spent it. You can slide past that difficulty by double-funding it, but then you would go to the other extreme and over-count it. The concepts involved are pretty simple, but the arithmetic gets pretty complicated because it will change over time. A monitoring agency must be charged with making objective annual mid-course corrections within boundaries set by Congress.

Double Counting.The lifetime Health Savings Account is in three parts: for children, for wage earning years, and Medicare. For Medicare, the funding is fairly adequate, because the money is saved up in an escrow account, unspent while the buy-out price accumulates. In fact, it could be 50% over-accumulated by continuing the payroll deduction and premiums. Once you are ready to transfer the funds for the buy-out, you can decide whether you need to accumulate the payroll deductions and Medicare premiums. My guess is that at first it would work without such supplements, but eventually longevity would increase, new diseases and new treatments would appear, and risks of a cash shortage would then appear. Accordingly, continuing the payroll deduction and premiums would be one possible way to accumulate reserves for unexpectedly high sickness costs. If that method is chosen, some protections must be built in, to protect the reserve from being diverted to other uses..

The same might be true of Grandpa's grandchild insurance, which in a sense is borrowed from an adjustment in Medicare rates. The childhood costs are also fairly small. The only real example of double-counting which remains, is in the wage-earning group from age 21 to 66. That issue could be visualized in two segments.

From age 21 to age 45, health costs of working people are not significantly higher than for children, except for obstetrics and gynecology. Even those two items are partly covered by splitting apart the obstetrical costs between mother and child, now artificially combined in contrived family insurance plans. Aside from this issue, the health costs of young adults are not greatly different from adolescent costs. From age 45 to 66, however, the cost curve gradually rises until older adult costs begin to match the Medicare costs (with terminal illness removed). It is this subset of one group which likely would create the greatest cost resulting in double-counting the investment income, and replacing the medical expenditures. Furthermore, this is also the arena of greatest cost-shifting, and therefore, may I say it, obscurity in the data. Nevertheless, the shortfall of middle-aged sickness costs has boundaries constraining it. The annual costs surely cannot be greater than the first year of Medicare, for example, and the earning power is at a peak at this time of life. The greatest medical advances have fortuitously concentrated in this group. The costs are likely to decline, as science concentrates on the four or five main diseases of maturity (diabetes, cancer, Alzheimer's, and Parkinsonism). There is also the special issue of the ability to delay some costs a few years, until Medicare has the responsibility to pay for it.

It seems possible the data already exists to cope with the costs of these matters, but at an extreme they should be covered by doubling premiums for the twenty years in question. Doubling $365 a year should provide a $365 cushion in escrow for contingencies. Since this is the peak earning period of life, and still remains well below average health insurance premiums, it seems to have the greatest fairness. Transition costs, the other great unknown, are beyond my capability to predict, and I simply don't do it. During the transition, the opportunity would exist to devote special research to this topic, and at least see if it turns up any crippling issues. I hope not, and I doubt it, but the potential has to be acknowledged. In the meantime, it would look as though the good ol' standard issue Health Savings Account is a little safer bet. It reduces costs, but not as much as the various methods of capturing the upswing of compound interest, at its far end.

Black Swans. There's a possibility that things will go in quite the opposite direction. The stock market has been going up at a rate of 12% for a century. Why does the investor only get 5% to spend? Inflation is clear enough, but why not 9%? In a sense, this apportionment is traditional, tracing back to investing endowments for colleges or museums. If the stock market has a black swan and drops 50%, are you going to close the doors of the college until the market recovers? One conceivable strategy for this event would be to accumulate a cash reserve to be used during dark days of a depression. However, this has inflation dangers, and it is impossible to say how much it should be, because if you keep 50% in reserve, you might as well say you are only realizing 6% overall during a 12% rise. So, the alternative wisdom urges an investment of 60% in stocks (at 12%) and 40% in bonds (at 4.5%), allowing you to keep the doors of the college open in both an inflation and a deflation, when the numbers will suddenly change. So, a 60/40 investment ratio became traditional in investment circles, reinforced by saving the neck of many investment managers. But just a minute.

We are investing for our own health care, not for a college. If revenue declines for several years, it doesn't matter nearly so much for a young person if his income dips, only to recover in later years. The fundamental argument underpinning 60/40 is weakened considerably. If the market is headed for 12% in the long run, why not just ride out the dips and peaks? There's no good reply to this challenge, except an innate conservatism when you are managing other people's money. Very well, why don't we just lean in that direction? Surely a ten year old child can ride it out, even if a 70 year old has to be more cautious. Consequently, you begin to see more and more investment managers leaning toward 80/20 or even 90/10 mixture of stocks (12%) and bonds (4%). When your clientele is of many mixed ages, such as pooled Health Savings Accounts are likely to be, perhaps the younger ones would be well served to get 6% or 7% income, while the older ones play it safe with 4%. This line of reasoning is likely to be more widely heard as uncertainty about middle-man costs gets more wide-spread. If the investment manager is suspected of taking 2-3% of the reserve as a kick-back, or just profit margin, it becomes a more pointed argument that brokerage accounts are not pooled investment funds at all, but rather an open market between a buyer and a seller. If the stock market takes a black swan dive, you can be sure the 4% reserve will not be used to buffer the losses of the investor, in the present arrangement of things.

If the projected investment return is high enough, no investment contingency is worth discussing. In this book, we only wish to point out that a 6.5% lifetime return is more than ample to cover lifetime health costs, plus a wide contingency reserve. That is particularly true if you remember the bulk of costs come later in life. A return of 6.5% does not seem at all inconceivable, if you look at Ibottson's data for Twentieth century asset returns, and read John Bogle's books on saving passive transaction costs on total-market index funds. At the same time, I am mindful of all those potentates who blithely accepted 17% projected returns on pension funds a few years ago, and now look at them. We are double-counting the reduced medical costs of the future, which we cannot know with precision, and warn that you must keep an eye on them. But there is such a wide swing between present premiums and any conceivable escalation of $365 a year, that it seems worthy of serious investigation.

The Premium of Catastrophic Coverage. You have to feel sorry for the owners of an insurance company which sells catastrophic health insurance. It has long been defined as high-deductible coverage, but nowadays everything has a high deductible, and an upper benefit level which is not mentioned much. The was a time when a well-functioning market was maintained by the adage that the higher the deductible, the lower the premium. It was often called "Excess major medical coverage", and entirely used as reinsurance. Under the circumstances of the Affordable Care Act, high deductible policies hide the subsidies they make and receive, and do their best to avoid quoting a price unless the customer is in the office and has his pen in his hand. The Affordable Care Act made it clear it would like nothing better than to have Catastrophic insurance disappear in disgrace. As a matter of fact, ever since the McCarran Fergusson Act, it is a question whether any insurance may be regulated under the Federal, as opposed to State, government. The United States Supreme Court has an opportunity to address these vexing issues in King v. Burwell , and we await its decision with eagerness.


Please Let Us Know What You Think

(HTML tags provide better formatting)

Because of robot spam we ask you to confirm your comment: we will send you an email containing a link to click. We apologize for this inconvenience but this ensures the quality of the comments. (Your email will not be displayed.)
Thank you.