Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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SECTION FOUR: New Health Savings Accounts
The project combines several concepts developed in other chapters, but is ready to be considered as a whole.

Proposal for Health Savings Accounts, Extended (N-HSA, 2015 Version))

On June 26, 2015, the United States Supreme Court announced its decision upholding the status quo of the Affordable Care Act. As Justice Jackson once put it, "We are not final because we are infallible, we are infallible only because we are final."

It would thus appear that some or all of Obamacare will continue at least until the next presidential election. For now, the Affordable Care Act is the Law, and so my immediate reaction was to propose a health care program to take care of everything else, leaving a deliberate gap from 21 to 66 untouched for whatever might be coming from the Administration, because it seems so unpredictable. What that leaves is childhood care and Medicare, plus thirty million special cases, like prison inmates, illegal immigrants, and disabled. A good case can be made that these groups differ so much, it would be better to employ five special-purpose programs rather than some one-size-fits -all approach. However, they do share some common features, and could be better integrated. For the most part, the government is their ultimate source of revenue. They are all limited in their freedom, so more supervision of the care they deliver is required. And, especially for children and prisoners, they will eventually be entitled to some of their money back at a later time. In some ways, the government acts like their trust officer.

So a Health Savings Account might well be generally suitable, since they all might need a trust officer and a guardian angel resembling a Judge of the Orphans Court. In all the cases, there could arise special needs in their management for an accountant, a doctor, and a Judge. Foreseeing a triumvirate for supervision, and a HSA for storing the funds, the issue then arises whether it is superior to have a federal system or a more local one. Let's forget the Civil War; the federal approach confers uniformity, the state approach confers more flexibility for local control. In turn, the federal approach provides an escape hatch from local preferences. Obviously, federal prisoners will have federal supervision, and state prisoners will have state supervision, although it is questionable whether the source of the funds has much to do with the best form of supervision. Money talks, however, so this issue is probably not debatable. Nor is the issue of co-mingling of funds; the answer is a loud No. In fact, turf issues probably lead to the same response in most of these programs. In the cases of prisoners, the government must supply all the medical care, not just part of it, so voluntary Catastrophic insurance is unsuitable. All in all, you would have to ask what problem we solve with all this quarrel; ultimately you must answer for whether this new supervision is or is not superior to existing ones.

That leaves a Health Savings Account as a vehicle for funds, adding some income and possibly reducing some costs. To some extent, the HSA relies on individual responsibility, and all these people potentially have some loss of individual responsibility. Just as some Orphans Courts seem to be run by angels, others are a sickening mass of corruption, and there is no reason why this would be much different. The situation may possibly call for a blue-ribbon panel of experts to review and recommend, but scarcely calls for action to restructure everything. And it is doubtful whether the similarities of these different groups of people are greater than their differences. All these ideas have some merit, but seem more appropriate to individual adjustment, than to nationwide debate.

That is, the practical residual is addressing the healthcare of children, and the elderly. It seems-- to some people-- too soon to propose privatizing Medicare, since it has not sufficiently completed the process of shifting most illness costs from employer-based to itself, and has not even begun the process of shifting healthcare costs to retirement costs. Both shifts will probably occur in the next fifty years, but right now, the future of program planning is too unstable to build on. Its core problem is inability to afford the 50% government subsidy, and yet there is continuing sentiment to extend that subsidy to everybody with a "single payer" system. Fighting a battle of perceptions like that is too daunting to attempt. So what does that leave? Children.

Once you narrow the focus, you can easily see why financing the care of children has been avoided. No one has seen any way to pre-pay a newborn's health care expenses, which are reported to be 3% of the total, for the first year of life. You might as well make that 8%, and include all children up to the age of 21. The most immediate legal responsibility falls on parents who are themselves only marginally self-sufficient, many of them either unmarried or in unstable relationships. The only hopeful feature of their finances lies in the potential addition of 21 years of compound interest, if funds can somehow be transferred to use that.

I propose we overfund Medicare just a little, compound the inheritance for (on average) 83 years, and transfer it (greatly enlarged) to a grandchild's HSA at birth. Adding the two, the transfer would have 104 years to compound, and thus would require only minute amounts of seed money. My calculator reports an investment of $42 at the start will result in growth to $27,559 in 104 years. That would assume an interest rate of 6.5%, tax-free, net of 3% inflation. The revenue wouldn't look like that for 83 years, because existing grandparents are of all ages, ranging from 40 to 100, and each one would be expected to contribute catch-up revenue from birth to present age, and could stop contributing with the birth of a great-grandchild. But let's not get down into the weeds of smoothing out the payroll contributions to make the transition payments appear smaller; payroll deductions already do some of that. There's a long transition period, but the ultimate cost comes down to $42 per person per lifetime before you fudge the numbers. Meanwhile, a major problem which has defied planners for a century gets solved, and reduces the insurance costs of everyone else who was invisibly subsidizing the system. You might even increase the birthrate, which some would applaud but others would deplore.

That results in no small effort, however, because extreme versions of our focus programs require a transfer of at least 68% of healthcare costs from people who are not seriously sick, to the places where costs more naturally concentrate. The longer we wait, the worse the problem could become because of demographics.That is the case for every broad-based plan ever proposed, but this is the first one to concentrate on nothing else, because we are blocked from diluting sickness costs with the costs of well people. Since we cannot easily force well people to agree to funds transfer, we merely relieve them of the need to pay the costs, and expect they will take advantage of the opportunity. Similarly, we cannot force sick people to make use of the program, so we must rely on their recognizing the advantages.

First Year and Last Year of Life Coverage. We start with the simplest case. Everybody gets born, everyone dies; there are no exceptions. Furthermore, these two years are the most expensive ones, and are likely to remain so. Medical advances of the future may raise the costs of terminal care, but even that is uncertain, and costs may go down. It is likely to remain true that just about everybody who dies, dies at the expense of Medicare, so we start with firm data, readily available. To simplify boundary disputes, using the calendar dates of the first year and the last year eliminates that particular fuzziness. Furthermore, obstetrics and terminal care contain elements found in no other age groups, concentrating the scientific issues. When I first presented the idea to a medical audience, one wit rose to the microphone and recalled a town in Pennsylvania that passed a law stating: "Every fireplug in the town must be painted white, ten days before a fire." He was of course quizzing me how you knew when the last year of life began. The answer is, you wait until the person dies and count backward, and you get the cost data from Medicare. Since everyone knows how imprecise hospital prices may be, it is probably sufficient to reimburse average terminal care costs for the year and the region. If the patient retains Medicare coverage, a simple funds transfer to Medicare simplifies both administration and coverage disputes.

The big problem is the long transition, unless Medicare and the Administration should agree to prime the pump. Therefore, the program must remain voluntary, and may even have waiting lists at times, depending on its popularity. Certain tricks known to financial managers may help to shorten the transition to self-sufficiency. For example, CSS reports that the first year of life absorbs 3% of healthcare costs, and the last year about 6%. That is, $10,000 should be more than ample for the first year and $20,000 for the last year of life. That's assuming a lifetime medical cost of $350,000, the best estimate available. By externally supplementing the first deposits, the surplus after ten years can be applied to accelerating the funding of the last year. But even doing that could take twenty-five years to complete the process. Funds could be borrowed with a bond issue, of course, but eventually that would raise costs and prolong the transition. "Sweet spots" can be found, but at the best, the transition is a long one, certainly spanning several turnovers of political power. Nevertheless, at the end of it, these pivotal medical coverages would acquire a major funding source, and other programs could experience a major reduction, up to 9%, in cost duplication.

In this, as in other parts of the book, we round off investment returns to 7% when we really expect only 6.5%. Using the old adage that money doubles in ten years at 7%, the reader can verify approximate accuracy by doing the sums in his head as he reads. The rounding errors also compound, so for accuracy it would be better to rely on a present-value calculator, many of which can be found on the Internet.

The Rest of Childhood, Seniority, and Permanent Unemployability. So that was the first Proposal 21: , to which the second one is a natural extension. All children are dependents of their parents, and the heavy costs of obstetrics (magnified by the unusual concentration of malpractice claims) make it impossible to devise conventional pre-funding schemes. Young parents are often strapped for funds, so the lack of pre-funding is a growing problem in a Society uncertain of its family structures. Therefore, we have devised the grandparent roll-over. Tort reform would improve but not eliminate this work-around. Therefore children are lumped with senior citizen costs, and hence to a gradual buy-out of Medicare.

The permanently unemployable are included by using surplus funds from the other two, mainly because there is no way to establish eligibility except by starting a program and seeing what it costs if you monitor it. Those may not seem like adequate reasons to lump them together, but it will be seen the details feel congenial, to do so. That is always a good sign in new proposals.

Multiple Programs in Multiple Years. The transition problem is always vexing in a new program, but reaches some sort of new limit when the ambition is to work toward uniformity and maximum patient control, across the entire nation; fragmentation always sounds easier. The temptation is always there to issue orders and threaten to use force, but it must be resisted. Furthermore, enormous cost savings are readily available if programs are multi-year, and cost is a paramount issue, here. It's hard to beat compound interest, the longer the better.

To explain the reasoning of the grandpa transfer mainly requires the observation that grandparents are comparatively new re-entrants to the average family. It's simple (one grandchild's worth of costs, per person), it uses surplus cash after a grandpa has no further use for it, and it comes at an optimum time on the compound interest curve. It greatly stretches the lifetime for compounding, but it is also readily suited for a limitation on perpetuity. It even follows established family patterns, although families are under considerable stress, these days. True, it jumps over a new barrier for the first time, but it doubles the duration of compounding, skips over the issue of leaving a dark hole around the Obamacare age group, skips over the contentious issues of pre-funding obstetrics, simplifying a host of unnecessary red tape obstacles. And it reduces costs by half.

No Employer Involvement, No Obamacare Contributions. At first, it seems like a relief not to have to deal with the two thorniest issues of the past, but in fact it doesn't quite do that. If the patient has duplicate coverage, there must be cordial negotiations to see which coverage should be dropped. And while significant savings can be readily demonstrated, there will be some residual revenues which have to be transferred along with the patient, or the new program will starve. The complicated systems we have evolved to facilitate cost-shifting will probably invalidate old statistics, and perhaps some old ideas. Transferring six percent of the gross domestic product is by definition a tedious, difficult task, even if you reduce it to four percent in the process. Everyone is hesitant to name the individuals who will lose their jobs, or their pensions, or their seniority, if the program shifts significantly. But if the savings aren't significant, what good are they?

 

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