Philadelphia Reflections

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

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SECTION THREE: Classical Health Savings Accounts: Many Surprises
One of the originators of Health Savings Accounts describes their advantages over existing health insurance. Improvements are suggested for the regular HSA. More dramatic cost improvement emerges from a lifetime HSA version, substituting whole-life approaches for pay-as-you-go. Most of this requires legislation, but could reduce health costs dramatically.

Simplified Math

Let's do some simplified math. The ancient Greeks, possibly Aristotle, discovered that money at 7% interest will double in ten years. By remembering this simple accident, you can follow the math of Health Savings Account in your head, without writing anything down. If you remember that life expectancy is now 84 years, you have eight, going on nine, opportunities to double your money. Go ahead and do it: 2, 4, 8, 16, 32, 64, 128, 256, 512, 1024. At the rate things are going, a dollar at birth becomes 512 dollars at age 90, and it isn't unreasonable to hope for a thousand-fold increase in the future.

The current expectation is an average of $350,000 in lifetime healthcare costs per person. A gift to the newborn of $350 will almost pay for it. If he sets this aside for a lifetime, forgets he has it, or just doesn't spend it, it will cover his costs. Medicare is about half of the lifetime cost, so $175 at birth would pay for a buy-out. The individual is already paying a quarter of Medicare as payroll deduction, and another quarter as premiums. So, it would cost something like $87.50 at birth to pay for the rest. Whether it's a gift of his family or a government subsidy, that is manageable. It's close, but it's manageable.

How do we get 7% interest? We assume an index fund of the total stock market will produce 11% per year, because that's what it produced for the past century, in spite of wars and recessions. We assume 3% inflation, for the same reason, leaving 8% net return. Because every 28 years on average we have a "black swan" stockmarket crash of 30-50%, you have to ride it out. Therefore, the conventional advice is to invest 60% in stocks and 40% in bonds, reducing your net return to 5%. But unlike a college or a museum, we have no payroll to meet, so we only use 60/40 after the age of 50, when major illness costs begin. That brings us up to 6.5% overall, after the HSA gets past its early transition costs. Since index fund investing is now readily available for less than a tenth of a percent management cost, we ignore the present fees of ten times that, which are customary. If you are forced to it, just put the certificate in your bank lockbox and have it opened when you die.

How much you actually invest at birth, or whether some other payment method is employed, are political decisions. The point to be made right now, is that passive investing of this sort is close to being feasible. It is close, but a cure for cancer or diabetes might make it a sure thing. The points to be made are two:

1. Adopting this approach with the Classical Health Savings Account, may or may not pay for the whole health system for everybody, but it would pay for a mighty big chunk of it.

2. The rest of this book, attempts to find a few other improvements which really would pay for the whole system with some confidence. There's no way to prove it was successful except to conduct some pilot programs. I would expect that dozens if not hundreds of other people would try to find other refinements.


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