Philadelphia Reflections

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

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Right Angle Club: 2015
The tenth year of this annal, the ninety-third for the club. Because its author spent much of the past year on health economics, a summary of his latest book on the topic takes up a third of this volume. The book I published in 1980 is now selling on Amazon for three times its price when new, so be warned that at one time, the subject used to improve with age. George Fisher

SECTION SIX: Condensed Summaries

What I Have Learned (2)

That's what I believe I have learned from the Classical Health Savings Account of 1981, and what I think will improve it still further. Essentially, that's a correction of the tax inequity, a removal of the age restrictions to make it optional at any age, and an enlargement of the deposit limits. It requires very little legislation to accomplish those three things.

But my own horizons have been expanded by the reception of the original, simple proposal. So I have some additional suggestions for Congress to consider, for a New HSA which is an extension of the classical variety. These ideas tend to bump into other programs and require negotiation of the apparent difficulties, with resultant adjustments of other plans, originally intended or other purposes.

Encourage the use of index funds as sources of investment income for HSAs In this era of abnormally low interest rates, the public seems to like the substitution of common stock, even though it seems risky. I'm afraid we have learned that bonds are just as risky. But they pay considerably less, except in rare moments of "black swan" recovery from a stock market crash. Roger Ibottson of Yale has published the long-term results of the entire stock market, which today we would equate with total market index funds. He found the results over the past century have averaged 11-12%. At a viewing distance of about three feet, regardless of many wars and stock crashes, if you had bought the whole market and forgot you had it, the average looks pretty much like a straight line. That's no guarantee it will be the same in the coming century, but it's the best guess you can make, particularly if you don't read the newspapers very often. Buy-and-hold almost becomes buy and forget.

That's the wrong risk to worry about, however. Inflation and imperfect agency are much greater risks for buy and holders. At 3% a year, inflation has reduced a dollar to a penny, in the past century. So, instead of 11-12 %, a buy-and-hold investor really only gets 8-9%, net of inflation. In addition to that, every 28-30 years he encounters a black swan stock market, loses at least 50%, and lacks the courage to buy it back at its low point. From that point forward, the market "climbs a wall of worry", and he finally buys it back just when it regains its peak. The time-honored remedy is to buy a mixture of 60% stocks, 40% fixed income (bonds), which further reduces real income to 4-6%. If we ever cure this habit, gross stock prices will probably gravitate toward paying 5-7%, gross. Unfortunately, middle-man fees and kickbacks now result in the customer getting 4-6%, trying to avoid getting zero. Unfortunately, the majority of experts actually surrender somewhat less than that, and the reasonable investor simply buys index funds and forgets about them. That is, it comes out about the same, unless you get greedy, in which case most people end up losing money. For the most part, whether you win or lose, mostly has to do with where the market was when you started.

Consequently, we here advise "passive" investing, in an index mixture of total American stocks and bonds. You will do better than most people, and that's a pretty good badge of success. However, the puzzle is whether rules and regulations can improve on this result still further, by a tenth of a percent, here and there. Those who promise more, will probably deliver less.

Stretch out the compound interest as long as possible. Since Aristotle, it has always surprised people to find compound interest rises at the end of its term, so the longer the better makes the best outcome. We make three suggestions:

1. Don't buy term insurance (like most health insurance), buy whole-life. You might turn the whole business over to whole-life life insurance companies with experience in these matters, but they are private companies who can do as they please. The next-best choice is a Health Savings Account, which rolls any unspent balance over to later years, and gives it back to you at age 66. It's tax-exempt, and if you spend it on healthcare, it is doubly so. If you waited another twenty years, it would grow quite surprisingly.

2. Use last year of life re-insurance. People die at different ages, but the last year is usually the most costly, and it happens to everyone. If you set aside a comparatively small amount of money at birth, it will multiply 289 times at 6.5%, by the age of 84, the current average longevity. If you got 7% net, it would grow nearly 1000-fold. If transferred to Medicare, it reduces Medicare costs by at least a quarter, and Medicare really should refund a quarter of your payroll deductions as well as your Medicare premiums, maybe even more. The arithmetic is pretty complicated, but with luck it might pay for all of Medicare, except for existing debts for borrowing earlier when we ran a deficit. Furthermore, Medicare is 50% subsidized, so that has to be figured, too. Extending this subsidy to everyone is a big argument against single payer, by the way.

3. Use first year of life reinsurance. This is the reverse of the above, because the 3% of healthcare costs now thought to affect newborns is almost invariably donated by another generation. Young parents without much savings are strained to subsidize their children, so you might as well include children to the age of 21, which is 8% of healthcare costs. If you overfund Medicare by $100 at birth, it will grow by enough to subsidize grandchildren by the time grandpa dies. There are laws against perpetuities, but they limit inheritances to one lifetime, plus 21 years--plenty of time. This is a new concept which will take time to adjust to, but I can think of no other way to pre-pay a newborn. If you use some variant of this approach, health costs could be reduced by another 8%, for an additional cost of less than $100.

In closing, let me remind the reader health insurance is turning into a gigantic transfer system. The middle third of life is supporting the two-thirds, before and after. And only the last third has much sickness. People who are well don't like to subsidize those who are sick, and eventually may rebel. It's much better for young individuals to subsidize their own old age, than for one demographic group to subsidize another group of strangers. Particularly if those few who are lucky and escape much sickness, get to keep the savings for their protracted retirement.


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