Philadelphia Reflections

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

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Introduction: Surviving Health Costs to Retire: Health (and Retirement) Savings Accounts
New topic 2016-03-08 22:42:53 description

More on Last Year of Life Re-insurance.

It's looking far ahead indeed, but at least in theory, everything about health care costs will eventually disappear as we cure disease -- except the first and last years of life. Everybody's born, and everybody dies, so the goal of all health insurance, single payer or single individual or other, is to reach the configuration of only two critical remaining years to be paid for. How long it will take, at $33 billion per year in research costs, is hard to say, probably a very long time. But at least we can be working in that direction, while we pursue shorter-term goals.

Our short-term goal is to lengthen the period of compound interest, and to get more of it deposited early. Ultimately, that should reduce the amount to be paid at the time of service. The more we reduce Medicare costs, the more these two features combined, lead to flattening out the lifetime bulges in costs at the time of service, which essentially means, from further evolution into Medicare. That, in turn, reduces the amount transferred to Medicare from working generations. As mentioned earlier, it is dangerously unbalanced to have the working population, which gets less and less sickly itself, pay for healthcare of children and retirees, whose costs are steadily rising as disease gets pushed into new categories of life. We must hope ultimately to achieve reduction of the cross-subsidy, while we work to prolong the period of compound interest income, directly.

To a degree, it is a happy circumstance that young people are healthy, while old folks relentlessly concentrate a lot of sickness and death in their group. It's a moderate nuisance for cross-subsidizing employers who extract subsidy money without being able to guarantee benefits after an employee changes employers. There's not much they can do except hide when it happens. This nuisance has been regularly endured, until by now it is becoming a serious problem. But it's so simple, really. All you need do is let the employees own their own policies, take them with them when they change jobs, and actually collect what they earned while they were young. A whispered appeal would be, to correct this difficulty before it causes rebellion.

If the Medicare payment system is reviewed, it can be seen we are already sequestering about a quarter of Medicare costs through the payroll withholding tax, collected from every workman's paycheck. What happens next is not so attractive. Instead of accumulating the withholdings within an interest-bearing account, they are absorbed into the general fund and can be spent on almost anything.

Accountants in the government will have to tell us the exact amounts that could accumulate, but Medicare spends about $50 billion a year. We can thus assume equilibrium at 25%,or $12.5 billion for payroll withholdings. Suppose for a moment the money could be put into total market index funds (which at 11% gross sustain inflation attrition of 3% and overhead of 1%) leading to a 7% net gain. Since money doubles every ten years at 7%, in fifty years the withholding float should produce five doublings, or 3200%. Since we started with a quarter of Medicare expenditures, that's 800%, or eight years, of annual Medicare cost for each year you keep doing it. No doubt it's too drastic to remove 25% of withholdings, but we only need a fraction of the total to cover the last year of life. And we don't even have to pay that until the worker dies, which on average is going to be 21 years (two doublings) after he reaches 65. So it sounds to me as though you only have to wait sixty or so years before a set-aside of a portion of a year's Medicare cost would pay for current last-year-of-life costs. You probably wouldn't do it exactly that way, in order to shorten the time you must wait to get to the payoff. But this rough approximation illustrates that no amount of quibbling about the principle involved would reach any conclusion except that it's do-able. The issue is whether we wish to change our whole fiscal premise in order to do it. But let me suggest another consideration: if the Singapore government, for example, succeeds at doing it, can we withstand the pressure to go along? In my opinion, our rhetoric would rapidly change, because everyone knows nothing must ever happen for the first time.

And remember one more thing: if it works, it will reduce total Medicare costs by 20%, or whatever is found to be the true medical cost of the last year of life. Make it the last two years of life, and you almost wipe out the Medicare deficit. The last four years include half of Medicare cost.

We expect a more accurate assessment of the "exact" numbers from this source by people who own calculators, and it may be less, but it will still seem appreciable. In addition to payroll deductions from working people, Medicare obtains a similar amount from retirees as Medicare premiums. As you reduce the deficits, you can stop collecting premiums. Carried far enough, you can start reducing the Medicare budget -- and start sending the reduction to beef up the retirement funds, which in this case I would expect to define as the surplus within their Health and Retirement Savings Funds. There's more to this idea, starting with the first year of life, which is a wholly different matter.


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