Philadelphia Reflections

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

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Pearls on a String:Further Extending Health (and Retirement) Savings Accounts
Pearls on a String: Further Extending Health (and Retirement) Savings Accounts. HSAs are the string. Retirement saving, Privatizing Medicare, and Shifting Childhood Costs-- are the Pearls. Other Pearls to follow.

Pearl #4 : Funding Newborns and Children, a Special Case

We like to say newborns have a limitless horizon, and we also like to say their health costs are pretty cheap. Both things are true in a general way, but the occasional exceptions are quite often a financial disaster. An episode of extreme prematurity can cost a million dollars, and an extra chromosome can lead to a perhaps lovable life combined with the prospect of never becoming self-supporting, for the entire lifetime. The overall situation seems to demand a dual system: a catastrophic insurance for one group, and a highly predictable protection from the small, steady and universal health costs of the usual child. That seems simple enough, except the economic circumstances of the parents are an additional variable. And probably the unusual abundance of malpractice suits is another.

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Medical costs of children neatly bifurcate for HSA use: rare catastrophic costs, and common small ones. {bottom quote}
Let's dispose of the two side-issues hurriedly, in order to focus on the two types of health insurance required. It would be my position, the respectable members of the legal profession have shirked their duty to clean up the profession's trial bar. The malpractice situation will not be rectified until they do. Secondly, most problems are the consequence of earlier solutions, so the changing environment is going to force us to modify the concept of "family plans" to pay for childbirth and children. That was once largely an accommodation to the need for the father's employer to find a way to pay the full health costs of his employee. Subsidizing large families was just part of the approach. But in effect it created a disincentive to hire employees likely to have large families, at a time when economists view economic growth as parallel to population growth. So the philanthropy of early company leaders eventually became a disincentive for later Human Resources departments, because it was now perceived as not in the company's interest to subsidize expensive employees. (It was probably the change from family businesses to stockholder corporations that was the main change.) That also applies to political squabbles about immigration, probably related to the tendency of immigrants to join one particular political party. Both of these mixed motives, malpractice and demographics, make the already overcomplicated health insurance problem, progressively more complicated.

Obstetrics is expensive for young parents, and with prematurity, malpractice costs, and genetic medicine in its future, finances may well get even more strained. The employer's contrivance of "family plans" will only serve as long as employers are willing to pay for it, and society seems to be moving away from even this option. Comparable provisions would apply to those who do not have employer-based insurance. A contrary but related incentive described later, is to add 20 or more years of compound interest at the beginning of the child's Health ("and Retirement") Savings Account. This extra extension of compound interest back to childbirth is about all little children would have to offer an insurance design, while everything else has some kind of drawback.

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Newborns have no money. Someone has to give them some. {bottom quote}
The goal we are therefore working toward might easily be called an exchange of the obstetrical and pediatric insurance costs to the baby's HRSA (Health and Retirement Savings Accounts, sort of in return for the protracted compounding. Even such remote return isn't a completely even exchange, but it's an exchange for something society is forced to give away, anyway. This is the exchange of income-generated funds for what had previously been a gift of someone else, usually the parents, sometimes the employer. It definitely is not a repayment of anything the baby paid for. Before that argument causes a flurry, let it be said that all obstetrical and pediatric costs already represent an unacknowledged gift to the penniless child from somebody. Whoever that is, could be called the true recipient of the gift. But since the money was generated by new investment, it benefits some people without hurting anyone else. Call it a gift if you please, but remember it lacks many of the features of what might otherwise be called a gift. Society gains an increase in the birth rate and probably the growth rate of the economy. It also gains some measure of relief from general disquiet arising from cost-shifting to a racial subgroup in straightened circumstances, who have traditionally responded to such pressures to the disadvantage of the educational system, and the choice of careers.

The direct purposes behind a shift are to add the extra years of compound interest to the baby's HSA, which effectively means adding it to everybody's HSA, a very sizeable sum, but perhaps a smaller one than more directly addressing what is causing so much trouble. The same people will generally pay the same amount in premiums, but a framework has even been created for shifting the social sands of the future in same-sex marriages and the like, just as well as penniless parents with expensive children. Every child would get catastrophic medical coverage, and routine childhood medical costs through two types of insurance. That is, every newborn would get an HRSA, and every newborn would have cost-free obstetrical and pediatric costs, which for the most part would be shifted from the parent's insurance arrangements. Since the catastrophes, obstetrical and pediatric, usually end up as a cost to society anyway, it is not extreme to investigate whether government subsidies may be appropriate for their insurance. In fact, it is not greatly different from the exchange Henry Kaiser invented, of making a gift to employees out of health insurance, which was already deductible from corporate taxes, and now is deductible from the employee's taxes. Since the unemployed and self-employed are excluded from that contrivance, this proposal -- in a sense, proposes we extend it to everyone.

In somewhat greater detail, the proposal is to take the unsubsidized cost, give half to the mother's HSA, and the other half to the baby's HRSA, with the proviso that with both parent's consent they may assign it to the father's HSA, which makes up the other half of the cost. In essence, the rebate is split between parents unless one objects. (Hidden in the background is the suspicion that childbirth and death costs are both overtargeted for cost-shifting, just because they are unavoidable.). The ultimate source of the money is from the growth of the parent's HSAs from the birth of the child until the child's 25th birthday, a growth ratio for the money of about 6 to one. A single-premium health insurance for the child from birth to 25 might follow the same funding pattern. If you add the extra years to the other end, from age 70 to 90 however, the multiplier is 512 to one. Overall, the gift consists of a substantial subsidy for a substantial portion of the obstetrical and pediatric cost of having a child, but not a full subsidy and, one should hope, not coming from the taxpayer. The cost is reduced by the growth of HSA investments for a 25-year period, but ultimately is only reduced, not eliminated. There would be an initial cost to the parents, or in the case of poverty, a subsidy of about a fifth of the original cost. It would seem unwise to subsidize more heavily until we discover the response of the birthrate to this much subsidy, and the resulting public reaction. The subsequent ability of the parents then to modify the birthrate is an unexplored feature of this proposal, which could unfortunately extend into disputes about immigration policy.

Advantages. It's complicated to explain, fairly easy to understand. The advantage of an indirect solution lie in the establishment of a program which would considerably widen the appeal of an HRSA, extend its legitimacy to widen the period for compound interest to work, and make a start on a solution to a portion of healthcare which has previously defied complete resolution. It begins a program of a First and Last Year health insurance which by accordion principles would eventually replace the present disjointed one with another which matches the more probable scientific future. And all of this at relatively small cost, because of the multiplier effect of compound interest for twenty or thirty years.

Some time ago, it was originally imagined that Medicare could become overfunded, and result in surplus at the end. Grandparents could then transfer the excess to their children or grandchildren and pay for it all. Unfortunately, the finances of Medicare turned out to be so parlous, this approach must be more tentative; since it implies the money would still be there, ninety years later. It's going to take a long time to restore the trust in government we had a century ago; but on the other hand it took a century before that, to dispel the distrust of government with which we first crossed the Atlantic.

Being Born as a Pre-Existing Condition. Medical science is a wonderful thing, but it is impossible to imagine a lifetime without some medical costs, because everyone has the cost of the first year and the last year of life. The insurance problem is to define who must pay the bill. It seems unfair to assign all of the cost to the mother, but in today's world it is more visible the father may not always be available. The concept of family plan insurance was once stretched in order to include the employer-gifted concept, whether the mother worked for the employer or not. But the unfairness of charging the same premium for families of three, as for families of six was obvious, since it might later warp employment practices to include religious preferences. Everybody had a fairness argument, nobody had a workable plan.

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The disincentive of the same premium for a family of three as a family of six, is obvious. {bottom quote}
Dispelling a Myth of the Past. It must be remembered, a "straightforward" funding proposal is not very simple, and for illustration an alternative is sketched out: Just have someone, the government in the case of indigents, contribute a hundred dollars to everybody's HSA at birth. Invest it in total market index funds for 90 years, and guarantee to pay a "big" lender back. The "big" lender finances the cost of the delivery and is repaid by the guarantee plus rebates from the two parties who benefit: the employer (or individuals who no longer have to pay the premiums for obstetrics), and the hospital which no longer sustains bad debts from this source. After appropriate payments from these indirect beneficiaries, the "baby's" HSA is the ultimate guarantor to the "big" donor. There should be some money left over, so the fund can be transferred to others and become perpetual in effect if not overtly. Unfortunately, this "straightforward" financing scheme is itself so complicated it will probably fail, and if not, its paperwork might eat up all its savings. In fact, the "big" lender might charge a higher interest rate than the HSA could earn. Let's see if a less straightforward approach works better.

Still Another First Twenty-Five Years of Life, Health Insurance Proposal. The first step is to get legal permission to do some unorthodox things. As a condition for providing the Last Four Years of Life benefit, which greatly favors Medicare recipients, the beneficiary agrees that somewhat less than ten thousand dollars may be transferred out of unused death benefits in Health Savings Accounts for the benefit of one child or grandchild, into the child or grandchild's HRSA. The ultimate source of this money is its growth following deposit, so it actually wasn't the depositor's money. Furthermore, with a birth rate of 2.1 per child-bearing woman, the math works out to one contribution per donor, no matter how many grandchildren there are, as long as the present birthrate remains constant. An insurance pool would be provided for childless situations. Because of higher interest rates at the end, payment may be delayed up to 21 years after death, just skirting the creation of perpetuities.

Upon the birth of the first child or grandchild, the money is transferred between HRSAs to the child's, meanwhile continuing to gather investment income for up to 21 years. It is paid out as a health insurance policy for half the cost of the birth of the child, plus the first 25 years of his life, and calculated to become exhausted at that time--except for the seed money to pay the next death benefit, which started to gather interest at birth. After age 25 the child is on his own. Age 25 is the moment of maximum career-choosing, but it is also the time of least financial responsibilities. It is the time to be taking risks, and therefore the time to be carrying least baggage.

Of course, health care might become the responsibility of the Affordable Care Act, the employer, or the individual, until the onset of Medicare. That issue remains to be seen. The rate of return on seed money is constantly monitored and re-adjusted to equal the final cash requirements, so the fund is gradually adjusted to be self-sustaining after the transition period. Our more realistic position is that age 25 is the point of lowest health risk in a lifetime, and it would not be shocking to leave the matter undetermined until the ACA issue gets more clarification. If by any chance the ACA is repealed or collapses, repairing the damage will probably occupy the full attention of Congress. It would then be particularly useful to have debated the various components of this plan in advance, searching for possible substitutes.

Features of First-Last Years Proposal. In the first place, interest on borrowed money is reduced or eliminated; that invisible cost disappears. Secondly, start-up costs can be postponed until financing accumulates, administration is in place, etc. Thirdly, the day would surely arrive sooner, when this system was self-financing, than with the reverse-mortgage approach. Although this system has a complicated start-up, it gets simpler and cheaper with time, and would be gradual. Ultimately, it might even solve a problem no one has solved -- unlocking childhood costs, the main obstacle to lifetime, or whole-life, health insurance -- at comparatively minor cost. That, too, would be a gradual phase-in, but it need not wait for a resolution of Affordable Care perplexities, using Health Savings Accounts in both cases as its foundation.

The Ultimate Outcome is the creation of a First and Last Years of Life Fund. The drain on Medicare, ACA, and regular health insurance is greatly reduced, along the way, but it may be unwise to aspire to eliminate these costs entirely; future generations can decide that. Meanwhile, the creation of a huge pool of ownership rights in the American economy should be addressed, with the first priority of reducing medical costs if possible. The creation of government control of the private sector should be vigorously avoided, as well as concentrating ownership control of corporations, by the accumulation of diffused stock voting control in millions of HRSAs. For this reason, the courts should recognize the unwisdom of permitting voting blocs, transfers of voting control, and other strategies to defeat the diffusion of control expressly intended.

Let's go back and look at the math. Money at 7% will double in value every 10 years, so if a newborn invests a dollar at 7%, it ought to be worth nine doublings in a lifetime, or 2,4,8,16,32,64, 128, 256, 512 increases -- that is, $512 in 90 years. Apparently it's rough and rounded off; a calculator on the Internet says it will be worth $515.69, based on two assumptions.

The first question is whether you will really get 7% on your HSA investment, and will it be compounded quarterly, following tradition for stock dividends to be issued every three months. Historically, that's fairly close, except the stock market averaged only half as much during recent market turmoils, suffering 30% dips in some years, 30% gains in others. In retrospect, it makes a whole lot of difference if you start investing just before a long recession, or just before the start of its recovery, so it may take 20 or 30 years to smooth out to the average. If you started investing at the age of 60, it's likely your results will mainly reflect your lucky birth year, even if you follow the precepts of "passive" investing in index funds of the entire stock market. A newborn risks a little. Approaching retirement, he may risk everything, but actual performance is unpredictable. Therefore, proposals to even it out in some way, are inevitable. But that should be the last step. Somehow, the public must learn to accept the fact that experimenters, risk-takers, are usually necessary as a first step in any major change.

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A newborn risks a little. Approaching retirement, he may risk everything. {bottom quote}
Black Swans Another way of looking at this matter is to get out Yale Professor Roger Ibbotson's compendium of stock prices for the past century, and ignore the boilerplate reminder that past performance is no guide to future performance. Of course it is no guide, but it's all you have. Limiting your attention to the biggest 500 or 1000 corporations, which are a little safer, stock market total returns have risen fairly steadily at about 11% a year. However, inflation has eaten away at that by 3%, so the investor only realized 8% before the broker agent took out his own expenses. Moreover, the market is subject to 30% swings every few decades, and if you protect yourself from "black swans" by holding 40% in bonds, your returns average closer to 5%. "Active" investors try to run between the raindrops and do a little better, but the fees of an expert advisor absorb most of the profit, bringing you to about the same result. So unless you can somehow control the year of your birth, you are going to average somewhat less than 7%. The great challenge is to whittle away at these deductions. For example, this particular fund does not have a museum or a school to run, and thus has fewer ongoing cash needs to compete with depositor distributions. We must be careful not to add a burden in the name of prudence.

But if you fool around with tips you heard at a party, you will almost certainly do worse. Taken all together, most conservative investors would say: an average investor is going to do worse than 7%, would be lucky to average 6%, and may well average about 5%. The challenge is to beat those numbers. According to our predictions, that won't be enough to pay for healthcare and retirement completely. But then, nothing will do it perfectly as long as we don't know where longevity will level out, or whether healthcare costs will fall, or what the economy will be like in the meantime. We must assign a more reasonable definition to a "decent" retirement, provide for a moderate one, and leave the differences to our own sources of wealth. It's essential to encourage that much financial Darwinism to keep one generation from attacking the income of another through other routes. But it's hard to see us going much further.

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An average investor is going to do worse than 7%, would be lucky to average 6%, but may well average about 5%. {bottom quote}
Black Swans
To doubt that investor distribution won't cover the entirety of healthcare and retirement is definitely not trivial. It's worth trying however, in view of the gamble that science might do the rest, by curing some common diseases cheaply. And it's close enough to keep seeking that extra percent return, here and there. Since the existing financial system is so riddled with obvious inefficiencies, the chances of finding a breakthrough are not all that bad. The opportunities for people willing and able to take a risk are pretty attractive, but not everyone is temperamentally or financially wise to take them. Furthermore, everybody alive has already paid his birth costs somehow, so this childhood program can afford to be phased in last.

My guess is childhood funding will be greeted with reluctance. All the nasty talk about Wall Street makes a jarring clash with our soft and fuzzy notions about little kids. Kids run around in circles making excited noises, quite at variance with extensions of compound interest or contingency funds. But nevertheless, the math is close, and we cannot afford sentimentality. If we want to fund everybody's future, we need those years of extra compounding, and we need to face the fact that newborns will never have any money unless someone gives it to them. Those things won't change, and it helps nothing to drag out the discussion of it.

The system badly needs to put some money into itself, as early in life as possible, in the following areas:

Contingency Fund. Any person whose grandparent is willing to spend a thousand dollars at birth is very likely to win any healthcare bet. (It's likely to require much less than that, if we work hard at it.) There are lots of people who will never see a thousand dollars in one pile, in their whole lives. But there are millions of others who could easily afford it, and would become belligerent to be deprived of the liberty to do so. Is it really fair to prevent 80% of children from doing what 20% are unable to handle? Furthermore, a five year-old may seem impoverished at age five, and become a prosperous basketball star at twenty-five. With a swing of 500x from start to finish of a 90-year life expectancy, a contingency reserve eventually growing to a quarter or half-million dollars could easily be leveraged into a lifetime free of healthcare and retirement worries, and hence make a significant difference to lives. The issue of income disparities for newborns has little meaning until much later when the opportunity to exploit it has already eroded. There surely are many people who could afford this, and the leveraged effect on our economy might well unleash an unimaginable economic boom. Maybe it wouldn't, some would say; so a whole lot of people have lost a thousand dollars. So what? With enough income gain, these quarrels lose their significance. This contingency platform needs a demonstration program to make the gamble seem more realistic to its detractors.

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Transfer away of terminal care costs should reduce the cost of all healthcare by a quarter, and the cost of Medicare by half. {bottom quote}
The Last Four Years of Life Reinsurance. Medicare now costs about $12,000 per person per year, and the average person stays on Medicare for twenty years. Remember, average lifetime health costs are thought to be 300 or $350 thousand. But Medicare health costs themselves are also internally J-shaped -- a miniature version of full lifetime costs. Half of expenditures come in the last four years of someone's life. Let's simplify the slogan: Medicare is about half of healthcare cost, and the last four years are half of that. Advancing science may change this curve, which seems likely to reflect terminal illness. If it's approximately true, the transfer away of terminal care costs should reduce the cost of all healthcare by a quarter, and the cost of Medicare by half. The money isn't taken from anyone else and it isn' t created by magic. It takes advantage of the fact that terminal care comes at the end of longevity, which has grown to be almost ninety years. The rest is up to the stock market and the elimination of unnecessary costs. It it can't be done completely, it can be done in part. Its first step might be to eliminate the costs and profits of the secondary carrier, and add them to the compounding interest pool (see below). If the contingency fund pays for terminal care, it would come after a newborn expenditure of about a hundred dollars. That is to say, an expenditure of $100 (to the contingency fund at birth) could readily pay for cutting Medicare costs in half. If you know it is coming, why not save for it? The savings would express themselves as a reduction of deficit financing, payroll withholding, and Medicare premiums. These reductions could be gradual and in different priority, during the transition phase.

The first Twenty-five Years of Life Reinsurance. There is no way for newborns and children to pay for their own health costs; someone else has to shoulder this burden, usually the parents. Families of differing size are another complication, because small families resist paying for large ones. Because this problem has defeated conventional notions, we originally presented the possibility that grandparents should make the transfer, largely using investment gains to do it, but eventually for the relief of the parent generation. The parlous condition of Medicare makes this less certain. The first and last years of life would be largely funded by investment gains, and residual health costs would be much smaller and more equitably distributed. The precarious present system, of having the working third of the population support the non-working two thirds of the population, would be much reduced by a way shown to do it more safely.

Seemingly Shifting the Birth Costs to the Baby. Furthermore, it is important to emphasize that parents are currently paying the costs for children, so programs to fund childhood health would really mostly benefit their parents or their employer. Therefore, the most important part of this program is the re-arrangement of health costs between mother and child, which on first hearing seems to benefit the child. But it is unclear where the emancipation of women is going to take us. The perfectly understandable surcharge for women's health insurance, is nonetheless a factor in hiring patterns, and in family decisions about who is going to stay home as a caregiver. If the costs of health insurance for men and women were closer, it could help a lot. But they must not appear to violate the designs of Nature, or they will cause more trouble than they help. The two genders are in fact so different that attempts to even them out are often met with a contempt that is no help to the situation at all. A shift of health costs from the mother to the baby is a shift to someone else -- to a spouse or a consort who may well be isolated by his employer from the actual shift in costs. But it has a certain logic to it, and is about as far as you should dare to go. It also might help this problem to have a few states try it out as demonstration programs, because its effects may be unexpected.

Fun With Numbers. In summing up the reasons for a childhood insurance plan, one warning. These figures are derived from the published reports of CMS for 2015, probably reflecting 2014 data. Let's take the average Medicare benefits cost per capita as an example. To an East Coast resident, the figure of $12,000 per year per person seems a little low for terminal care. It is a national average, reflecting low rates for one state, high rates for another. Furthermore, a great deal of terminal care takes place at state expense in Medicaid. To enhance the recipients of ACA, such costs are shifted to Medicaid nursing homes. It's mainly Federal money, but it appears in the state ledgers and could quickly shift around, and end up as a Medicare expense. So the use of Last Years of Life cost-shifting might well shift the investment savings, but the net overall cost might also shift, or even seemingly rise, when new expenses are dropped on it. The transfer of terminal care to the contingency fund from Medicare would indeed save the consumer about $120,000, but the net Medicare cost could almost be made to seem what the political opponents want it to seem, even including an increase in Medicare expenditures as their last resort.

The Working Population, from age 25 to 65. Except for removing its destabilizing burdens, this proposal does not endeavor to change the Affordable Care Act. Although the author harbors opinions about it, this proposer has every intention of leaving the ACA to political, judicial, and electoral decision. For the practical purpose of avoiding discussion, the fiscal effects of the ACA are assumed to be neutral, in order to have as little effect on the broader discussion of program design as possible. In its present formulation, the ACA could disappear tomorrow, or it could last forever, and still make little difference to the essence of this proposal. But the chances the ACA budget rearrangements will be neutral, are apparently pretty slim.

 

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