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.

Limits on What Can be Promised: Healthcare Plus a Modest Retirement.

This study of Health Savings (and Retirement) Accounts was begun thirty years ago, and with increased intensity in the past five years. During most of that time, paying for health costs was the central concern. Paying a big chunk of health costs would be an achievement, paying for it all would be an impossible dream. Therefore, paying for the whole healthcare system became a goal of my proposals -- to extend the duration of the compound interest generated. If it fell short, well, it paid for a big part of it. Either way, we could afford to leave Medicare alone. But once Medicare came into focus as the main impediment to solving an even bigger problem for exactly the same age group, "saving" it becomes a relatively smaller issue. There had to be some money left over for retirement living, which meant all of Medicare must first be covered, and then, new revenue must be found. The quality of care must not be injured, and -- most of all -- public opinion must be re-directed. This is a specialist's game, but the public is now the supervising coach. Whether they realize it or not, a dependable agent is what they are going to need. And agency has a long history of imperfection.

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The New Goal: Legitimate Healthcare, plus a modest retirement. {bottom quote}
Resource Assessment. Adding up all the other economies of Health (and Retirement) Savings Accounts, but now also including the retirement costs, the most optimistic goal is that HRSAs might pay for substantial health costs, and some but not all retirement costs. Any politician who promises more is counting on a research miracle curing one or more expensive diseases. And the warning is: you will probably get less. Much of the shortfall comes from difficulty stating a "decent" retirement payment which would satisfy most people. What's enough for a Trappist monk is not enough for a movie star, and what will be called decent in 60 years is pretty hard to say. So the most we should promise is: healthcare plus some retirement; supplement more generous retirement as you are able. Even promising that much is a stretch, but is certainly superior to healthcare plans without the discipline of individual ownership. Unfortunately, it forces the individual to some choices he must make for himself, versus allowing some big anonymous corporation to do it all for him at a hefty markup. Let's specify the two big dangers he must navigate:

Imperfect Agents Theoretically, the best result anyone could provide would be to give a newborn baby a couple hundred dollars at birth, let a big corporation do the investing, and pay a million dollars worth of bills over the next ninety years on his behalf, at no charge. The long investing period would provide some astonishing returns, and it would be entirely carefree for the customer. But that really overstates things quite a lot.

Unfortunately experience over thousands of years has demonstrated agents eventually extract much of the profit for themselves. When they form large organizations with a business plan to maximize profits, the plan becomes institutionalized. Countless kings have been known to shave the edges of gold coins, even more have been found to have employed inflation of the currency to pay their own bills. Investment managers are almost invariably well compensated, usually for mediocre returns to the investor. William Penn, the largest private landholder in history, was put in debtors prison by his wayward agent, as was Robert Morris, the financier of the American Revolution. Whole-life insurance companies are the closest approximation to an agent for a Health Savings Account who might propose to get paid a level premium for decades before paying out a limited benefit for a dead client. They seem to survive by promising a single defined fixed-dollar benefit, and counting on inflation to work for them as it does for dictators, overseen by a politically appointed insurance commissioner. Unfortunately, they have the moral hazard of falling back on other surviving competitors to bail out a bankruptcy, and the political hazard of trying to force premiums downward for the taxpayer without any reliable benchmark. Just how much they have been rescued by lengthened longevity is something only an actuary knows. Long ago, the situation was summarized by the question, "And where are the customers' yachts?"

Inexperienced Solo Management. If Warren Buffett had an HSA, he would have no problem managing it, and neither would a great many other savvy folks. The problem is to make the management so simple and standard that expenses can be kept low without injuring investment returns, for the average citizen. This consideration almost drives the conclusion that lifetimes would be best divided into at least three component parts, with benchmarks and averages published more regularly, since the medical and beneficiary problems divide into the same three (childhood, working age, and retirement) components. It begins to look as though a new profession of fee-for-service advisors needs to become educated and distribute themselves widely, perhaps in local bank branches, and they must develop a professional ethic of fiduciaries. As will be described in later sections, the need is for the income stream at least to be kept in balance with the probable expenditures, adjusted for inflation or deflation -- and volatility. It is not to achieve the maximum possible revenue return, regardless of risk. That is to say, the purpose of the HRSA is not to make as much money as possible, but to be sure as much medical need as possible can be provided by the revenue available. Let's put it all in a nutshell: There's a big difference between designing a system to cover a public need inexpensively -- and designing a business model to make a profit. But that's not nearly as big a problem, as doing both at the same time, because it tempts the agent to be too timid.

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If you spend too much too early, you won't have anything left for later. {bottom quote}
After Assessing Obstacles Comes Strategy. Most HSAs make cash payments with a debit card compatible with long-term passive investing (utilizing total market index funds) by staying within the stream of cash deposits, on behalf of inexperienced investors and for otherwise unevaluated accounts. If deposits fall, or expenses are unexpected, they may need reserves. Theoretically, a single investor with a single advisor may reduce this need and improve the overall return. However, there's a technical problem: the earning period is not the first stage of life; it's the second, following nearly a third of life in childhood and educational dependency or debt. Health expenses in the childhood third of lifespan may be comparatively small, but the earning capacity of children is essentially zero. This unconquerable fact leads to splitting investment considerations into three stages, the first and last thirds subsidized by the middle one. The result is, two systems feeding off the middle third in opposite ways, requiring opposite approaches. Somehow, it must all come out in balance at the end. And remember, it starts with a deficit in the obstetrical delivery room unless we re-arrange something else. That's the biological situation, against which financial systems must lean their weight. Therefore, there is a need for different agents for different age groups. This has not yet been fully worked out, so there is a constant need for transferability of accounts between agents.


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