Philadelphia Reflections

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

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Health (and Retirement) Savings Accounts: Steps To Lifelong Health Insurance
If you are a fast reader, we will begin with a ten-minute summary of Health Savings Accounts. At first, it covers future revenue, then spending projections follow. No matter how medical care changes, cost and revenue must remain in balance.

Last Four Years of Life Reinsurance

Half of lifetime medical expenses are reimbursed by Medicare. And half of Medicare represents the cost of the last four years of someone's life.

Having got middle-men off our chest, we return to a search for other ways to introduce greater efficiency into the medical financing system. That might be accomplished by reducing medical prices, or eliminating medical problems with research. Rationing, however, never seems to work without distorting resource allocation, and medical research is best left in the hands of the scientists. Here, we offer a third method, which is to increase the revenue by modifying its structure, while minimizing changes to the medical system it pays for. The National Institutes of Health (NIH) research budget is already $33 billion a year, and somehow that seems like enough. Right now, our mission is seeing what might be done with the payment system to fit its purpose.

Up until recently, paying for medical care has been treated as just part of paying for anything else, but it has some special features. For example, because of a welter of scientific advances, it is possible to imagine a future when nothing except the first and last years of life will contain any substantial medical costs unless they are self-inflicted to some degree. The American public seems consistently adverse to subsidizing self-inflicted conditions, which it views as a disguised form of suicide. Since homeless, addicted males seldom have children because females avoid them, non-cohabitation of the Lizistrata sort is a hidden way of punishing them for failing to support their families. With exceptions of this sort, medical care is an expensive need which will gradually become less essential. Except the system should be arranged to accommodate unexpected changes, because change itself is confidently expected to occur.

What's Reinsurance for the Last Years of Life All About? Ends of life concepts were designed to take advantage of the permanently J-shaped curve of medical costs increasing with age. They divide revenue into two investment classes maturing at different rates. The longer the period of compounding, the more we should want to save it for heavier expenses. (And the less we should be interested in spending a valuable resource on age groups with little to fear.)

Start by cutting escrowed Medicare costs into two subaccounts, differing in content and thus in timing. Overall, while all curves of lifetime health expenses are J-shaped, skewing progressively toward old age, containing roughly half of expenses in Medicare, and half of that (one fourth of total costs) concentrates in the last four years of life. (Later on, we will apply the principle to covering the increased cost of being born, addressing that initial upswing of the J.) There are six or eight variations, but our version has Subaccount A starting at age 25, the least expensive health year for the typical person, but also the time when Medicare withholding tax begins its forty-year climb. Our Subaccount B by contrast, begins at birth with a major obstetrical expense, but currently must abandon this opportunity to achieve maximum compounded interest because of a newborn's lack of income. (The age group from 25 to 65 is temporarily abandoned to the Affordable Care Act, until the nation decides whether to continue ACA, change its scope, or abandon it.) What follows is a description of financing everything except the Affordable Care Act, while temporarily accepting the implausible assumption ACA will seem revenue-neutral, until after the public gains full access to its books. The big data approach should speed up this examination.

Therefore leaving out ACA, and examining only what is left, Subaccount A buys out Medicare voluntarily, paying for retirement (which usually begins at the same time) with what is left over, in return for the hope of retirement income. Subaccount B pays for the last four years of life, thus removing half of Medicare cost from part A, as well as funding one grandchild equivalent until he or she reaches age 25. In effect, Account B pays for childhood, later materially helps buy out Medicare by re-insuring the last four years of life, and eventually becomes the basis for First and Last Years Insurance as a pre-paid substitute for pay-as-you go Medicare. It may take a long time to get there, but that's the goal. Meanwhile, it effectively cuts the cost of Medicare into two equal parts and thus makes it more digestible for buy-out. (By applying different revenue sources, its timing is different in the two pieces.) During the long transition period, the payments for Medicare are divided between the two funds to satisfy obligations, one of them is extinguished, the other continuing to fund retirement costs until the death of the subscriber. It amounts to shifting the costs and revenue around, taking advantage of longer compounding for heavier costs. Ultimately, it raises questions of how far the public is willing to go with all that, including donations to another generation, and being educated it's a sensible thing to do. By accomplishing many things at once, it acquires what mathematicians call elegance, but the public may regard it as too complicated unless it is accomplished in steps.

If, during the transition phase, there still remains a deficit, consideration might be given to establishing postmortem trust funds as a fall-back to continue the interest compounding until its debts are paid, and/or conceivably pre-birth trust funds anticipating childhood costs (see below). At the moment, mandatory conversion into an IRA would be subject to tax. However, we hope Congress can be persuaded to defer the taxes until the date of death. In this way, unpaid taxes could be utilized to extend retirement benefits until they are needed, and taxes can be discontinued if they aren't needed. Meanwhile, savings continue to gather investment income. During transition, there might be several revenue/cost mismatches which require expediency and/or bond issues, and there is no reason to see it as shameful.

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When costs can finally be known, the Last Years fund reimburses Medicare. {bottom quote}
The last four years of life are not the same as the last four years of Medicare. It is only possible to establish which four years are someone's last ones, after the date of death is known. The proposal here is to set one half aside as a special fund for the last four years of life, because old-age health and retirement funds will generally not be needed for decades, but costs will eventually be heavy. When costs can finally be known, the Last Years fund reimburses Medicare. Some funds must be constantly consumed for medical care, and they should utilize funds which are soon to expire, and not be escrowed. Escrowed funds are usually set aside for distant medical costs, and like Odysseus bound to the mast, keep him from yielding to the temptation to use them prematurely. Meanwhile a third, non-escrowed, subaccount is free to manage current expenses, and need not be dealt with further in this section. Medicare doesn't know when you are going to die any better than you do, so it reimburses every cost at the time it is incurred, spending revenue about as fast as it is received. Account A was designed for future healthcare costs in all but the last four years, a burden considerably lightened by removing those last four years, and letting the revenue grow. The switch isn't exactly insurance, it is re-insurance. The beneficiary is then dead, and even his relatives would scarcely notice this transfer has taken place, except by auditing receipts.

As a matter of fact, Medicare needn't reimburse the particular costs for specific last-four-years clients, since there are only two parties directly involved, both of them insurance companies. By maintaining aggregate books, Medicare merely needs to determine the average cost for all its dying patients, to emerge with equal aggregate reimbursements for everyone who dies. Whether this bookkeeping short-cut can actually be utilized, however, depends on whether variations in regional cost are too substantial for local politics to tolerate. Even then, statewide averages might serve. This detail is an accounting efficiency which the two parties could sort out with Congress.

The substance of the following table is that the investment of $250 at birth would result in $21,714 cash for retirement at 65, plus the present value of $28,000 in Medicare premiums, plus an uncertain value for the improved structure. But this improved structure assumes no interest is gained on the premiums, and in fact they would probably be discounted to present value. So, it seems better to sacrifice the structure for improvement in cash flow. That would be summarized as follows:

A number of combinations could be imagined from the premise that we should see what can be extracted from present contributions. And, of course other combinations are entirely possible if we relax that self-imposed limit. We attempted to show the requirements imposed by adhering to those limits and simply rearranging their sequence. You soon find that matching children with old folks defines the outer limit of revenue by rearrangement, the point where you have to add more expense to get more benefit. If it is deemed essential to adhere to present age matches, the benefit drops considerably. And conversely, if you don't aspire to increase the benefits, the cost goes down. No doubt the debate would begin to sound like a meeting of a condominium membership, with one half wanting to fix the place up regardless of cost, and the other half fearful of spending a penny they don't have to spend. Here, we defined the priority as revenue production, but other priorities must be considered.

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Everybody is born, everybody dies, and nobody does either thing twice. {bottom quote}
Using different methods, it has been estimated by Michigan Blue Cross and confirmed by federal agencies, the average lifetime cost of medical care is somewhere around $350,000 in year 2000 dollars (i.e. corrected for inflation). The typical lifetime gain by the average citizen's new HSA is unknown, but seemingly approaches $1 million, if customers actually succeed in achieving 7% income on investment. It could be argued a total success of the HSA approach could benefit the economy by 9 percent of Gross Domestic Product, about half of which would benefit the federal budget. The sums we discuss are so large the considerations involve more than just health care, so as a physician I urge we restrain ourselves, for fear the medical advantages might get sacrificed.

Eventually, the taxpayer under present law might pay long term capital gains tax of 25% on withdrawals from tax-free accounts; revising such tax laws is under discussion. The present value of such revenue is difficult to estimate, but it would likely be offset by reduction of interest rates paid on the indebtedness, which is also hard to predict. And all of this would be offset by a long term rise in the stock market, also subject to capital gains tax. Since a rise in bond rates seems almost certain at present, and thus a long-term rise in stock market averages is likely, it seems reasonable to suppose the government would make a huge profit on an expanded Health Savings Account. Only a major prolonged recession or a war would reverse this judgment, and even that would see bond revenue mitigating the stock market loss. The private purchase of huge amounts of stock would certainly raise stock prices, and might put any qualms of the IRS to rest. It is true, stock market exuberance can lead to a bubble which collapses, but this observation never seems to restrain a bull market.

To review the matter, splitting Medicare payment into two escrowed subaccounts and one non-escrowed one, has simple purposes related to transitioning between systems, and really isn't that hard to understand.

1) Technically, it allows longer-term funding to avail itself of compound interest for longer periods, largely by devoting more attention to the matter, and ignoring the original assignment of the funds.

2) Secondly, a transfer of $18,000 out of a million-dollar retirement fund would not meet with nearly the same resistance as it would from a fund scraping the barrel to survive. We take this intergenerational transfer up in a later section, but here it should suffice to summarize, this transfer would solve a number of problems which hitherto have been treated as issues one simply has to endure.

2) Part of a spectacular revenue enhancement comes from adding twenty years of compounding a rather large sum ($1650 annually for 20 more years) onto the end of a long period (40 years) of compounding a smaller contribution, of $825 a year. Reversing the sequence (Medicare premiums first, payroll withholding subsequently) would generate even more revenue, and advancing Medicare premiums to childbirth-to age 25, would generate the most. Furthermore, any one of these sequences follows the design of original Health Savings accounts by ultimately depositing left-over funds into the individual's retirement account, as a sort of reward for being frugal. Acquiring revenue for other insurance components, what had previously been a unique feature of HSAs for retirement, it discourages early diversion of these funds to unrelated government activities (aircraft carriers, etc.), a recurring anxiety of beneficiaries. Perhaps more to the point, it gives the client a tangible reason to be frugal, at an age when such ideas are not entirely natural.

3) The proportions of the public who have already consumed, or paid for, parts of Medicare will vary with their demographics, largely related to the year they happen to have been born. But a rising proportion of cost in one compartment, means a decline in the other half. Because revenue often has unexpected connections to cost, this will always be a rough proportion, but it ought to help placate the sense of helpless public disenfranchisement which attends all major transitions.

4) And finally, this new configuration approximates the way things are probably going to go anyway, with ever-increasing concentrations of medical cost pushed toward the end of life. Not everybody dies at Medicare expense right now, but the universal trend is for people to die later, eventually making it approach 100%. Further, as we describe later, it provides a framework for first year-of-life coverage as well. That is to say, the trend is for health insurance to narrow down to the beginning and end of life, as science gradually eliminates disease. One day in the far future it might be said, nothing else is left of major health costs. Everybody is born, everybody dies, and nobody does either thing twice. Insurance as we currently think of it, will slowly become a thing of the past, replaced by what is more frankly a pre-payment methodology on a much grander scale. And eventually the public will see it happening, which eases political resistance considerably


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