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.

Paying for Medicare Transition with Trust Funds.

Since its finance isn't much affected by the Affordable Care Act, there's a temptation to skip over Medicare. But ACA deficits and design flaws frequently grew out of Medicare's initial design decisions. Furthermore, the scientific tendency has been to cure acute diseases of younger people first, so the trend predicts still more high expense (chronic disease) patients will migrate toward Medicare. The ultimate prediction is for little to be left uncured at some distant time, except in the first year of life and the last year of life.

Changed Circumstances. There have been three main changes since some wag called Medicare the third rail of politics -- "just touch it and you're dead". The first change since 1965 is much-increased longevity as a consequence of much-better healthcare. Someone must have seen this coming, but apparently no one spoke up. Although prolonged retirement is expensive, notice also how it prolongs the period of time available for compound interest to work, so the income curve starts to bend upward after thirty or forty years, regardless of the economy.

Secondly, passive, or index, investing has greatly simplified and strengthened amateur investing. Finally, the Health Savings Accounts appeared, often producing savings of 20-30%. It's time to re-examine the assumptions of 1965, with these three lights shining on them: longevity, passive investing, and payment design. We are not recommending that HSA be entirely funded by index funds, but merely recoiling from too much debt backed by government guarantees.(see below)

Proposed. In "Ye Olde" Medicare, the average beneficiary pays $56,000 per lifetime (in payroll withholding tax and premiums), but it actually costs the government at least $112,000 per person -- the remaining $50,000 or so per person is secondarily borrowed, so there are no left-overs for retirement. But prolonged longevity and longer retirement, hence more borrowing, are inevitable consequences of better healthcare with the present design. Viewed in that light, Medicare is broke. But viewed as a transition problem, it paradoxically addresses half of it; since half the Medicare transition is already covered by bond issues. Put that together with the halving provided by Last Year of Life re-insurance, and you have made big progress toward transition. We also offer several other proposals for transition.

Our "New" Medicare, by contrast, seemingly could pay for all its present medical care, plus appreciable retirement cost, with the same revenue. Minimal extra government debt, no rationing or curtailment of service. It does it without changing major program elements; this is a financial change, not a medical one. It really does let you keep your own doctor, and doesn't tell him how to treat you, because it doesn't concern such things. Half of all medical expense is covered by Medicare. And we propose to fund half of that, plus all of obstetrical/pediatric care, with First and Last Years of Life Re-Insurance. Transition begins to look feasible if we can convince old folks with a fixed income to take a chance on it.

Tools Seemingly Available for Transition to the New System, But Presently Not Provided For in Law: (See below) 1) Scientific break-through cures which significantly reduce the cost of Medicare. 2) Gradual buy-ins for latecomers, which significantly reduce the buy-in cost for people well past 65 at the start. 3) Special Trust Fund Extension eligibilities after death or before childbirth. Compound interest doesn't need the owner to be alive. 4) Delaying the Start of a Childhood Roll-Over. 5) Graduated Retirement as funding develops. All of these will be explained later, and the news is not all bad.

Extra Tools, Needed From Congress: "Change the destination" of Medicare's Withholding Tax, and Premiums, so the same money, plus interest, ends up in the individual's Health Savings Account, instead of Medicare. That's in return for the subscriber agreeing to buy out Medicare at its mandatory onset, plus any other imposed conditions. There is one technicality: the tax exemption is currently distributed through the income tax system, while it should be added to the HSA, instead. Furthermore, if a considerable surplus (more than $100, say) from compound interest persists after withdrawals, the choice of buying out Medicare can be offered at its beginning age up to the perpetuity limit (on average, age 104), disregarding whether the depositor is still alive or covered by a special successor trust fund. Re-depositing in an HSA should make such contributions tax-exempt and earn compound interest (we hope, at 7%) in an escrowed sub-account which bypasses current medical costs until it is time to use them for Medicare. At least, escrowed in a way which cannot be diverted from Medicare use. Therefore, average payroll-withholding transforms from $28,000 ($700 yearly for forty years, taxable) into health care worth on average 18% more than that, or $825, because it's before-tax, and at 7% grows to $138,000 at age 65 (Try that out on your Internet compound interest calculator). That's what folks are paying right now, but including the tax exemption isn't as smooth as it could be. Don't forget the escrow feature, which keeps people from being their own worst enemies when other purchases compete for the single-purpose savings escrow.

Starting at any age before 66, it could then transform $1400 yearly Medicare premiums, before tax, and thus really $1650 into 18% more for twenty more years, and also pays tax-exempt interest. (Most people will find they have to read this several times, because Health Savings Accounts are the only plan enjoying these particular features.) The net effect of augmented income tax augmentation, compounded, is to transform $56,000 before tax, into $534,000 beforetax at age 84, the present life expectancy, not counting $112,000 borrowed by the government, which we hope they can eventually stop borrowing. That doesn't sound like good arithmetic, but If you don't believe it is possible, just try it on one of the Internet's free compound interest calculators. (Furthermore, if an afterdeath trust fund is created to the limit of a legal perpetuity [one lifetime plus 21 years], the present expenditure would be subsequently transformed by compound interest into whatever $2,066,000 is worth at the time, we should hope amply providing for all of Medicare, plus some generous retirement without government borrowing. You won't be surprised to find others think this is more than you will need. We will later suggest better ways to rearrange the same facts, but this summary contains the general idea in highly condensed form.

Although an accumulation of over $2 million per subscriber seems adequate for any normal purpose, it should be recognized that this figure only applies to someone who started saving from birth and waited 104 years to collect. Therefore it would only be a theoretical issue for a long time. A far more generous sum is possible earlier if the original purposes of payments are ignored, and the principle adopted that the largest contribution should begin earliest. That maneuver results in payments age 104 of $30,165,195.00 which would make most people giggle. The obstacle to overcome is the resistance stirred up by matching Medicare premiums to newborn children's HSAs. However, if the system needs more money, this is the place to get it. By adopting this principle, a $2 million fund is achieved at age 60 instead of 104, which eliminates the need to consider several other strategies, expenses and objections thereto, subsequent to a Medicare buyout. It would make an $18,000 grandchild gift seem trivial, and last year of life strategy unnecessary, for example.

Transition costs dominate the replacement of almost any health insurance, so let's restate the theory. A J-shaped cost curve forces a J-shaped revenue stream. When you switch systems, you must reverse the order, paying expensive existing ones first; and funding proves inadequate unless you can double it. If you could just manage, it would be possible to make partial cost savings you could boast of, but except for the Postmortem Trust Fund way you must pay double for all of it, or give up the attempt. By contrast, if you have at your disposal a large new source of credit like a postmortem Trust Fund, with an elastic retirement fund absorbing embarrassing surpluses, you can survive early misjudgments. Medicare could pay for its entire cost with compound interest on what subscribers now contribute, save for the fact it will have inadequate cash flow from people on their deathbeds. But if the death of the subscriber is ignored, the inflow of funds from surviving depositors could continue into postmortem trust funds of the decedents. At 7% return, extending the payments to the length of a perpetuity (21 years) would multiply its amount four times, reducing the problem to a quarter of where it started. The transition time is thereby considerable shortened. For transition purposes, it might be wise to create a contingency fund, of up to $250 at birth. But remember, the size of the gap in a lifetime plan can only be finally addressed after we see what is to become of the ACA (Obamacare). For the purposes of this book, we simply treat the ACA as if it were revenue-neutral, a somewhat unlikely forecast, but a completely understandable assumption.

Comments made by a group of liberals:

1. You are comparing non-inflated with inflated results.

2. You are comparing people who pay contributions without including people too poor to pay.

3. You express distrust of government agency, without suggesting an improvement.

4. You are misallocating the high-deductible cost to age 25-65 and allocating none of it to Medicare.

Answers: 1. You are right, in a sense. The 3% inflation figure has been applied to revenue, in the sense that the investor merely gets 7% of the 11% income, while there has been a haircut of 4% between stock profits and investor returns. The consequence and cure of this gap is presently uncertain. There exists an unexplained attrition of 3% commonly ascribed to inflation, but it is unclear who really absorbs it, probably the finance industry. The reasoning is flawed and should be corrected, but the conclusion is likely correct: a 3% annual revenue should probably be added, but a 3% cost must later be subtracted. A custody cost of acquiring and storing several trillion dollars of index certificates does not justify such charges.

2. No, the figures apply to all Medicare revenue, divided by the number of subscribers. Thus, the results include free riders, equally. Figures limiting the results to full-paying customers would be lower, thus concealing the subsidy.

3. The individual nature of the account means that extravagance by the subscriber only results in later constriction of his benefits, whereas when the depository is the government, extravagance is treated as common property of the whole nation. No one spends other peoples' money as carefully as he would treat his own.

4. The high-deductible insurance which is a component of Health Savings Accounts is one-year term insurance. Therefore, its costs from age 25-65 are more fairly apportioned to insuring working people. After age 65 HSAs are presently discontinued, when perhaps it might be fair to assign the Medicare premium costs to HSAs -- if there were any premium costs. As it stands, there is no recovery of costs for accumulating Medicare premium deposits in HSAs. Nor is there a reimbursement method for Trust Fund handling after death, if that option is chosen.

Posted by: George Ross Fisher MD   |   Oct 24, 2016 10:21 PM

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