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.

Re-funding Medicare, Pearl #2, Part 3

So we end up funding Medicare mathematically, but with misgivings about both the politics and the economics of it. It would not be the first time America launched an adventure without the money to finance it, as we do almost every time we start a war, or face a depression. However, both the ACA is in doubt, and linked with it is the idea of a single payer with Medicare as a model. Although I have grave misgivings about consolidating delivery systems as a first step, it could be a decision that is beyond the suggestion of a citizen.

Under the present uncertain circumstances -- of wishing to put the ideas forward but lacking the ability to control the environment -- it seems better to hold back on grander designs than just saving a little money. The linkage of Medicare and its secondary insurance is both tight and of long standing. By just eliminating the second insurance policy, we might eliminate a large and useless expense as well as suggest a few ways to save more. Isn't saving several billion dollars worth some effort? The factors which would lead America to embark on a financial crusade as radical as suggested here, are not to be found in mathematics, or even in one-man logic. They are cultural and emotional, mostly evolving out of endless simplification and repetition. The public might be persuaded to try something on 20%, which they would be afraid to try out on a whole program, however floundering it might appear to be.

How Would This Particular Approach Make Medicare Solvent? It wouldn't, but it would help. And it would provide a demonstration of the practicality of some of these ideas for worthy motives, and still leave room to back down if they unexpectedly fail. Most people do not trust their own judgment of complicated math, so we have made it simple. It is surely not the case that every single solution is either too complicated to understand, or too simple to be believable. Every grand proposal, from Otto von Bismarck's social security through the European systems, to Blue Cross/Blue Shield, followed by Harry Truman, Hillary Clinton's foray into HMO, to Barrack Obama's ACA, has proved to be overambitious at the beginning, and woefully inadequate at the end. It seems there ought to be better ways to do things, but this is our way.

Medicare's original design has become so over-extended it has exhausted conventional insolvency approaches. Like any other proposal that might work, our own plan relies on approaches which are usually thought to be best avoided. So the first fundamental is to keep the core of it simple, and be willing to discard the embellishments if circumstances undermine them. The doctors should devise the medical choices, the patients must control the finances, paying only for what pleases them. Government has a limited role in market failures, but very little role in defining them. The goal is to eliminate disease, ultimately reducing its cost to a framework of the first year of life and the last year of life. Anything more must defend itself against efforts to improve, then eliminate it.

And there is another idea which needs testing. Alexander Hamilton persuaded George Washington that "A national debt, if it be not too large, is a national treasure." In 2006, we may have discovered what is a little too large to be sustainable, by permitting banks to convert mortgage debt to stockholder equity and then watching banks topple over from the sudden shift. Up to that time, it was quite legal to rebalance excess debt that way, which is why no one has gone to jail for doing it. And now we have the uncertainty over whether to encourage more of it (as a safety valve), or punish it (as toppling over the entire economy). It does not help matters for the two political parties to take extreme positions without more evidence. Pre-paying for medical care instead of borrowing to pay for it, is an indirect way of testing this thesis.

First of all, our own proposal depends on such long time periods that unexpected events could be the rule, not the exception. Nevertheless, many Congresses of many political parties would have to understand the basics and leave them unharmed for a century. Secondly, such huge amounts of money are involved that tampering, embezzling and fraud are not merely possible, but inevitable. These problems would confront any reformer. From them emerges a third one. Multitudes of individual Health Accounts would have less risk overall than gigantic single payers, because small ones can only be converted into bigger ones, not defeated in a single pitched battle. Inevitably some individuals in charge of any system will prove to be stupid, reckless and venal. The real question is: Compared with What? If you make up your mind in advance that you will rescue everyone who doesn't succeed, the whole system will be no better than a single gigantic reinsurer overseen by either an idiot or a crook, and probably both, from time to time. Index investing is itself a triumph of everyman against the experts, after all. For long periods, single payer systems may be run by saints, but diversity is more resilient in the long run. The more important issue is to define how you will respond when you detect "imperfect agency". The opportunities for illegal gains will inevitably exceed the individual opportunities for honest managers, in size if not in frequency. Therefore, smaller decision units are better than bigger, simpler is better than complicated, and success should never be guaranteed. The irony of the role reversal between the political party of individualism and the party of diversity, is not to be overlooked.

Medicare financing could possibly be eventually covered by this approach, retirement income financing, probably not. To do the quick math in your head, it is useful to remember money at 7% doubles in 10 years. Current interest rates do not achieve that, but then current rates seldom do. During the eight years of the Obama administration, low-cost total market index averaged 11% gain. Most people would never have guessed that outcome in advance. Much of it never reached the average stockholder because the government (taxes and inflation) and the finance industry absorbed it, but public restlessness may change things. The pharmaceutical industry may possibly be over-compensated, but that's not necessarily permanent, either. In this proposal we are proposing to make the average patient become an average stockholder, with little voice in management perhaps, but ultimate ability "to talk with his feet", to buy and sell. Let's take the six components of the proposal:

#1. The co-pay feature. We've offered our opinion that co-pay has little restraining effect on spending, and is only a device for adjusting the amount of insurance to the buyer's budget. So let's take it as that, and use the amount of the copay as, not 20%, but whatever fits our budget. We advocate the accordion principle for predicting future revenue uncertainty. Furthermore, we would abandon the pretense that it is a second insurance policy, and simply pay the carriers a fee for administrative help in running Medicare. That opens it to a bidding process related to work actually performed, eliminates the State insurance commissioner as an actor in this drama, and eliminates a huge source of confusion with the public. Imagine, one statement of benefits instead of two.

#2. The Contingency Fund. is designed to be overfunded for contingencies, so it is hard to say what its upper limit should be. And although on paper no one gets paid off for ninety years, banks are accustomed to rearranging the terms of a loan to shorten the time period for a fee. Dealing with transition periods is an old story for Congressional staff, since otherwise nothing would ever be upgraded. The most conservative investment period would terminate at death, but expand to whatever age is necessary to pay it off, up to age 105. That implies the initial deposit never varies. Congress might, however, decide to vary the initial deposit but devise a shorter fixed time period. It makes no mathematical difference, but its political difference might be considerable and we do not propose to weaken our case by getting into such weedy details.

Eventually, a "sweet spot" should emerge. But let's not drop the argument with a confession of modesty. An officer of a large paycheck company recently declared to me the revenues of essentially all government programs have nothing to do with expenses, and everything to do with politics. True, we operate under a general mandate to balance new appropriations with new revenue sources. But the current payroll deduction for Social Security is five times as high as the deduction for Medicare, with only about 25% difference in expenses between the two programs, for example. The accounting rules for appropriations could be made considerably less political without significant impairment of flexibility. In the long run it is not good politics for the public to discover you have been doing outrageous things. Over and over, you discover the Constitution is a cultural document, intolerant of judges who are obtuse.

#3. Delay Liquidating the HRSA at death. Although things get a little threadbare beyond this point, there is no reason to hold back borrowing for observed volatility. We are at the point in the compound interest curve, where holding the funds for ten years after death would multiply the original subsidy by 128 instead of 64; even 256 is conceivable. We are paying the Chinese much less than that for the Treasury bonds, and they would probably be relieved to see a way of recovering their investment. #2 may not sit very well with some people, but it would surely guarantee repayment, which at the moment, looks rather chancy.

#4. Investing the Pay as You Go. The problems created for others in the payment process have to be reckoned with. We propose the individuals continue pay/go temporarily for half of the withholding tax receipts. That's effectively unchanged because half the cost has been transferred, but the withholding tax revenue remains constant. What is essentially involved is to balance the problems of the current administrative staff against the problems of passing acceptable legislation. But once more, the mathematical "sweet spot" is comparatively easy to calculate, but the political effects are more intangible. It is probably impossible for an outsider to have a firm opinion.

Additional unknowns in this equation are how much nursing home costs from state Medicaid plans would eventually emerge in the form of Medicare deficits. It is common knowledge that although custodial costs are not allowable costs, states have found ways to make them a federal responsibility. We also understand the HRSA owner might get less than 7% income on his deposits. Although the Chinese debt would stop rising, past indebtedness remains unpaid. Current Medicare bills would have to be paid for probably another decade, and may well rise in size. Ultimately, the way to balance the books is to raise the contributions. So, privatizing Medicare might or might not make it costless, but would greatly relieve its present costs. Funding of retirements will have to come from other sources. However, right now contributions from the two contingency funds could easily be increased.

#4. The Last Four Years of Life Half of Medicare costs appear in the last four years of Life. By reimbursing Medicare for the last four years from other sources, Medicare's average cost is cut in half. but the withholding tax remains the same. Therefore, we come closer to breaking even in several decades, although we still probably won't quite make it. The essential feature of carving off terminal care is that it is half the cost of Medicare, and therefore reduces the burden on the other contrivances to reach the final goal of financing it.

#5. Simplicity, Simplicity. To begin with the opposite of simplicity, two quite unacceptable new ways to manage the medical payment system have been suggested by others. One alternative is to consolidate the whole industry, with one corporate administrative arm assuming the payment tasks for everybody, along with the whole delivery system. That scarcely seems appropriate management for a health complex which is already too big to manage. But it seems to generate many current proposals, especially those coming from the bureaucracy itself. Another idea, based on its resemblance to whole-life insurance, proposes a giant company or government department to concentrate on health finance, doing it for everybody. It might seem suitable for an insurance company, a medical school, a computer company, or a medical society. That seems to be what these organizations would like, but it immediately creates additional complexity, because computers only work if you specify some response to every contingency in advance. In a sense, this version of "Single Payer" would be a throw-back in thinking to the days when only a big company or a big government could afford to own a computer.

Is medical finance really so complicated most people couldn't handle it by themselves? Let's remember the anguished words Tzar Nicholas: "I don't run Russia. Ten thousand clerks run Russia." What the Tsar was saying, was the problem isn't individual complexity, the problem is the huge volume of simple problems. For example, if we proposed to butter everybody's bread, it wouldn't be hard to do, it would be hard to manage.

#6. Linking the New Medicare with Health Savings Accounts.. Probably the most important feature of putting pearls on the string, is to avoid tangling the string for the convenience of the pearl. The purposes of the linkage are to acquire a connection to the retirement feature and its incentives to save, and to lengthen the time period of any compound interest. It is not to generate inter-plan borrowings or conveniences, particularly for the early entrants to the string of pearls, at the expense of the later ones.

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Is medical finance really so complicated most people couldn't handle it by themselves? {bottom quote}
For Health and Retirement Savings Accounts --- Transfer Slips, and Monthly statements, Only. So, yes and no to computers, which is what all this amounts to. Abundant cheap computers tempt us to use them for simple tasks, at the risk of making the simple task complex and losing the truth in a huge pile of statistics. (In another generation, self-correcting code may conquer this problem, at the same time it will widen the opportunity for vandals.)

The proposal made here instead, is a confederation of otherwise free-standing organizations (The Pearls), each hiring its own experts, feeding into a common channel of Health Savings Accounts owned by individual patients (The String). Individuals could hire consultants if they pleased but the decisions should be so simple the average high school graduate could cope with them.

One consolidated lifetime account form, which serves as a transfer vehicle for a single person's various balances. Sort of like a lifetime check-book. It provides a common incentive to be frugal for future retirement, and a common way to multiply such savings.
If that won't suffice for some tasks, we are travelling down the same path as the income tax, and should re-consider such high-handed laziness.

There might be many networks, as long as their balances are uniformly transferable and they each link ultimately to a transferable retirement fund (The Goal) and a transferable investment fund (The Multiplier). Such networks might grow very large, but still remain quite simple, and decisions which belong to the patient would remain within his control. The only outward purpose of such paperwork would be to transfer credits of the owner, to debits of the same owner or vice versa, with the adjusted balance ultimately coming to rest in his retirement account, creating a common incentive to be medically frugal. This would maintain adequate "records" (which mostly no one ever reads), an information source, and a designated HSA representative, but their outward form and unit would remain a transfer slip. You are striving for a good retrieval system, not a good archive system. If you want a simple system, give it to individuals who have an incentive to keep it simple. Don't give it to people who have a graduate degree an incentive to make it complicated.

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If you want a simple system, give it to individuals who have an incentive to keep it simple. {bottom quote}
This particular feature has a political element. The American public now imagines it gets a bargain with Medicare, somehow getting a dollar of healthcare for fifty cents, and therefore a treasure they are unwilling to surrender. In all probability, no organization except the government could function long with such a deficit, so taking the deficit away from the government necessarily places it in the hands of someone who must balance his books. Somehow, legal protections for the patients against the debts of organizations which participate in the confederation must be established, so they can occasionally provide benefits at a loss, but only within stated limits. Called a "loss leader", the situation is a common one, but the effect is quite different from making the government a payer of last resort. Two additional savings multipliers must be added, although they will be explained shortly, along with two important investment designs.

Investment Mechanisms.We promised to discuss two investment mechanisms which might help matters. The first is the tendency of compound interest to rise with time. We have already shown above that adding another decade to the example will have an exaggerated effect on the outcome. This is an inherent quality of compound interest which crept up on us as science has conquered early death, and should have wide application in the future. As we learn how to avoid borrowing and learn how to be successful creditors, it should become a commonplace to rearrange financing to optimize it.

The second new model is index investing. As international borrowing has vastly increased the money supply, interest rates seem to have settled at a new low. Bonds have always been a zero-sum investment, but recent trends seem to set an even lower boundary. Common stock has more risk and volatility, but John Bogle and others have shown that it is practically useless for an ordinary person to buy anything but low cost total-market common-stock index funds ("passive investing"), since the fees charged by intermediaries tend to wipe out the profit from active investing. We recommend a heavy emphasis on this method. Beyond that basic approach, other strategies may be considered as a way to add fractions of a percent to total returns, but best avoided by people without experience, or lifetime years to recover from investment misjudgments.

In Final Summary of Privatizing Medicare. The public sector has been allowed to turn "privatization" into a term of contempt, when in fact it is a goal for the public sector to emulate. Very few people begin their careers in the public sector without spending their whole career there. In that sense, they are natural monopolists and act like them. We should strive for more varied career paths.

Even with considerable twisting, Medicare is so underfunded, no way can be found to self-fund it without adding several hundred dollars per person as a pump-primer. Of course, that's a great bargain compared with a hundred thousand dollars of medical care later on, but it will meet far more resistance than five hundred dollars is worth. Even then, it might require forty or fifty years at the most optimistic, to show a profit. In the Pearls on a String concept, the deficit might be made up by surplus generated by other programs, but Congress is unlikely to be willing to identify such a donor, and indeed it is a slippery path. The Affordable Care Act does not look as though it is going to generate a surplus, for example.


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