Philadelphia Reflections

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Can Pre-payment Supply The Deficit in Health Revenue?

Lifetime health care is commonly stated to cost about $350,000, per person, in year 2000 dollars. This figure is based on work of the Michigan Blue Cross, confirmed by two government sources. The underlying formula was supplied by Dale Yamamoto, a Washington actuary, applied to data supplied by insurance companies, and intended to give relative cost projections into the future, adjusting for inflation, but not adjusting for scientific advances which might take place. Because the source of cost was data supplied to insurance companies, the possibility exists that insurance costs are not part of the calculation. Let us assume therefore that $400,000 would be a more accurate estimate for average lifetime costs, setting unknowable scientific advances aside.Doing so allows for potentially omitted insurance costs, and if this surmise is upset, we can transfer $50,000 of the proposed restructuring to retirement benefits.

If we further set aside the costs of working people aged 25-65 until at least the November 2016 presidential elections, we get a rough estimate of $300,000 lifetime cost for medical costs, but excluding the costs of employer-based insurance, Medicaid, and the Affordable care act. Unfortunately, even this estimate doesn't include the 42 million people who don't have the ability to pay for themselves, like mentally impaired, illegal aliens, prisoners in custody. Let's estimate that the average American must anticipate $400,000 lifetime costs, including the need to pay, somehow, for these medical obligations. When the dust finally settles, we may attempt a more accurate projection of average healthcare costs, but for the moment it seems adequate to state them to be: about $300,000 plus these extras. How much are we spending, right now?.

Well, we are spending about $60,000 for Medicare, and we borrow another $60,000 from bondholders--far from enough to cover even roughly estimated costs. Further, we are spending 8%, or $9600, on childbirth and pediatric care to the age of 25, by way of ascribing that cost to the mother and father instead of to the child. That's a total of $60,000 which is visible, and $69,600 invisible..

By contrast, we get more acceptable numbers by doing three things. We could generate 7% interest on the $60,000, by directing prepayments to personal Health Savings Accounts, -- of our present withholding taxes and Medicare premiums. Same amount of money, different post office addresses. And secondly, we relieve the payers for the parents, by paying the costs of the babies and children.. Lastly, we generate 7% on a $250 one-time gift at birth

The amount of revenue is complicated. For withholding tax, we generate 7% on $700 yearly additions to withholding, for 40 years. And we generate 7% on $1400 annual Medicare premiums for 20 years.You may need a calculator to verify this, but the interest on withholding is 137,000 + 57,000=$194,000..

And the $1800 escrow gift at birth at 7% equals $137,000 at age 65..

$137,000 +194,000 = $331,000.Commentary: We have postulated a mysterious contribution of $250 at birth which, with a change of postal address, might convert a massive indebtedness into a break-even arrangement. Never mind the rough approximations, the simple reform converts a hopeless deficit into a plausible solution. One more simple step creates a comfortable surplus. Placing both funds into a single investment vehicle (the Health Savings Account) extends the duration of the two pieces to the point where compound interest for a longer span of time, greatly increases the percentage return, as illustrated in Figure 2..

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..........................................................................................Table 2......................

........................................................Running Summary of Individual Pieces of Revenue now being spent:

Age....................0....................25....................25-65.................................65-85..............85-104...........................Lifetime.......... Childbirth.........250..............4000...................

................. Working Age (omitted).........0.00

Medicare withholding tax.....4000.+$700&......231,000.......

Medicare Premium.............................................231,000+1400& ....$960,000

......................................................................................................................................................................................................

The Health Savings Account, alone among health financing methods, provides for transferring unused healthcare savings to an Individual Retirement Account (IRA) , and thus automatically makes a surplus available for retirement spending. There's justice to that, because improved healthcare results in living longer, and hence in rising retirement costs. Of course ultimately science may help pay for the benefits it has provided, whenever it succeeds in reducing costs by curing some disease. Ultimately it is possible to imagine health costs reducing to the first year and last years of life. Everything in between will have been cured, but only after myriads of untreatable diseases have been expensively treated. Right now, most heavy costs are concentrated in ten diseases. But half of medical costs are consumed by Medicare, and half of Medicare is concentrated in the last four years of life.

... .................................................................................................................................................................................... Age....................0....................25....................25-65...............65-85..............85-104...........................Lifetime.......... Childbirth..........XXXXX*.*...........XXXXXXXX** .,,,,,,,,,,Trust Fund.................350.000*........ Dependent Child......................................... Working Age (omitted)....................................................0.00 Medicare, plus supplementary................................................................$58,000 +(58,000 borrowed) Lifetime,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,$350,0000(-116,000+(234,000)+Insurance admin=approx 289,000 ... ....................................................................................................................................................................................

 

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