Philadelphia Reflections

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

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Health Savings Accounts: Replacing Affordable Care Act?
The Election is over. The health financing problem remains.

Plans for Healthcare Financing Retirement, Too

The preceding chapter seems like enough to say about the existing Health Savings Account. It should suffice for anyone who is stranded without health coverage, since it is already existing law, tested many times, and ready to go in a pinch. The handful of technical amendments are only about what you would expect from any fairly new program, and with any luck they will slide through and suffice. The public, however, would be entitled to be disappointed with such thin gruel after so much hubbub, although repealing Obamacare outright would certainly make things more exciting. There has been insufficient time in a lame duck session to render it effectively booby-trapped, but the pre-existing Obamacare law and its regulations are voluminous. After passing legislative actions to repeal it dozens of times, I have to assume the low-hanging fruit has already been picked by Congress. I would hate to see a relaxation of forward progress at the present stage; the resulting chaos would be considerable.

The J-Shaped Cost Curve. From a high altitude viewpoint, the healthcare of an average lifetime costs about $350,000 in year 2000 dollars. It divides easily into roughly three thirty-year compartments: childhood up to age 25, employment from 25 to 65, and retirement from age 65 to death at age 84. Childhood is necessarily a gift from someone else, retirement costs are a gift of at least 50% from the government, and the lifetime operation is almost entirely funded by the working age group from 25 to 65, if you consider the government as being funded by the employed segment's taxes. Last year's NIH research budget was $33 billion, the Medicare budget was $55 billion.

This is quite a natural consequence of the way money is earned and spent in our society, but I consider it hazardous. Remember, the working segment (age 25-65) is not terribly sick. For a non-sick third to be supporting the sick two-thirds, is asking for grievance to be expressed, and for somebody to be tossed out during an economic upheaval. Let's put it another way: the people earning money aren't sick. The people who are sick may seem to have some money, but if they lose it, look out. The curve of health spending is said to be J-shaped: a childbirth expense and neonatal costs, then gradually increasing expenses clustered toward the end of life. Later on, we will discuss the proposal for First and Last Years of Life Reinsurance, which seems to me to match the future much better than what we now have.

Self-Funding, Rather Than Bulk Funding of Subsets. Furthermore, a long period of saving precedes a reasonably short period of spending. So a person's early saving would pay for later healthcare claims cost, if we judiciously match savings with insurance. That's the Health Savings Account function, to which is added using surplus funds for retirement, by overfunding the premiums, and keeping the invested surplus for later use. Somebody in 1965 made the serious blunder of overlooking the extended longevity provided by better healthcare. The awkward fact is retirement and Medicare begin at the the same age, and retirement by some reckonings can cost five times as much. Retirement costs are continuous, while sickness comes in episodes. Further, saving for your own future needs will create an incentive to save; paying for whole classes of strangers creates an incentive to spend other people's money. Because when you create such a system, the money belongs to someone else. The newspapers report that health insurance averages 17% to pay its own costs, and the other 83% still goes to someone else. It isn't too hard to see where 30% savings might come from.

To synthesize an example of a $5000 annual premium, 30% savings, for 40 years at 7% compound interest, would generate $13,600. At 6%, it would only generate $6800.

 

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