Philadelphia Reflections

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

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A New Currency? Equity Savings Accounts.

Remnants of a Medical Past

For thirty years this primative HSA widened the band of lower-middle-class people able to afford their own healthcare. Another (shrinking) band of poor people with trouble paying full cost always remained however, provoked by rapidly rising healthcare costs. For many people the full cost was obscured by neglecting to fund the resulting retirement cost of improved longevity. For those with bare-bones coverage however, the added cost was added cost. When retirement funds eventually ran out, distinctions didn't make much difference to people with other things on their minds. In both cases, added longevity was a serious hidden cost of improving healthcare, and those who didn't know what to do about it had that incentive not to notice. Linkage to employment crippled employer approaches, such as ERISA, whereas balancing the federal budget limited rising retirement subsidies to the poor. Using big data or little data, it is nearly impossible to see a way to keep such revenues and expenses in national balance over a period of a century from birth to death.

For those without outside support, HSA's were a sort of Christmas Savings Fund of reserves built up by young people, to pay for even anticipated future health costs. But that's not all they covered. By a quirk of the statute, any funds left over in an HSA at the time of joining Medicare, reverted to IRAs and could be spent for anything. Those who had considerable medical spending however, probably had a lessened longevity, whereas those with unusually robust health were the only group who actually had a mechanism for funding lengthened retirements. (In other sections, we discuss how some extra money was actually created by this system.) But even the Health Savings Account beneficiaries did not have an automatic total re-balancing system, except to the extent that individual savers collectively (and inadvertently) kept income and expense in aggregate balance. Similarly, any system yet to be devised in which a bureaucracy uses these funds as a piggy bank, is doomed to political danger. The Federal Reserve is fairly successful at maintaining independence by obscurity of behavior, but even it becomes visibly less independent of political pressure, year by year. It is a possibility politicians will figure out how to get around the Fed, long before the public does.

Initial low costs and later heavy ones, combined, describes the cost curve pretty well, bending upward about age 55. It's also augmented by wasteful costs proving to be mostly small, handled more cheaply by the client than through a remote insurance company. Start with insuring the most expensive items, try to pay the cheap ones, out of pocket. Deductibles might be flexible, and although some will always be too poor to afford them, younger people might have time enough to recover.

Co-pay was explored by HSA developers, but it never completely goes away until the costs are eliminated, mixing it relentlessly with high-cost (ie insured) charges and small ones in the deductible. Co-pay became either became a second insurance policy, which implied a separate administrative cost, or a bad debt for providers. Everybody therefore had both large claims and small ones at the same time, increasing overhead when it really served no cost-restraining purpose. Since the deductible served the accordion idea just as well, it seemed better to use it alone, not double its administrative cost. And then the idea struck that attaching it to a "Christmas Savings Fund" would allow young people to accumulate the missing deductible within the account, gathering interest in the process. Furthermore, once the amount of the deductible accumulated, the poor person who owned it had gradually assembled "first dollar coverage", but the premium for the deductible insurance would not be increased by it. In effect, the individual would then be self-insured for small medical costs, transferring this cost for the insurance company into a profit for the client. Later on,when Medicare took over heavy expenses for everyone, there might be money accumulated in the account which would instead help pay for retirement. As experience actually accumulated, the contrast between first-dollar insurance which encouraged frivolous spending, and the interest-bearing account which rewarded frugality, reduced the insurance cost by 20-30% and made certain the client (instead of the insurance company) got the benefit of the cost reduction. That summarized the original Health Savings Account. It was cheaper, discouraged frivolous spending (or permitted it with a minimum of investigation), offered costless first dollar coverage, and created a retirement savings vehicle which no other health insurance included. It even sorted the people with a lot of sickness from the ones who were lucky enough to need more retirement funding, and who eventually needed retirement funding -- the most.

As experience gradually accumulated, it became evident other desirable features were latent in a very simple-sounding system. As one form after another of government funding for the poor emerged from Washington, some of the theoretical objections to that approach made an actual appearance. The double insurance overhead implicit in co-payment, and the 80-20 split which did not put enough "skin in the game" to restrain spending, exposed that larger amounts really did occasionally pinch some people. Some did actually drop their insurance. The idea that better health inevitably led to longer retirement, had never embraced the notion that life expectancy might increase, as it did, by thirty years. Indeed, some estimates place the retirement cost at five times the cost of the healthcare which provoked it. New drugs might make an occasional appearance, but no one expected new drugs and more luxurious hospitalizations to reach the point where they cost five times what an average year of retirement savings might produce. Retirement was continuous, sickness was episodic.

One way or another, health costs responded to the traditional health payment system by making its cost into a curse. An alternate system which envisioned paying at least half of these costs without rationing, could not be brushed aside, at least just had to be examined. The movement of 4 trillion dollars from stock-picking to index investing in a single year, got lots of attention, especially when it happened to several "passive" funds at a time when just about everything else was doing poorly. Inevitably, the money accumulating in Health Savings Accounts found its way into index accounts, and theory became experience. Extrapolating into the future, even a modest shadow of such results would greatly help our health-care deficits. Combined with a century of future scientific progress eliminating disease costs, we might actually survive what was beginning to look like a well-intentioned blunder. For now, we'll leave the details to Congress and other policy makers. It may disappoint us somehow, or it might exceed our expectations. But when you start talking trillions of dollars, you know the idea has its own momentum. We haven't even started to test the potential of enlarging the idea.

So this book throws an idea on the table. Ever since the Bretton Woods conference, the elimination of the gold standard has been in the cards. There's a limited amount of gold on earth, and to substitute a committee opinion is equally unlikely to resist the political pressures on it. We need a substitute for gold which enlarges and contracts with the economies of the earth, which is internationally valuable, and responds to local problems in an individualized manner. Why not explore the idea of using national total index funds as a monetary standard? If it doesn't work, there are several tons of gold buried in Fort Knox as a back-up.


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