Medicare: Begins, Not Ends, Reform
The elderly consume a disproportionate share of total health expense. That soon forces Medicare, the "Third Rail of Politics", to get first attention in any lifetime health plan -- even Lifelong Health Savings Accounts, our central proposal. In it, Medicare revenue remains unchanged, while the rest of health finance adjusts around it. Revenue flow is assumed to be neutral from age 18 to 64, so other changes can be serially assessed. Assumptions like this make long-term planning possible when costs of some age groups are unpredictable.
Let's apply a Due Diligence approach to the technical steps of this proposal. That is, skip past the overwhelming detail of existing data, to focus on conclusions to test. First, divide the population into three groups: dependent children, the working age group, and retirees, and start with Medicare. That's ignoring the advice that Medicare is the "third rail of politics--touch it and you're dead". The easiest place to begin is with the elderly, because they have the greatest medical cost, and anyway if we continue to "kick the can down the road", we are admitting defeat before we even start. Medicare is not only where most of the costs are, but predictably where they will migrate further. It's only half paid for by the recipients, while a major goal is to break even. Indeed, as science cures diseases, surplus should be consumed into a retirement fund, so realistic projection errors could overstate the revenue. As the old Quaker observed, the best way to have enough is to have too much.
The Composition of Medicare. With the single important exception of disabled persons, Medicare eligibility is age-related not income-related. Everyone between the ages of 65 and death (averaging now 84 years) is eligible, regardless of finances. We also contemplate funding children out of this source by transferring 5% for them. It's not much, but it is central, and it dramatizes the cost distribution. The raw data is blindingly comprehensive, sometimes to the point of obscuring important conclusions, so rather than starting with it, we should come back to data after we see what we need.
A fair working assumption is that Medicare borrows about half its costs, while Medicare totals constitute about half of total medical costs. So at least a quarter of all medical costs are already indebted. Medicare's actual sources of hard revenue are about evenly divided between payroll deductions from future beneficiaries, and premiums from existing ones, or about an eighth of total costs, each. So about twice as much is borrowed, as pre-paid in wage tax (one quarter of total cost borrowed, versus one eighth pre-paid). Since lifetime costs are estimated by actuaries to be $350,000 in year 2000 dollars, the problem is to take $42,500 and turn it into $85,000 in 21 years in a post-mortem trust fund--seemingly at only half the rate of a reasonable rate goal of 7%. Average costs are even somewhat overstated, because the 9 million disabled come from younger age groups who also contribute less than average. Furthermore, leftover revenue would probably be available for covering gaps in healthcare coverage in other age groups, as yet to be decided by Congress. You might cover these gaps by doubling the wage withholding tax, but it would be uncomfortable. Our proposal is to substitute compound interest principles, which are harder to explain, but easier to accept.At present, the Health Savings Account is the only medical payment system which could adjust to the predicted migration from healthcare to retirement care, and it is the only component which could then fund all children with about a 4% carry-over from each grandparent to an average of 2.1 children per mother. HSA currently provides for money still left in the account at the time of achieving Medicare coverage, to flow into an IRA which can be spent on anything. If you are lucky with health problems, you can even seem to use the same money twice. That's something to brag about, but it could be made even better. Right now, for a system hoping for millions of subscribers, it is too rigid and uniform. The idea of post-mortem Trust Funds (see 1b) somewhat smooths this out as well as generating a four-fold increase in revenue. Money is left over from Medicare for retirement, and then if there is no debt left over from retirement, you do not need a Trust Fund. But flexibility would be particularly useful during the transitions; some will need it, some won't. The fact that you don't know in advance, enhances the ("Old Quaker") incentive to overfund the balances.
I see no reason for HSA/IRA migrations to be so uniform, so one-size fits all. Surely there will be subscribers who would prefer to accumulate funds for later life, rather than as soon as possible. There is no reason to demand that everyone be within a certain age group, or to stop depositing at a certain age. If there is some such reason, it ought to provide for a court or agency to approve exceptions. The same court could handle the vagaries of marriage affecting grandchildren (see 2.0, below).
For example, there is even no reason to terminate accounts at the time of death. The transition will uncover numerous exceptional situations, and some people would even want to create an HSA at age 64. If they want to do it, why spend hours figuring out how someone might somehow game the system with his own money? If their parents can fund an HSA at birth, why not get started twenty years sooner and add four times as much accumulation by age 21? If there must be disincentives to accumulate money, apply them after the termination of the Trust Fund, when family responsibilities are mainly (but not invariably) coming to an end.Growth. Money at 7% doubles in ten years, so one specific proposal is to re-direct the money already being collected during 60 years, doubling it during a gradually declining 104 years. The money must earn 7% within a Health Savings Account if it is to pay for Medicare plus a million dollars per person left over for retirement. (Bear inflation in mind, however: money at 3% gross might not grow at all.) Compounding should start early in life, remaining in one continuous storage location for as long as possible, with escrowed compartments for specific goals, like buying out or consolidating shorter-term vehicles and anticipating some marital ones. Tweaks to current Health Savings Accounts will suffice, but must be at least mentioned in the legislative language, to guide the long-term regulatory one.
Only a few present limitations on HSA prevent this lifetime compounding from beginning immediately, and 7% annual returns are expected back from financial intermediaries over the longer term. Even though raw stock market returns have averaged 12% annually over the last century the financial community will probably object to 7% return for the customer from total market index funds because of its 3% inflation assumption within the middleman portion, and the intermediaries have already shown they resent the security measures. (Fear of the trial bar probably plays a role in fiduciary disputes.) But the reward for winning the lobbyist war, is funding half of the shortfall deficit by placing risk on the proper shoulders. Two principles guide revenue enhancement : begin to save early, and relentlessly escrow inescapable life goals. Benefits from careful adjustment of terms with legal permission, might range all the way from doubled returns, to cutting them in half.
Running through this dispute with your financial advisor is the need to use the "annual total returns" on major domestic total stock market indexes as a benchmark to be exceeded to escape penalties for ethical misbehavior. The principle in Law is well established that if there is no injury, there is no case.
1. Creating Revenue Instead of Floating Bond Issues.
The underlying problem is to fund retirements after you have funded Medicare, when both of them begin at the same time. Suggested technical steps now follow, trying to co-ordinate designated approaches as beginning with as little amendment as possible, until the fate of the Affordable Care Act is decided. Beyond that, it is a possibility that, if the tax exemption of employer based insurance is equalized, funding might become easier for the other half of the employable population. At the time of closing down the trust, there are only two eligible recipients, the Medicare Trust fund, and the IRS, so it usually makes no difference how the Government got the money during the long transition phase, and the extra administrative cost would be considerable.
1b. Post-Mortem Trust Funds. Some parts of this proposal are not obvious, and should at least be mentioned in the statute to guide the subsequent regulatory phase. For example, I see no good purpose in limiting Health Savings Accounts by age or occupation. Expenditures from these Trust Funds should only pay off Medicare-related debts. This trust fund concept alone would quadruple available revenue (and beneficiaries during a transition.) The Health Savings Account already devotes any surplus after 65 to a retirement IRA; why not make the timing optional, and hence more flexible? Underneath any regulation you will usually find a lobbyist.
The transition from our present system to a better one will be the biggest problem; why make it harder to manage? If someone is aged 64 when the program starts, why not give his estate twenty more years to invest and retire when it judges he can afford it? With a trust fund, if he is dead and has money left in the account, why write off his retirement debts immediately after he dies? The money in a trust fund will continue to grow until it becomes a perpetuity -- one lifetime plus 21 years. That means his estate will have four times as much money to pay his debts--what's the matter with that? The central point is to expand the number of people able to pay back what they owe -- to the government; who cares if they are alive or not when the money is paid. Effectively, an index-fund certificate is funding an escrow account. Why not "take delivery" of the certificate by the creditor, whether or not the debtor is alive? The result would be many more funded accounts, not more bad debts.
1c. Last Four Years of Life Reinsurance. Alternately, a more complicated 50% partial buy-out of Medicare could continue present systems at half price. Eventually the cost can be adjusted from actual payment histories, both individual and collective. The outcome might be halving the transition time by pre-payment and repayment to Medicare at death, as well as replacing a liability with an asset. This is hard to explain, and post-mortem trust funds are probably politically preferable.
1d. Revenue Estimation By Exclusion. This discussion envisions lifetime coordination, but since future revenue is uncertain, adopts the temporary hypothetical that ACA is revenue-neutral. Like Frank Sinatra's song about "making it" in New York, if the idea is feasible without ACA and/or tax exemption revenue, it surely would be even more feasible with those two Laws adding revenue. Without such revenue, this proposal still addresses the majority of present medical cost, but would need to be endlessly integrated with whatever emerges from ACA. One tweak is apparent: catastrophic insurance is mandatory in an HSA, but there may be long periods of employment or marital situations when a lifetime depositor has two health payment systems at once. Therefore, if a Health Savings Account has not made a health payment for a year, the premium for catastrophic coverage should be waived for the following year, substantially reducing its overall cost. The underlying assumption is that when you have two health insurances, you especially don't need two reinsurances. To pay the premium by the HSA itself would greatly ease this problem.
1e. Steadily Improved Longevity v. Steadily Greater Retirement Cost. For the first time in history, longevity has increased by 30 years in a century, followed by 3 more years in the past decade. That's a good thing, of course. But someone neglected to plan for increased retirement costs, in some ways a "bad" thing, directly caused by living longer. That is, while the present working third of the population is paying for its parents, the cost of transition will double in size, but costs of the retired third who benefit may increase tenfold. By that time, the contributors will evolve into becoming retired beneficiaries without employment, so revenue will not increase tenfold, and the situation becomes impossible to correct. The imperfect precision of these projections is irrelevant to their gloomy conclusions. Furthermore, the interests of the citizen and his government will often get into conflict, an inherently disruptive situation which interferes with solutions.
2. Grandpa Pays For Grandchild With Newly Created Funds.
A vexing parallel situation is the location of children in the scientific cost curve. Medical costs for children may sometimes seem impossibly high, particularly if obstetrical costs are lumped with them. But they are really quite small when compared with the late-in-life compounded revenues of retirees. In our plan, the money is newly created, belonging to no person, so it can be shifted with less resistance. Costs of children are disproportionately troublesome because of their timing within the context of their entire family. Politically, they insure a lot of people at not much insurance cost, so expect a lot of new children's hospitals to be built if they are insured.
2a. Shifting the Cost of Obstetrics and Pediatrics From Mother to Child, and Having Deceased Grandpa pay the Bill. The lifetime medical cost curve is J-shaped, with the lowest point at about age 17, rising steadily until death averaging age 84. The shape of the J-curve is emphasized by half of Medicare cost being experienced during the last four years of life. (This conclusion is blurred somewhat by adding 9 million younger disabled to the Medicare rolls. That adds to lifetime average Medicare cost, appearing to portray lifetime cost as even more J-shaped.) Even accounting for the distortion, financially struggling young parents have a hard time managing medical costs, made even worse for unmarried mothers. Middle-aged women often have gynecologic costs which lack a satisfactory resolution if they also have marital financial problems. Most of these distortions are artificial. Stripping them away by assigning them to the child would expose a steeper incline to the J-shaped cost curve of both sexes. From a politician's standpoint, equalizing medical costs of the two sexes would soften some political noise, by reducing employer costs, reducing female wage inequality, even affecting immigration by raising the citizen birthrate.
2b. How Is Money Transferred from Grandpa to Grandchild? The answer is simple: it is transferred from HSA to HSA at Grandpa's death, or Grandchild's birth, as a 5% transfer. The math means one transfer suffices for 2 grandchildren, at a 2.1 birth ratio.
3. The Working Age Group From 18 to 64.
Our basic position is simple: we ignore the working age group until business and government reach agreement. Meanwhile, we treat both Obamacare and Employer-based insurance as unchanged and revenue-neutral, while fervently hoping for some surplus revenue to reduce the cost of the dependent two thirds of the population. Employer groups have resisted being taxed for indigents since long before the Affordable Care Act, arguing that hospital cross-subsidies were already more than their fair share of charity. We hope things will evolve as two new systems, one of which is an HSA with temporary waivers of catastrophic premiums, but both employer groups and ACA have regarded their negotiations as nobody else's business. Blue Cross seems to be taking a cautious look at HSAs. We wish they would read one of John Bogle's books.
3a. Employer Donated Employee Groups and Tax Implications. Two other vexing laws stand in the road of peaceful resolution. The first is the Henry J. Kaiser tax loophole, apparently the largest tax loophole for individuals of all time. So much profit is at stake, one scarcely blames big business for trying to extend it, but it seems nevertheless un-Constitutional to permit a tax loophole of this size to persist for 70 years for half the population, while stone-walling extension of it to the other half. It is as though no one could read the "equal protection" clause. There is little doubt the fairest solution would be to abolish the health-insurance double tax exemption for everyone, but the resultant confounding of world trade prices would be daunting. The simplest solution is to have Health Savings Accounts pay the catastrophic insurance premium, thereby extending a full tax exemption to everyone. That maneuver would reduce federal revenue, which would then have to be adjusted in the coming Tax Reform legislation.
3b. Big business seemingly has no pre-existing condition problem, but in fact they avoid hiring impaired people to avoid this issue if they can, leaving it to their smaller competitors to wrestle with last hired, first fired. So a small issue became a big one; in a sense they created it.
3c. Medicaid: A Special Age Class Trying To Become An Age-Independent Income Class.Finally, there is the Affordable Care Act, with missteps addressed. Medicaid was originally a state-sponsored program for mothers and dependent children. The Affordable Care Act tried to expand it to all poor people, and met with mixed success in different states, so Medicaid expansion potentially invades the working age groups. It is uncertain whether the nation can afford expansion, and its fate probably depends on the decision, possibly on constitutional grounds. If healthcare is ever to pay for itself, extra funds must ultimately derive from the working third of the population. (Children have no means to pay for future care, while retirees are largely without working income until the very end.) In this analysis we treat the net cost of age group 18-64 as revenue-neutral. That means this one third of all inhabitants must generate its own costs, plus enough surplus to cover the deficits of the other two thirds who are dependents. Reduce the dependent cost, and you will reduce the strain on the employee group. Furthermore, the J-shaped medical cost curve means most new costs will increasingly arise among retirees. Already, Medicare is 50% subsidized, and then re-borrowed with bonds. That means it is already 50% laundered and can scarcely stand more burden. It is very difficult to make long-term plans when the finances of ACA are so obscure, and its margin for error so narrow. In one form or another, we repeat this performance every time political control reverses. The private sector could not survive without a better form of "due diligence" than this. I suggest the President immediately assemble a due diligence team for his own information, mostly consisting of accountants, to give him the news, however bad, of where we stand. And then, ways must be found to extend the "surplus" from employed people to the unemployed two thirds, stretching a tiny surplus to meet a big shortfall. Without that tiny surplus, medical finance is close to a cost spiral.11. The final point to be made concerns Subsidies. The foregoing discussion focuses on Payment Structure. Whoever considers costs must add the cross-subsidies which shift real costs from poor patients to insured ones. At first, reimbursed systems appear cheaper than straight-forward ones, simply with prices re-named reimbursements. But be sure to include subsidy cost before deciding which structure is really cheaper. If you want to subsidize this system, go right ahead.
4. Constitutional Issues.
For the most part, the rest of the uproar about the cost of medical care is mostly man-made, thus seemingly should be negotiable. The problem with this attitude is the man-made problems are so numerous and of such long standing, they appear more intractable than one would suppose is realistic. In the first place, the Tenth Amendment of the Constitution clearly makes the licensing and regulation of medical care reside exclusively in the several states, even in spite of greatly increased nation-wide transportation. Both specifying state regulation (for instance, the McCarran-Ferguson Act) and national regulation (ERISA) are so clear and carefully worded it is hard to guess why both have not been challenged, or indeed which side would win an appeal. The Maricopa 4-3 Supreme Court decision clouds judicial resolution along anti-trust lines. Reams of legislation by State Legislatures suggesting one organizational pattern, and voluminous Congressional legislation suggesting the opposite, allow the citation of precedent to be almost anything. Certainly, no one wants another Civil War.
5. Pay As You Go. A major mistake was made in 1965, when Medicare adopted the "pay as you go" system.The program might never have started without it, so Lyndon Johnson cannot be exclusively blamed. But the first year recipients were enrolled free to the beneficiaries, and since then, revenues have been spent as fast as they are generated. No interest was generated on this enormous foregone revenue, and the recipients are now dead. Continuing revenue consists of payroll withholding of 2.9% of income during working years. It also consists of premiums amounting to a similar total. Before the books were scrambled with ACA subsidies and $30 billion for "meaningful use" of electronic medical records from the stimulus package, this revenue source would almost have paid for Medicare if it earned 7% income. At present, it will have to be amortized. I suggest we change the recipient address on the envelope of this revenue, from Washington DC to individual Health Savings Accounts, who would then employ John Bogle's system of passive investment of index funds, hoping to achieve 7%. In time, the numbers could be adjusted to be revenue precise. When the due diligence team reports the equilibrium state of affairs, further adjustments will have to be made. They won't be revenue neutral, but we are starting 70 years late.
6. Substituting Passive Investment for Pay/Go. So far, we have only explored one approach to paying for lifetime healthcare for everyone -- take the money already being spent on Medicare, deposit it into escrowed individual Health Savings Accounts instead of milking it for pay-as-you-go, when index investing could on average double it at 7% tax-free returns in ten years (sixteen-fold increase in forty years, thirty-two in fifty years, etc). Doubling its revenue should make it self-sufficient, easily surpassing almost any expected inflation after a ten-year transition. Because Medicare costs are age-stratified, not income-stratified, this heaviest of Medical costs now subsidizes no other age groups except disabled persons, so paradoxically, voluntary participation is facilitated.
7.The hardest thing to explain to non-mathematicians is the power of compound interest to increase virtual interest rates, a concept that baffled even Aristotle. Essentially, compounding explains why increasing longevity steadily increases effective interest rates, a saving grace for this whole idea for beating inflation. In fact, this saving grace increases effective interest rates after age 60 by so much, that paying for a grandchild's health cost is fairly trivial, compared with the struggle their young parents might endure. A five percent dollar transfer would hardly be noticed by grandpa's heirs at age 84, whereas it might seem an insurmountable amount to his young children, acting on behalf of his grandchildren. Simultaneously protecting grandchildren and grandparents with a single rearrangement may strike some as fraud, but it isn't. What's really strained are two things: convincing 300 million people to do the simple math quietly, and to keep the custodians from spending the boodle, whether on stockbroker income or on aircraft carriers. In fact, I have omitted much mention of "last year of life re-insurance" as unneeded, but to be held in reserve in case a chaotic transition requires shortening.9. There are other approaches to paying for medical care, and we may need them all. In addition to earning income on idle cash balances, we could thus display the cost of care by moving most patients from the hospital, to the home or retirement community, and exposing the internal cost subsidies (usually transferred through indirect overhead charges). The wrong people are doing the medical commuting; shifting the center of care to the retirement community, along with doctors' offices, laboratories and parking lots, would reduce costs by reversing the commuting. Its biggest cost savings would come from disrupting the internalized accounting, getting control of malpractice awards, rationalizing wage and executive costs, and removing middle-man costs from supplies, especially drugs. But I predict these streamlining efforts will prove to be disappointing. The public is proud of its hospitals, and will defend them.
8.Why use Health Savings Accounts, when we could just use single payer? Well, that translates to, Whom do you trust not to misappropriate it? Robert Morris of Philadelphia took great pains to arrange the Constitution and the First Congress to prevent the federal government from ever owning shares of a business, because of fear of "imperfect agency". That is to say, Morris foresaw greater danger in diverting medical money to battleships, than to Credit Default Swaps. No doubt your victorious government would share some of your money with you if it won a war, but what if it lost a war? You can make your own translation of what Morris meant, but it was essentially what is very wrong with medical cost control in general: Nobody spends someone else's money, as carefully as he spends his own.
10. The best way to reduce costs is by research. Much of research is wasted money, and there are hundreds, perhaps thousands of diseases. But scientists are not fools, they concentrate on the expensive and devastating diseases. It is estimated that a majority, perhaps 80%, of medical cost is spent on four to ten diseases. I'm afraid that eradicating diseases like cancer and diabetes might lengthen longevity somewhat, while other diseases like Parkinsonism and Alzheimer's could take their place. After a while of course the disease burden will diminish, and within a century perhaps the cost effect will be to reduce health costs to the first and last years of life. In the meantime however, the cost of research, new drug development, etc, may even raise medical costs. In the meantime, the immediate effect of research on costs could be uncertain. When a tough-minded drug czar is finally appointed and faces down public clamor, we may well discover how to identify and direct the efforts of good researchers. Generally speaking, research is a young man's game; they burn out. Because they are young, they make poor administrators. Somehow, the system needs shaking up, so unproductive researchers can be identified sooner and shifted to teaching, administration, and clinical practice, without fear of stigma or shame. That's mostly identifying research failures. Identifying scientific brilliance is an entirely different thing, because brilliance is in great demand, financially and otherwise. I'm afraid the American system is expensive but effective: we throw money at a goal until it succeeds. No other nation can afford to match that. Some time within the next century, I expect we will be down to the expensive first and last years of life, plus a horrendous retirement expense. We should arrange our systems to direct unspent medical money into more comfortable retirements, without exactly knowing when the two requirements will mesh. That's why a self-adjusting overflow surplus has great advantages.
At present, the Health Savings Account is the only medical payment system which can currently adjust to this predictable change from healthcare to retirement care. HSA currently provides for money still left in the account at the time of achieving Medicare coverage, to flow into an IRA which can be spent on anything. That's something to brag about, but it could be made better. For a system hoping for millions of subscribers, it is too rigid and uniform.
George Ross Fisher M.D.
203 Chews Landing Rd
Haddonfield, NJ 08033