Philadelphia Reflections

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

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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.

Rescuing Medicare from Its Short-Term Thinking.

Ben Franklin expected a hospital to pay for itself by returning sick people to employment. That misconception runs through medical payments even today.

Instead, our good intentions have created a more expensive problem, with its solutions always just out of reach. If you live longer, you get more retirement to pay for, because society also asks for an age limit to employment. Like Franklin we might miss our target, but at least we see the goal. Right now the inevitable consequence of eliminating disease is extension of longevity. Because retirement is continuous while illness comes in episodes, the extra retirement cost (Social Security payments, if you please) might even become more costly than Medicare. Science may eventually cure enough disease to shave costs down to the first and last years of life, starting if possible with the most expensive diseases first. All fine enough, but not right now.

We must devise a better system than that, which like Health Savings Accounts, could expand from cradle to grave (and 21 years beyond death), generating a surplus by age 65, retaining unused medical surpluses for retirement, and taxable only at death. Because of compound interest, such a result is actually achievable, but requires a discouraging length of time. We can buy more time with more money, but the public must agree it is worth it.

A lifetime perspective has six new features, because we begin with a deficit and end with a surplus: 1) Passive investing of reserves as a new revenue source 2) Twenty years of post-mortem Trust Funds to pay for transition 3) Redeployment of current Medicare payments to individual Health Savings Accounts without changes to its delivery system 4) Hooking the pieces together on individual Health Savings Accounts like beads on a string, to increase compounding. 5) Funding retirement with unused augmented Medicare funds, as diseases become cured by science. 6) Reaching zero balance at age 18, by grandparents half-funding the first 18 years for each of 2.1 grandchildren out of HSA surplus. These are unfamiliar concepts, consuming the rest of this essay.

Unfortunately, even if Congress devises a system to do all this, a century is a long time to leave your money in the hands of strangers. There would be one invariable consequence. Whether money is diverted to bankers' salaries or to aircraft carriers, rulers always prefer inflation to long term taxes, and sometimes prefer "imperfect agency" to other short term solutions. Even the Roman Empire eventually succumbed to this conflict. No one oversees other peoples' money as carefully as he would spend his own, so we stand warned by Milton Friedman that your own money management is the only peaceful oversight with a chance of wide-spread success. Even that success depends on running dual systems during transition, one fading out and the other fading in. In the technical section which follows, ways are suggested to manage this dilemma, but above all it seems best to prevent false starts by planning for them. Allow duplication, the ability to make mistakes, and a certain amount of waste from repairing bad choices, as the cost of doing business. Most flaws start as proposed solutions, so it will prove best if winners and losers are widely visible.

This Lifetime Health Savings Account is not a competition of ideologies; it is a series of seemingly unrelated mid-course corrections relating to changing age environments. It leans heavily on putting idle money to work at compound interest, preferably by John Bogle's total market indexing. Even Bogle's system works best with some initial lucky timing. But after a few decades it would scarcely matter when you started, it only matters how much time you have left. Since the beneficiary is dead by the time of settlement, the ones who will really care are those who must pay off the debts. It is up to beneficiaries to fund it, and to educate their descendents to begin early. A single system for everyone will probably never prove universally sensible for hundreds of millions of people. A voluntary system with age quotas seems the most painless way to smooth out an admittedly protracted transition. This is a long term plan with short term concessions.

Non-profit systems are not very good at weeding out failures, so for-profit competition is advisable, to speed things up. But anti-trust violation is a common for-profit short-cut, so modern approaches concentrate on preserving competition, not necessarily efficiency. Always remember we probably have plenty of money, never plenty of time. Young people almost never see it that way.

No other large nation has the money or the brashness to attempt so much change all at once, so there are few foreign models. We are pioneers, and costs will be higher for it. Scientists are not fools, they concentrate research on the eight or ten fatal diseases which (they are told) cause 70% of present costs. But several hundred other diseases wait in line, undermining cost prediction for the coming century. Nevertheless, there are only three stages in life with transitions to consider: childhood, working years, and retirement. Two out of these three are dependent on the remaining one at any particular time; but everybody gets a turn. The easiest way to pay for children is for grandparents to donate at death; the best way to pay for retirement is to add compound interest to what we already have saved, and all the rest depends on working people doing more saving, or less spending than they formerly did. There are lots of gimmicks, but that's the basic plan, while we pray for scientists to eliminate the most expensive disease instead of marking time, counting the number of grains of sand on every beach.

A good plan uses demonstration projects and accepts the possibility of occasionally slowing down. Research and development can be costly at first, before costs eventually decline. We may be--or may not be-- as lucky as we were with heart attacks, in which the commonest cause of death was greatly diminished by a daily aspirin tablet. Or we may struggle on as we did with pernicious anemia and diabetes. Both diseases are treated with injections discovered almost a century ago. But pernicious anemia is treated at trivial cost while diabetes struggles as the most expensive chronic disease we have, prolonging life but not extinguishing cost. Only Americans would plunge ahead anyway, while a President would be foolish to try to change deep cultural attitudes too rapidly. We are warned not to see ourselves as exceptional, but we do see ourselves as exceptional, no matter what the facts.

The facts are the Medicare age group has most of the costs, younger people generate most of the savings. Third rail or not, the problem is to manage a gigantic funds transfer between generations, while avoiding imperfect agents who divert money to their own purposes. In some ways it is more a financial problem than a medical one. We watch private insurance pay its executives multimillion dollar salaries, and we watch our government divert medical money for battleships and babysitting. It is time to stop watching, and try modified individual ownership, putting our idle money back to work. Saving our own money for our own retirement if given a choice, instead of forcibly moving money among demographic groups of strangers. Choices should be voluntary and for-profit, so people will actually notice which approach works best, and then switch to it when convinced. This being political, some people will put their thumbs on the scale. But this being America, the public will not be fooled for long.

So this summarizes the idea. What follows is a general outline of vital technical details for pulling it off.


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