Much has been made of risks for giant creditors in the 2007 credit crunch. What about the little creditors, the depositors with their savings at stake?
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An old friend, than over ninety years old, once growled that Paul Volcker, the esteemed even heroic Chairman of the Federal Reserve, was only interested in saving "the banks". It's certainly true that many members of that board are elected by banks in the different regions, but it isn't easy to see how the Chairman could help banks if he wanted to, or why he would want to. It takes only a moment of reflection to realize, however, that all banks would naturally want to charge the highest possible interest for their loans and pay the lowest possible interest to depositors. Essentially, everybody is their adversary.
Except the Federal Reserve, which needs its regulatory power over banks to control the amount of money in circulation, in order to stabilize the currency both at home and abroad. In another place, we discuss the remarkable ingenuity and the worrisome weaknesses of this arrangement, but for now, let it suffice that it's the arrangement we have.
The difference between the prevailing return on deposits and the return on loans is called the yield curve, because short term rates, which the Federal Reserve controls, normally slope upward toward higher long term rates, which the Federal Reserve does not control. Essentially, the Fed controls what depositors are paid, but has no direct control over what borrowers are charged. Depositors are savers, and it is widely agreed that Americans do not save enough. To some degree, that must be the fault of the Federal Reserve. And when market conditions force a decline in the rates charged borrowers, the Federal Reserve must allow the banks to squeeze the depositors' rate of return, or banks will go bust. That's all my old friend was trying to say when he criticized a national hero. Luckily for Volcker's reputational legacy, he needed to boost interest rates dramatically in order to stop inflation, and that put plenty of interest in the pockets of old folks with money in bank deposits, while unfortunately, it throttled borrowers unable to obtain loans except at very high prices. He stopped inflation in its tracks, but at the price of hurting business.
For over a year before the 2007 credit crunch, short-term rates (and depositors' interest return) were higher than long term rates (and borrowers' interest cost), an infrequent occurrence called an inverted yield curve. The difference between the Bernanke problem and the Volcker problem was that this time long rates were stuck at historically low levels, probably because of international situations. Depositors were protected and banks were made to suffer, although their reserves were invisibly eroding. One has to suspect the housing bubble was allowed to go on, to some degree to rescue the banks. With inflation starting to appear, interest rates needed to be raised, and with a national election approaching, deposit returns needed to rise to placate elderly savers. Furthermore, banks had a relatively new competitor for deposits, the money market funds.
The inverted yield curve put savers in a strange position. Normally, they had to balance in their minds the higher interest rates obtainable by investing in bonds, against the inflexibility of locking up the money for long periods. With an inverted curve, however, bonds looked like the dumbest possible investment when they paid less interest than money market funds. Bonds were thus under pressure to raise rates, but they didn't rise. Greenspan's conundrum still persisted, but the situation highlighted one of the unpleasant consequences of correcting it. If interest rates rise, the price of existing bonds must go down; somebody's going to lose money. That's what was soon going to happen, once the credit collapse got started. Bond prices might dip and return if you didn't actually sell, but if you urgently needed cash in the meantime, you had to call on your money market savings. The spreading of the problem from one asset class to another was likened to the spread of a contagion.
In a sense, that's isn't quite accurate, because the similarity of bank deposits and money market funds is to some extent an illusion. Money market funds are minibonds. These bundles share the characteristic with bonds that rising interest payments result in falling prices for the principal involved. To preserve the appearance of interest-bearing cash they have a par value of a dollar a share, and the interest they pay is really a dividend. To preserve the appearance further, when interest rates must rise, fund owners make strenuous efforts to avoid "breaking the buck", or lowering the principal value, even to the extent of investing their own money to support the price. Rising interest rates are hard on money market funds, and most funds are owned by banks. The banks are under pressure by other factors in the credit squeeze, so it would not be inconceivable that they would be forced to break the buck. Elderly savers would not like that development and in an election year could make their displeasure felt. A great many people might wish to shift their savings from money market funds back to bank deposits, which are largely insured. A commotion of this sort would bring more attention to a comparison of different funds, leading to the wide-spread discovery that the money market funds, which stock brokerage accounts employ as "sweep" funds for dividends and spare cash, have long paid substandard interest rates because of ignorance and inertia by the clients. And so, the contagion threatens to spread further.
The steepness of the federal interest rate curve -- ten-year treasury bonds pay more interest than three-month treasury bills, and the rate for intermediate time intervals slopes gradually from one to the other -- is a function of the Federal Reserve; the slope of this curve concisely describes current Fed policy. The Federal Reserve controls the money supply by raising or lowering short-term rates, which "affects the slope at the short end", and mainly in this way restrains or encourages inflation, or alters the exchange value of American currency. For the most part, long term rates are set by the public bond market. Once in a while, the Federal Reserve does buy or sell long-term treasury bonds to modify long-term rates in the economy. By affecting rates at either end, the result is some kind of change in the slope of the curve.
Because banks make interest payments to depositors near the short-term federal rate, while the same banks charge borrowers at near the public long-term rate, the current slope is the main determinant of bank profits. Banks borrow short and lend long. If Federal Reserve tinkering steepens the curve more than it would be without interference, then bank profits are subsidized. Of course, it works the other way as well; in a banking crisis, yield curves can be steepened to rescue banks from failure, thus potentially sacrificing ideal monetary levels temporarily. For the most part, what is good for the banks is good for the economy; but it remains that bank profits are subsidized much of the time. Artificially widened yield curves either punish savers by lowering interest rates on their savings accounts or else punish borrowers by increasing interest rates on mortgages and other credit. For political reasons, the pain is usually shared among voting blocs. It can be argued this invisible subsidy of banks by the public creates a compensating benefit of economic stability despite occasional bubbles and recessions like the present one. However, the Federal Reserve system has been in operation for almost a century, revealing a long-term bias in favor of inflation, which is a subsidy of debtors by creditors. Present policy deliberately targets a steady rate of 2-3% inflation; the gold market responded to a century of this by raising the price of gold from $17 to $900 an ounce. A 1913 penny has become a dollar (before taxes) you might say. You might also say it took the Federal Reserve less than a century to make the present dollar worth a penny.
If gradual inflation is a consequence, a fair question must arise whether the Federal Reserve is worth its cost. Compared with an inflexible, relentlessly deflationary Gold Standard, yes, it is. Even accepting the monetary crisis as partly created by central banking, the international dominance of the American economy and recent smoothing of banking instability testify to the durable use of the Fed. But another criticism must be faced: In subsidizing depository banks with an artificial yield curve, is the Fed backing the wrong horse for the future? To answer that question, examine two components: With computer technology rapidly advancing, can the Federal Reserve accommodate non-banking competitors to banks? And secondly, international central banking appropriately accommodate globalization? There are, after all, aspects within the 2007-20?? a crisis which suggests -- maybe it can't.
Steady inflation of 1000% per century may well be preferable to 19th Century volatility of 1000% every ten or so years. But a gradual rise of, say, 500% or less each century might be even better. Relentless political pressure on the Federal Reserve has typically been used to explain its slow retreat from truly stable prices, and this defense takes the form of mentioning its dual mission of minimizing unemployment while holding prices as steady as possible. In recent years, European political rhetoric goes further, aspiring to add the right to employment to their fifty-page Bill of Rights; similar utopianism has crept into our own news media. Governments for thousands of years have cheapened their currencies. But while the drift is clear, our own pace is set by the amount of subsidy required to maintain a steep yield curve. As retail banks have struggled to compete with the wholesale investment banks, their increasingly uncompetitive costs require a greater subsidy from the yield curve. It is always going to be more expensive to aggregate deposits for lending purposes than to raise large sums by floating a bond issue. Securitization is here to stay because retail banks have consolidated and savings banks have gone out of business by the thousands; the mortgage industry can no longer survive without substantial amounts of mortgage-backed securities. Nor should it; securitization is a sensible route for importing capital from nations with a trade surplus. Depository banks long ago lost the borrowing business of corporations large enough to float their own bonds; securitization provides a means for smaller borrowers to share the same efficiency. After it has tried everything else, Congress will eventually devise a reasonable regulatory system for derivatives. Except for smoothing the transition to whatever proportion of market share the investment banks can justify, perhaps all of it, the subsidized yield curve impairs efficiency. It would be a mistake to allow some foreign nation to exploit such an opening before we do. The technical problem for all central banks is to devise a suitable alternative method of controlling the currency, other than by targeting inflation with adjustments in interbank lending rates.
Observers led by Martin Wolfe the economist for the Financial Times feel the 2007-20?? financial crisis can be adequately explained by Chinese pegging their currency too low, and could be rectified by persuading the Chinese to float their currency. Regardless of this extreme view, globalization is clearly both a good thing and an inevitable one. Thus some form of discipline must be devised to prevent central banks from destabilizing it for their own advantage. Wolfe proposes the use of a strengthened International Monetary Fund, which is unfortunately apt to project international politics into a process which could be harmed by it. An alternative to be examined might be to pool sovereign wealth funds as a pooled currency reserve, although this system probably could not withstand present extremes between surplus and debtor nations, so getting world acceptance could be protracted. Ultimately, everyone realizes that the real backing for an international finance system is the net worth of the whole world. But the example of Lloyd's of London is a haunting one; no one relishes putting absolutely everything at risk, down to the last shoe button. In the event of a disaster, everyone wishes to hold back some nest egg to use for recovery. Because of the same line of thinking, almost no one would trust foreigners to control more than a limited share of their future.
The future of international monetary relations is thus quite murky, but current pressures would seem to be driving something fundamental to change. When it does, regulating artificially manipulated yield curves had better be kept in mind.
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Mr. Alan Greenspan
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When there is inflation, the value of money goes down, so you might expect interest rates -- the rental cost of money -- to go down, too. However, people anticipate higher prices, so lenders build a premium into the interest rate structure to compensate for the value of the money to be lower when it is repaid. That raises interest rates, and the Federal Reserve will generally raise them even higher to put a stop to inflation. So, buying and selling bonds is a zero-sum game, far riskier than it sounds. Consequently, there is a flight toward common stock, thus raising its price. Meanwhile, inflation usually hurts business, tending to lower the stock prices. As a consequence of all these moving parts, long-term investors are urged to buy at a "fair" price and never sell, no matter what. Even that strategy fails for any given stock because somehow corporations seldom thrive for more than seventy-five years. So, the advice is to diversify into a basket of stocks, and the cheapest way to get that basket is to buy an index fund. In a sense, you can forget about the stock market and let someone else manage the index, for about 7 "basis points", that is, seven-hundredths of a percent. All of this explains the choice suggested for Health Savings Accounts of buying total market index funds. Limiting the universe to American stocks is based on a political hunch that it reduces the chances of harmful Congressional protectionism. Having said that, a Health Savings Account must raise cash from time to time, and to guard against forced selling in a down market, some average amount of U.S. Treasury bonds will have to be maintained. Ideally, the number of Treasuries would be small for young people, and grow as they get older, and therefore more likely to get sick. Pregnancy is the one universal cost risk for younger people, and they know better than anyone what the chances of that would be in their own case.
This approach is greatly strengthened by reference to the modern theory of a "natural" interest rate, to which the whole system has a tendency to revert, if only we knew what the natural rate is. It is not entirely constant, but over time it seems to be something like 2%. If we knew for certain what it was, we could set a goal for perpetuities like the Health Savings Account to be "2% plus inflation". Since inflation is targeted by the Federal Reserve as 2%, that would amount to an investment goal of 4%. If you can buy an American total market index fund consistently gaining at 4.007 % per year, you should buy and hold. If it rains less than that, it is either run by incompetents, or it is a bargain which will eventually revert to 4.007% and pay a bonus. If, on the other hand, it gains more than that, there exists a risk it will revert to the mean. That it is being run by a genius is sales hype to be ignored. We suggest buying into it in twenty yearly installments, which should balance out the ups and downs, so then you can forget about even this issue.
But don't count the same issue twice. In order to assure a 2% real return, it is necessary to obtain 4% in the real world of 2% inflation, and the compounded income of 4% accounts for both in equal measure. A compound income of 6%, however, is two-thirds inflation / one third "real", so artificially raising interest rates to control inflation can progressively overstate the requirement, and hence overdo the deflationary intent. Conversely, when the Federal Reserve fails to raise interest rates as Mr. Greenspan did, the result can be an inflationary bubble. The central flaw in adjusting prevailing rates to current natural rates is that we do not know precisely what the natural rate is. To go a step further for immediate purposes, we are also uncertain how much deviation there is between medical inflation and general inflation. As a result, the best we can expect is to make as much income on the deposits as we safely can, and continuously monitor whether the premium contributions to Health Savings Accounts might need to be adjusted. And the safest way to do that is to have two insurance systems side-by-side, one of them a pay-as-you-go conventional policy for basic needs during the working years, and a second one whose entire purpose is to over-fund the heavy expenses at the end of life and the retirement years, permitting any surpluses to be spent for non-medical purposes. With luck, the beneficiary might retain a choice between increased premiums, and increased (or decreased) benefits.
If these calculations are even approximately close, the financial savings would be several percents of GDP, a windfall so large that mid-course adjustments could be tolerated.
The DRG system constrains hospital inpatient revenue so directly, that hospitals themselves constrain costs, although they generally seek ways to maintain revenue first. It never hurts to verify such impressions, but allowing a 2% profit margin while the Federal Reserve targets a 2% inflation, is probably already too severe. Since the only way to "upcode" this rationing system lies in admitting too many patients, the regulators designed a penalty system for "unnecessary" re-admissions. It largely had no effect. That is, patients who were re-admitted within 30 days, were generally found to need it, so after a time the penalty may even be repealed. Congress probably does not yet realize what a blunt instrument it has created. The DRG system is so draconian it probably incentivizes the hospital to constrain admissions of all kinds, since all admissions may be turning unprofitable. Consequently, the first step in reducing induced use, and charges, in the outpatient area would be to increase the profit margin to 4%, which is to say, 2% plus the inflation rate. We have already mentioned the need to discard the underlying ICDA code and replace it with a simplified SNOMED code, to improve its specificity and remove the upcoding temptation. Having done this, there would remain little reason to worry about inpatient costs; they are what they are, providing the cost accountants find a better way to handle indirect overhead.
This preamble may at first seem irrelevant, but its point is this: both the old employer-based system and the evolving Obamacare variant need to focus on the same problem which faces the Health Savings Account. Whether you overpay or underpay, the main cost distortion lies in the outpatient area. All three systems seem to agree that the use of high deductible insurance will solve the small-claims problem. But the history of health financing is that the medical system is entirely too willing to shape itself to the reimbursement climate. It may take some time, but it is highly predictable that medical practice will further evolve toward substituting outpatient care for inpatient care. The cost of shifting the locus of care is astronomical, and if we switch it back again it will be doubly astronomical. All of this cost should be attributed to the reimbursement rule-maker, not the provider or the patient.
Within the area we are discussing, higher than the deductible but lower than the inpatient cost, the ACA insurance approach tends to push up costs because internal cross-subsidy makes it appear cheaper, but it also makes it far easier to shift the cost of subsidies. Because by contrast, the HSA approach creates individual, not pooled, accounts, it is cheaper because the patient has the incentive of sharing the savings. But its lack of pooling makes it seem less benevolent for elective outpatient surgery, cancer chemotherapy, radiation therapy, and whatever else will be stimulated to migrate to this borderland between inpatient and outpatient. The stimulation will come from both the hospitals and the small-cost ambulatory areas, both being effectively excluded from alternatives. The managers of HSA need to anticipate this coming demand and facilitate it by pooling the funds to cross-subsidize it, struggling to consume much of the profits generated by shifting the locus of care from inpatient facilities and shifting volume profits from drugstores, pharmaceutical companies, and nursing homes. It isn't universally obvious how to do this. so the task must be assigned to someone.
Maintaining the solvency of HSAs encounters two types of problems, endogenous and exogenous. Endogenous means the growth curves of revenue and cost are not two parallel straight lines. A person may have a pitiful amount of money in his own account to pay a bill, but his age group collectively may have huge reserves, on average. Furthermore, a young person may not have enough cash to pay a bill, even though his future accumulations should be more than ample. Both of these problems depend on how much illness is found in young people, and one would hope will progressively diminish. However, the expected shortfalls at all ages must be somehow calculated, and matched against expected surplus; after providing a margin for error, an amount calculated to cover net shortfalls at each age should be escrowed in a "taxation" account, and later returned to individual HSAs as they balance out. There will be administrative costs, but one would hope there would not be much interest or borrowing cost.
The goal would be to phase this process out, well before age 65, essentially returning the accounts to the same level of progress they would have achieved without the intervening disruption. My prediction is that most of this need will concentrate around pregnancy and neonatal care, with a low-level background cost of accidents and illnesses in other years. The general idea is to have each age cohort support itself, within the current year if possible, but borrowing against later years on a current-value basis, if necessary. Borrowing from other age cohorts should be seen as an emergency fallback only.
Whoever manages these "taxation" escrows would be well positioned to identify intergenerational anomalies, and therefore to manage the same sort of exogenous pressures. Such managers must look askance at all inter-generational appeals, but migrations from inpatient to outpatient must be matched by reducing the premiums of the catastrophic insurance and transfers to individual accounts. The catastrophic insurance stockholders will not cooperate without evidence of need, nor will pharmaceutical firms lower their prices without argument. Therefore, the managers of the "taxation" fund must establish adequate data resources, and negotiate small frequent changes rather that steep-step infrequent ones. To the extent this activity can stimulate anti-trust concerns, Congress might consider what issues there are, in advance.
Since everybody would benefit if the country found a way to pre-fund health insurance, what options are available or doing so? Or put another way, what obstacles, objections, and vested interests obstruct each possible way of doing it; how difficult would it be to overcome them?
Three general approaches might work reincarnation of Individual Retirement Accounts (IRAs) .for this special purpose, the legal encouragement of health insurance companies to sell permanent insurance or the creation of a national trust fund. Each of these approaches will now be changed to make them possible. All of them must somehow overcome the main problem inherent in payment in advance, which is that people must find spare money somewhere. while of course the disposable income could be found by reducing expenditures for non-essential luxuries, this discussion limits itself to examining how seed money might be squeezed out of inefficient practices in the existing health financing system.
Health Banking The first approach to be examined has been known by several names. When Michael J. Smith of Louisiana proposed it, he called it the CHIP proposal (Consumer's Health Investment Plan). When John McClaughry and I independently proposed something similar, it was called the Health Protection Account, Peter J. Ferrara of the Cato Institute, who likewise got the idea independently, had the genius to call it the IRA for Health. The IRA for Health has the great beauty that the title itself does most of the explaining; most people know what an IRA is, or was. An IRA for Health is obviously an IRA whose use is limited to health care costs. Unfortunately, congressman, whose cooperation is vital to the success of the idea, have gone through the experience of repealing the tax exemption of IRA's trying to reduce the national budget deficit. Congressmen have the mindset that IRAs will worsen the deficit, or at least that their constituents might think so. It isn't a correct perception, but the catchy H-IRA title has become a hindrance and must be replaced. Health Banking is here offered as a substitute title for Health Iras because it suggests an interest group who might assist the process of public persuasion because they would benefit from it. The definition of what constitutes a bank is in the process of change; perhaps there is room for health banking in some future compromise revision of the Glass-Steagall Act. For example, the mutual fund industry could become interested in health banking as part of their vision of non-bank banking. Perhaps the moribund savings banks could be entrusted with a trillion-dollar consolation for their regulation-induced troubles.
Whatever institution might aggregate and invest the funds, the main idea is that the tax-sheltered money which employers now spend on health benefits would be deposited in individually named accounts, and invested according to some rule of prudence. Withdrawals from the accounts would only be permitted for specified health purposes. It is absolutely central to understand that nothing is here proposed to be tax sheltered which is not already tax sheltered. For better or worse, employer contributions for health benefits are already tax-sheltered, and will almost surely remain so. Even recent deficit-desperate congresses have not dared to threaten that $50 billion annual revenue cost to the Treasury. Indeed, when Congress does develop the courage to curtail the tax exemption of health benefits (for employed people), perhaps then health banking could be described as costly. Until such time, however, it remains fair to generalize that reestablishment of IRAs, limited to health expenditures, has no Federal cost.
In the next chapter, we will discuss the investment issues which are raised. For the present, we should assume that the institution which becomes custodian or health banker will generate a safe and adequate stream of revenue; what rules must govern the way it is spent? Ideally, a health investor would want to accomplish the following goals:
-He would want to pay for essential health care.
-If he lives a long time and has money to spare, he would want to provide for custodial care in his old age.
If he dies and has money left over, he would want it to go to his estate.
But these are decreasing priorities. The first rule is survival. If he cannot pay for his old age, he must plan to throw himself on the mercy of family, friends, and community. If he has nothing left for his heirs that is no worse than a pity when he has no dependents, but tragic if he does.
To the foregoing self-evident principle should be added two more which are less adequately appreciated. The first is that the federal government has long addressed the problem of aid for dependent children, and ordinary Social Security benefits are quite generous for survivors. No doubt these programs for widows and orphans could be more generous, but they are as generous as twenty congresses have decided to be; it is unrealistic to include provision for dependent survivors in a new program proposal.
The second mitigating principle is nature's trade-off. Nothing is more clear to a doctor than the experience that ten percent of his practice develop ninety percent of the illness. If you get very sick very often, you need not worry greatly about the prospective costs of living for years in a retirement home. Dying young is a tragedy, and outliving your income in a shabby old age are both tragedies, but relatively few people experience both of them. To the extent that some people are needlessly insured against both disasters, it should be possible to create insurance efficiencies by combining both risks in one funding mechanism.
By reflecting on the general principles of prudent provision for the future, we arrive at the following proposed rules for releasing money out of healthy banks (aka IRAs for Health). Vouchers may be issued, or disbursements made directly, to pay health insurance premiums, front-end deductibles, nursing home insurance, entrance fees for life-cares communities, specially designated trade-offs with Medicare, and payment of any residual balance to the individual's estate. Investment income would not be taxed, but the estate tax would apply after age sixty-five. Since this statement of benefits is technical and terse, the following explanatory footnotes are necessary:
Payment of front-end deductibles. If the health bank only paid the present premiums of health insurance there would be nothing left over to invest. It is anticipated that premiums would initially be lowered y purchasing health insurance with at least $500 yearly deductible, and the amount of the "front-end" deductible would later gradually rise as funds accumulate in the account. This process would, in turn, cause a progressive lowering of the premium of the health insurance, accelerating the savings. When expensive illness occurs, the fund would reimburse the subscriber the full amount of the deductible, upon presentation of evidence that his health insurer had paid out amounts in excess of it.
Special trade-offs with Medicare, Nursing home care, Life-care communities. It will be necessary for the reader to be patient for these proposals to coordinate health banking with the entitlements under Medicare and federal catastrophic health insurance. The subject is dealt with in the section of the book devoted to Prescription II: Last Year of Life Insurance.
Payment of Residuals to Estates.No doubt there would be an instinct to examine whether the program could be made less expensive if residuals were forced to revert to the federal treasury. To permit an estate to retain these funds would seem to enrich the heirs out of funds which were largely made possible by federal income tax exemption. True enough, but long experience in my medical practice with life tenants of trust funds has been that they will relentlessly seek ways to spend money on pseudo medical care if there is no other way to get their hands on what they regard as their rightful money. Some incentive must be created to prevent "health insurance companies" from creating benefits like suntan oil and health spas in warm climates, whose only real purpose is to collude with beneficiaries. To attempt to prevent this sort of behavior with regulations is laughable.
That's not all you could do with health banking, however. If individuals should die young or use up all of their funds with repeated expensive illnesses, they might seem to be about where they are now without health banking, minus the extra layer of administrative overhead. But they have achieved portability. They can become unemployed, change employers, or retire early without the same concern that they have lost their health insurance. If they have developed a chronic problem, it has not become a "pre-existing condition" in the eyes of some new insurance carrier. They can quit their jobs without fear that a new employer with company self-insurance would regard them as potentially expensive employees. They need not fear that post-retirement health benefits will be blown away by a corporate raider, or that the company where they worked for years will subsequently go bankrupt and leave them with empty promises instead of health insurance. Portability.
For the vast majority of participants, however, another whole new concept becomes possible after a few years. We are now back to Benjamin Franklin and perpetual insurance. The health bank was just a transitional stage to reach it. The ingredients of perpetual health insurance are:
The fund has grown so large that its investment income is big enough to pay the premium on a high-deductible health insurance policy without any further contribution
And the fund is big enough to pay all of the deductible portions of a major illness
And there is still enough investment income to pay the premium of a reinsurance policy which covers the unusual instance of sustaining two or more major illness.
As a guess, such a fund would be in the neighborhood of thirty thousand dollars. As a further guess, most people would continue to work past the time the fund went perpetual, and further contributions would accumulate. Individuals who reached this happy state of affairs would almost by definition be fairly healthy, and in all likelihood would look forward to a long and dreadful sojourn in a nursing home. For a quick overview of the situation, the next time you go to a high school reunion, take a stroll over to the area where the fifty-year class is meeting. About half of the class will be in attendance, some in wheelchairs, but the other half of the class will be in memoriam. Fifty-fifty at the fiftieth.
What has been briefly described is a mechanism for designating a considerable amount of funds for long term care that are not now available. It was achieved without financial or other barriers to healthcare access except possibly some self-denial since full reimbursement for healthcare is available to every participant. If someone wants to put up with his hemorrhoids in order to have more money for later nursing home care, or if he wants to hold off entering a nursing home in order leave more money in his estate, well, those are his options. If he holds off getting treated for his cancer "for those same reasons", in my medical experience those wouldn't have been the true reasons", in my medical experience those wouldn't have been the true reasons at all and he would have held off no matter what his insurance arrangement might be. So, what's the magic? Where did this money come from?
From the operation of compound interest of between 3% and 8%, depending on the amount of equity risk assumed.
From self-denial of borderline necessary or even frivolous medical expenditures in response to the development of an incentive to save.
From the downward pressure on medical prices created by a more cost-involved public.
From the out-of-pocket contribution of health care expenses which fail to exceed the yearly deductible amount.
From reduced administrative costs of processing small claims through first-dollar coverage rather than paying them out-of-pocket. The reader is invited to consider this issue in more detail in Prescription IV: Insurance Tangles.
Will all this be enough to carry the project? Hard to know. What isn't hard to know is that savings of just 1% of a $500 million annual medical cost, amount to $5 billion per one percent saved.
Health Insurance Companies Unchained.Observers of the economic scene, especially the Washington political-economic scene, will be well aware that health banking is a proposal from the conservative side of politics. It had origins in the Reagan administration and the libertarian Cato Institute. A staunch Virginia conservative, Representative French Slaughter, introduced a bill (HR 536) along these lines, and he has been supported by the Republican Study Group under the chairman of Representative David Dreier of California. Just exactly because the proposal has this sort of appeal, it has a strong weakness. The idea is strongly rooted in the idea that individuals should make their own choices, even to the point of being allowed to make wrong choices. Individual citizens should be allowed to have their own way with their own money, even if their betters think their choices are not in the best interest of society or even best for the particular individual.
Well, that's just fine, but unfortunately in this instance, it comes up against a pretty big problem. Even when the IRA was available, only 14% of the eligible public availed themselves of it, there were vast numbers of people who had never heard of it. I spent endless hours fruitlessly attempting to persuade several of my secretaries to create an IRA, and even some of my children had to be prodded pretty hard. An executive of one of the largest corporations in the country told me of the dispiriting experience at his company with a 401 (k) plan, which is essentially an IRA. The company offered to match contributions dollar for dollar and conducted a large and continuous education program. This man made the estimate that in the whole corporation no more than a dozen unmarried women availed themselves of the opportunity, and the workforce included plenty of women lawyers and accountants. With an experience of only 14% enrollment in the IRA, it certainly isn't fair to point to just single women as having an anti-saving mentality, although I suppose there is something to it if he says so. In doing my little bit to encourage the world to establish IRAs, I noticed that one of the most effective inducements among those who did it was the wicked pleasure of beating the government out of some taxes.
So, we enthusiasts must make a grudging concession that if health banking is to succeed on a major scale any time soon, it must do more than just make itself available and then wait for everybody to get smart enough to buy it. It isn't necessary to share the rhetoric one union president unleashed on me, "You've got to find a way to keep the working man from spending his wages on drink". The paternalism of that degree is too much for me, but I will concede that something must be done to prod people a little. And that missing ingredient just might be a vast army of glib commission-motivated insurance salesmen.
It must not be assumed that health insurance companies are straining at the leash, impatiently lobbying for legislative release from their inability to sell funded health insurance. In fact, most of them do not have much sales force since health insurance is typically marketed in bulk to employer benefits departments. Most of them do not have much investment portfolio management department, especially outside the area of the short-term paper. There is minimal research on the subject of lifetime health costs. Incentives are weak; health insurance is typically regarded as a loser by full-line companies, Blue plans which dominate what is left are non-profit concerns. Insurance companies are fiduciaries, custodians in trust of other people's money. If careless paying obligations they get sued, if they can't pay their obligations they go bankrupt. If they make big profits they get bad press or ruinous competition, it doesn't matter which.
However nothing important is easy, and we want them to peddle our product. What's their problem? Their central problem turns out to be the fact that funded health insurance asks the company to assume the risk, and no one knows how to price the risk. Using the health banking approach, the individual subscriber assumes the twin risks that future health costs will inflate at a predictable rate and that investment results will equal the historical record. Who knows if we will have inflation like a banana republic, a depression like the one in 1933, or the development of medical miracles no one can afford? That's a risk, which the individual holder of a tax-sheltered medical account might assume willingly on the argument that any outcome could be no worse than unfunded health insurance. Put an insurance company's guarantee into the hands of that person, however, and you had better pay your promise if you want to stay out of court. Life insurance companies are just beginning to experiment with best-efforts investing, using the name of variable annuity life coverage, and that sort of approach would surely be necessary for funded health insurance. Predicting the average life expectancy of a large group of healthy people is however a minor mathematical exercise compared with estimating the aggregate average health care costs for the next thirty-five years. The actuary doesn't even know for certain how many people will have any health cost at all; at least the life actuary knows that everyone is going to die. The advent of a new and fatal epidemic like AIDS shows you what these predictions can be worth. The price Dr. Starzl's hospital charges to transplant your liver startled even me when I heard it last year.
Quick reflection on the issues brings the firm conclusion that health insurance companies could only be expected to offer best-efforts investing, without any insurance guarantee at all. They would surely market the product skillfully, as we desire they should, but the cost increment would be quite appreciable. The sales cost for life insurance is typically equal to the entire first year's premium, while an additional profit must be offered the company to induce it to handle the product. Investment experts will have to be paid to manage the money, and they characteristically value their own services highly. It's too bad to have to say it, but if you are too dumb to manage your own money you are going to pay through the nose to have someone else do it.
Perhaps this is an appropriate time to mention the idea that some large unions have toyed with, of becoming self-insured for the health benefits of their members. All that means is they would expect the employer to give them the money, and they would pay it out. In order words, they propose to become insurance companies. Most everything which has been said about other health insurance, therefore, applies to them, too. In addition, it might not hurt to mention Ricardo's principle of relative advantage, which roughly states that people with professional experience in a field often do the best job at it.
Publicly Managed Trust Funds. The third general method for achieving pre-funded health insurance is one which the American Medical Association as a method for basic restructuring of the Medicare program. In a widely discussed report of the AMA proposed the creation of an independent federal agency to receive the health insurance payroll taxes which now flow into the Medicare trust funds, invest them, and issue vouchers to the elderly which would permit them to purchase private health insurance. The agency would also fill the badly needed role of a group of experts charged with overseeing the course of national health inflation, demographic and health practice changes, and the national investment climate.
The AMA employed expert advice in the preparation of this plan, and it is likely their financial estimates are sound when they project that Medicare could become totally pre-funded by 2016, using tax rates achievable close to present taxation. This plan would include provision for working off the present unfunded liability for existing beneficiaries, honoring commitments previously made to the elderly. It is a great testimonial to the flexibility of the AMA in recent years. as well as to the tremendous power of compound interest, that such a monumental problem could be effectively addressed. After all, the AMA in 1965 quite correctly warned the country that the Medicare program would quickly pile up mountains of unfunded obligations if it adopted a "pay as you go" financing method. Not everyone who has been vilified for being right will subsequently adopt a constructive problem-solving approach to repair the accurately predicted damage.
The creation of an independent board of expert overseers supplies a need which health banking through the IRA doesn't, and creations of a government agency create a guarantor of last resort, even though it might be stoutly denied. Lots of Americans trust their government to keep its promises. However unsophisticated that attitude may be m, it helps get national support for the idea of pre-funded insurance in a way no television spot commercials could do, and no insurance salesman could do over the kitchen table. Every government since the Lydians invented coinage might have remorselessly devalued its currency, and it would not matter. A very large proportion of Americans trust government bonds as they trust nothing else in society.
However, a sizeable group of people simply will not have this approach, and a number of them are in Washington. The AMA made a small tactical error in describing the proposed independent agency as roughly comparable to the Federal Reserve Board in its independence and suggested a similar method of appointment. Apparently, the AMA had no idea of the violence with which the Federal Reserve Board is hated by certain influential members of both legislative and executive branches, or of the decades of bitterness between mid-western bankers and the New York banks which control the open market committee of the Fed. In a sense, the Federal Reserve is actually owned by the banks it regulates and tends to defend their interests. The whole investment community is at war (nice polite war, of course) with banks, struggling for turf in some pending revision of that Treaty of Versailles, the Glass-Steagall Act. Every election year, the Federal Reserve gets embroiled in bitter controversy as to whether its policies are slanted to cover up for congressmen who want the Fed to do their dirty work and have it within their power to abolish the whole agency if it does not comply. Independent as the Fed. Foo.
Let a Hundred Flowers Bloom. No doubt this inflammation can be soothed with diplomacy, but there are more serious worries about the investment difficulties which are unique to a trillion dollar fund run y the Federal Government to be addressed in the next chapter. In the meantime, the three funding mechanisms can be summarized as having certain flaws and certain strengths which are peculiar to each. It seems unlikely that the country could agree to permit only one of them to be designated to the exclusion of the other two. To a serious proponent of the general approach, it seems imperative that we authorize all three approaches while forcing them to remain in competition with each other. After all, we are talking about a system which addresses the needs of everyone no matter how different the circumstances. People who take wild chances should be restrained from becoming public charges, ignorant people should be protected against those who would fleece them. As Adlai Stevenson said, "It used to be said, a fool and his money are soon parted. But nowadays, it can happen to anyone."
There is, however, no certain way to know the future even if you go to Princeton to learn it. Let the banks and mutual funds exploit their lower marketing costs, let the insurance companies sell rings around them. Let the private sector shame the mediocre performance of the public trust fund, while the trust fund stands as a tower of strength among self-serving investment pitchmen. So long as the public is allowed to switch around, things should work out, in an investment version of the system of checks and balances.
Originally the "lower counties" of Pennsylvania, and thus one of three Quaker colonies founded by William Penn, Delaware has developed its own set of traditions and history.
Start in Philadelphia, take two days to tour around Delaware Bay. Down the New Jersey side to Cape May, ferry over to Lewes, tour up to Dover and New Castle, visit Winterthur, Longwood Gardens, Brandywine Battlefield and art museum, then back to Philadelphia. Try it!
Millions of eye patients have been asked to read the passage from Franklin's autobiography, "I walked up Market Street, etc." which is commonly printed on eye-test cards. Here's your chance to do it.
In 1751, the Pennsylvania Hospital at 8th and Spruce was 'way out in the country. Now it is in the center of a city, but the area still remains dominated by medical institutions.
Grievances provoking the American Revolutionary War left many Philadelphians unprovoked. Loyalists often fled to Canada, especially Kingston, Ontario. Decades later the flow of dissidents reversed, Canadian anti-royalists taking refuge south of the border.