PHILADELPHIA REFLECTIONS
Musings of a Philadelphia Physician who has served the community for six decades

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Health Reform: Playing With Matches
New volume 2014-07-28 17:28:55 description

Health Reform: Changing the Insurance Model
At 18% of GDP, health care is too big to be revised in one step. We advise collecting interest on the revenue, using modified Health Savings Accounts. After that, the obvious next steps would trigger as much reform as we could handle in a decade.

Handbook for Health Savings Accounts
New volume 2015-07-07 23:31:01 description

Second Edition, Greater Savings.
The book, Health Savings Account: Planning for Prosperity is here revised, making N-HSA a completed intermediate step, and L-HSA a distant mention. Whether to make CCRC next after that, followed by Retired Life, followed in turn by HSA as a Currency Standard-- is left undecided until it becomes clearer what reception the early steps receive. There is a difficult transition ahead of any of these proposals, so perhaps transitions require more commentary. On the other hand, transition can be consolidated, so Congress may prefer more speculation about destination.

It always has been clear Classical Health Savings Account promises only to reduce national healthcare costs by a big chunk, which may still not cover the full 18% of Gross Domestic Product we now spend. The New HSA surely reduces net costs still further, but with a caution: revenue depends on average investment income, and future discovery costs are unknowable.

(1) Obamacare: Spare Parts for a Book

Maybe these should have been included, but it was decided to leave them out.

New topic 2014-03-11 19:48:02 contents

Health Reform: Seen On the Mass Media

Both political parties in the 2008 election promised to revise healthcare financing and delivery; the nation was restless. It had been restless since a Republican Congress swept Newt Gingrich to Speaker in 1994. It soon swept him back out of power, but its ability to surprise reappeared in 2010 with Republican Senator Scott Brown's election to Edward Kennedy's seat, and then there was the 2012 Republican Congressional landslide, -- but on the other hand there was President Obama's 2012 re-election. One electoral mandate after another, often sending opposite signals. Only a King is allowed to be capricious, nations are described as undecided. When Democrat Barack Obama won his first election in 2008, a concrete proposal was eagerly awaited because it seemed likely to be radical; it disappointed, because it merely overpromised. He neglected the iron rule for leadership: underpromise, but overdeliver. In order to retain a free hand, the working elements of Obamacare were never concisely stated; in America, that is usually a misjudgment. After enactment, details can no longer escape systematic examination for what they are, and what they omit. We got rid of our King more than two hundred years ago. Capricious behavior is out of fashion. Over-deliver, that's the thing.

Political strategists calculate sweeping changes have best chance of approval immediately after a new president takes office. But for the Affordable Care Act, that slogan may still have been true but mis-timed; since overly brief sequencing gave interest groups responsible for Obama's election undue influence over the proposal, with undue sense of mandate from the elections they won. The resulting legislation, the Affordable Care Act, is heavily slanted toward rewarding the base, and the base expected a reward. With its momentum up, organized Labor, blacks and Hispanics displayed impatience about mitigating features the rest of the nation objected to. As Lyndon Johnson once said, the majority of Americans are non-black and non-poor. Political misjudgment increasingly characterizes Obamacare, which at first seemed so smart about politics..

Thousands of pages of uncoordinated proposals had emerged from four congressional committees in 2010, confusing the public about what the basic proposal was, and making it uncomfortably obvious that the congressmen themselves had neither written nor properly digested it. It was announced as a proposal to expand coverage to the whole population, uncharacteristically saving the resulting cost by eliminating waste and overutilization in medical care. That appealed to the public. But without more explanation about how these goals would be achievable, in fact whether the premises were accurate, the public could not see how program expansion and cost reduction were consistent, or how these two thousand pages made them so. Universal health insurance was said to be mandated, but in fact it doesn't say so. What it says is everyone has a choice between insurance and a small tax. Anyone with a pencil knew what to do next.

Furthermore, the public could not see what urgency justified delivering a stack of paper to congressional authorizing committees in the morning, and demanding an affirmative vote in the afternoon of the same day. Consequently, the conviction took hold that what was proposed would end up being a massive cut in Medicare benefits to pay for it. Soon after the voluminous bills were released, the Congressional Budget Office (CBO) further undermined trust in the proposal by announcing its assessment that it would add a trillion dollars to health costs in ten years, but still would only extend new insurance to about half of the uninsured population. That didn't sound like universal coverage at no added cost, at all. Furthermore the CBO had credibility, in fact was the only credible agency that had actually studied this massive legislation. The President immediately appeared on television, endlessly repeating the promise that the extra cost would not add one dime to the public debt. Therefore, fear of large impending Medicare cuts had to be entirely plausible if you believed anything the man said. Public uproar about an implausible idea thus became general before members of Congress had time to read it or devise soothing explanations; their floundering upset the public even more.

To rescue the deteriorating situation, the President attempted to go directly to the public with weeks of daily speeches. On one Sunday he appeared personally on five television talk shows. Naturally many speeches were ghost-written, containing misstatements or exaggerations, with the result that the harried President next resorted to heated oratory that would have been excessive even on the campaign trail. He was criticised as using rabble-rousing, undignified for a sitting President. Failing into a "trust me" approach, he actually was left with the difficult choice of withdrawing the proposal or being seen to ram it through Congress on a party-line vote. Party-line enactments of controversial legislation tend to justify the opposition party into repealing a controversial law just as soon as they return to power.

With the public bewildered as to what the proposal really was, enacting something certain to be reversed was even more unappealing. The alternative, a humiliating withdrawal of the proposal, seemed intolerable to its strongest supporters in the base. But reversal did not seem unreasonable to independent voters, who had wondered all along why there was such haste. The nation was fighting two international wars, both of them going badly, and was in the deepest economic recession since 1937. What's the hurry with this healthcare thing? It was a reasonable question, and the President did not help himself by darkly accusing opponents of delaying tactics.

* * *

In this analysis, the following three sections address 1) the proposal and its own flaws, particularly the savage strategy for getting enacted. 2) The growing consequences of flaws in health financing which had long pre-existed Obamacare and 3) An improved proposal, not so much radical, as extensive. For a century, conservative proposals of all sorts have been incremental, creating opportunities for mid-course corrections. Often denounced as hesitant and timid, a grand strategy often takes more time than a pitched battle, but usually advances farther and more enduringly. .

http://www.philadelphia-reflections.com/blog/2618.htm


Chicago Sauce on an Arkansas Turkey

Presumably, the proposers of affordable health coverage considered the approach of making it affordable through making it cheaper. Unfortunately, "affordable for every American" is so expansive that some people, somewhere, would require extra subsidy no matter how much prices were cut. Obamacare's supporters would be bitter to discover a two-class system, with them in second class. It did not take long to see how unpopular cutting existing programs would be, first with providers and then with providees. And then Obama advisors must have developed greater understanding that existing internal hospital cost-shifting meant: Medicare was already subsidizing Medicaid, while the private sector had really been subsidizing the indigent care that Medicaid excluded. The savings to government costs (of universal coverage) were not going to be nearly as much as had been imagined.

So, a subsidy program was required. In addition, insuring illegal immigrants during high unemployment was seriously unpopular, particularly in border states like Texas, where uncompensated care was already hard to manage. So we can easily imagine how the proposal emerged as: "Affordable health coverage for all Americans (legal residents only) achieved by giving cash subsidies ("refundable tax credits") to lower income groups, and expanding Medicaid coverage above its former income threshold". That wouldn't be a catchy political slogan, but it would be precise.

Such patchwork necessarily made it harder to comprehend. Somewhere in its evolution someone also seems to have determined to rescue Medicare from its impending bankruptcy -- while we are at it, let's fix Medicare. However both ideas, universal coverage and restructuring Medicare solvency, would be expensive; combining them might make the package unsupportably expensive in a recession, but it might also create more opportunity for major progress.

{top quote}
Affordable health coverage for all Americans (legal residents only) was to be achieved by giving cash subsidies ("refundable tax credits") to lower income groups, while expanding Medicaid coverage limits to include them. Universal mandate for coverage, (but only our way, or the highway.) {bottom quote}
Obamacare Capsulized
Legislative Strategy. It had been sixteen years since the Clinton Plan failed, but a book by Jacob Hacker called The Road to Nowhere outlined Bill Clinton's clever strategy for handling such massive complexity in 1994: by indiscriminately pouring everyone's pet schemes into one legislative package, planning later to remove unpopular prunes in the House-Senate conference committee, but reorganizing a few surviving plums into a unified plan. No one who voted on it would really know in advance what was to be left in the final pudding.

The Obama administration seemed to follow the same path. Modifying the pathway to a Budget Reconciliation Committee added the novel advantage of avoiding the Senate's 60-vote anti-filibuster rule, thus requiring only a simple majority to pass the Senate when it returned. It still needed 60 votes in the Senate to prevent a filibuster on the initial round, so the original Senate contribution to the conference committee had to contain a lot of goodies, just to get to the conference committee -- in order to be dropped.

In the flurries of lobbying activity, hospital advocates have suggested uninsured patients just appeared at hospital accident rooms, effectively causing other patients to subsidize them. That was somewhat true, but extending the idea to a claim the government was already paying for all indigent care, was a stretch, because hospital cost-shifting was laying most of the cost on the private sector. To go further and proclaim that including indigent care under the insurance coverage umbrella would thus be cost-free, did really strain the facts. How could it be cost-free and still cost a zillion dollars? Right from the start, this proposal was making itself hard to defend.

{top quote}
The sound-bite is: the Obama health reform proposal of 2009 will extend affordable health insurance to poor Americans (citizen), and save Medicare from ruin by cutting costs. Because this still won't pay the bill, the rest of the nation must get less coverage for more cost. {bottom quote}

So, at the end of September 2009, the country confronted multiple thousand-page bills from the House of Representatives containing wide assortments of liberal ideas, and a more conservative Senate proposal from Senator Baucus (D, Montana) representing the views of the Democratic caucus within the Senate Finance Committee. The British magazine The Economist promptly snorted; Senator Baucus' bill was "Half a loaf, half-baked." Since laws passed by strict party votes are in danger of prompt reversal when the other party next gains majority control, Senator Baucus had been struggling to achieve some Republican support but apparently decided bipartisanship was not worth the delay. In any event, the Senate's assignment was to get past a filibuster; the real zingers could come from Nancy Pelosi's House bill. Andy Stern the labor leader, had appeared on a television show offering no arguments at all, merely demanding a vote be taken instantly, presumably before public support eroded. Moderate House Representatives are characteristically most concerned with being turned out of office after passing a controversial proposal, because they face election every two years. The much more liberal leadership of the House, with seniority because of their safe gerrymandered seats, are however more likely to honor extreme partisan demands. With a safe Democratic majority of the House, a few moderates could be spared to "vote their conscience".

Because the Senate thinks of itself as the sensible, deliberative body, oversight of a law remains with its originating committee, to preserve connection to the "intent of Congress". Because Medicare and Medicaid are amendments to the Social Security Act, the Senate Finance Committee has maintained jurisdiction over these three social benefit programs. A "unified budget" made it easier to shift one program's surplus to cover another's deficit. In the House, with turnover every two years, continuing oversight is mostly assumed by the Appropriations Committee, on the grounds that this is the only committee which reviews every ongoing program, every session. But the realities of the program mix with the quirks of the Senate, and for over forty years whatever the Finance Committee says about Medicare, pretty much goes. During the fall of 2009, this group of old colleagues could be seen on C-Span, gently joshing each other, and even more genially suggesting their disagreements. Each member of Finance belongs to several other committees, but on Medicare, they know their stuff and have a loyal staff to remind them of what they have forgotten. They considered 550 amendments to Obamacare, and stubbornly defended the right of each committee member of either party to be heard courteously, in spite of what must have been a wild frenzy of pressure by unions and other partisans, to be done with it. Their patient labors turned up one issue that party leaders -- especially the Governors -- probably wish they had left alone.

{top quote}
Blow away the smoke. Obamacare is about fixing Medicaid without admitting who, or what, caused it to need fixing. {bottom quote}
The nut of the matter.

The fifty Medicaid programs are a big mess. They are run by state governments with Federal provision of at least 57% of the funds, and in some cases over 80%. Some states offer eligibility to those with incomes at only half of the poverty level, others go to several times the poverty level. Their tendency is to use the HMO model of healthcare delivery, but it is an individual state option. Minority groups absolutely hate HMO. The fraud level in Medicaid is by far the largest in the whole government. The quality of care is uneven, but it is always going to be somewhat substandard since it pays well below cost and deals with high-crime populations, amid uncomprehending chronic poverty. It attempts to deal with the deplorable psychiatric inpatient problem, which is in its present condition because of bungled regulation. Medicaid under-reimbursement is the main cause of hospital cost shifting, which causes still other distortions. And so on. If you search for explanation of the bizarre statistics on infant mortality, the ranking of U.S. "health care quality" as 19th in the world, etc, the explanation is to be found right here. To the extent that statistics are not rigged in order to make certain countries look good, the poor rank of American healthcare reflects the sadly underfunded Medicaid programs.

Even the medical profession is largely unaware of Medicaid issues, because most members of mainstream medicine have long stopped accepting membership in the program, in part because of its laughable reimbursement, but more importantly the HMO organizational model makes it impractical to treat an occasional poor person free of charge and skip the paperwork. It therefore is sometimes true that some Medicaid physicians see nothing else. And finally, hear this: Senator Grassley muttered that 90% of the cost of Obamacare is aimed at fixing Medicaid, and no Democrat on the committee corrected him. When you get down to it, Obamacare is a very expensive program for making Medicaid what it ought to be, and definitely isn't. Originally confined to Maternal and Infant Care, its money is largely spent on nursing homes.This would make a perfectly plausible explanation for why it has been so hard to see what the new proposal is all about -- it's about fixing the old mess which state and federal governments created, while at the same time hoping to extend a similar program to the rest of the country later, as a "single payer" system. Senate Finance has a difficult tap dance with this one, but they have put their heads down and are plodding on.

{top quote}
Eighty percent of the cost is devoted to fixing the flaws of Medicaid. {bottom quote}
Senator Grassley

Many unexpected developments are still possible in an on-going debate, but it seems timely to examine the Obama proposal as presently visible at half time, so to speak. What is so far proposed of consequence, and what problems would be cured?

Employer Mandates. First, nearly universal health coverage hopes to be achieved by mandates, making it illegal not to be covered, imposing fines for non-compliance. It does not seem extreme to predict a rise in the fines to a level where they support the rise in costs they provoke. That would serve the initial problem of pacifying the public during the early going, but ultimately justifying the Supreme Court assessment that it was a tax, not a penalty. Unfortunately for this idea Justice Roberts stated in his opinion that the fact that the penalty was so low proved it was a tax. If the penalty tax was raised enough, it would prove it was not a tax, and therefore the universal mandate would become unconstitutional, because the rest of the Court had already agreed that the Commerce Clause did not support it. Chief Justice Marshall once opined that "The power to tax is the power to destroy" which generates the justification that only a small tax is safely small enough to be a tax, and not a penalty. It follows that while the Constitution permits the Federal Government to tax for revenue, it is not an enumerated power to tax in order to coerce or destroy. Justice Roberts may have been tipped off, but if not it was a shrewd guess.

Obamacare closes the safety valve that just about every poor person has long been eligible for Medicaid, but few of them actually join it until they get into a hospital and the social worker signs them up. The true antagonism of poor people to "Welfare medical treatment" has yet to surface into public view. Mandates are always unpopular, but back in Washington two competing ideas for mandates once headed for conference committee. Because of the tax preference for purchase of health insurance by employers, we still have a largely employer-based system, defining for poor people what normal health care looks like. As hospitals (responding to the shift of Medicaid costs to Medicare which they are forced to make) have increasingly shifted the costs of indigent care onto employer-based insurance, those employers who participate are increasingly anxious to make their competitors stop evading "their share". Unfortunately for this proposition, the non-participating employers never agreed to subsidize someone else, and do not feel bound by any moral strictures surrounding the demand of big business that their competitors are obliged to share a buden which big business decided to assume for its income tax benefit. If you doubt that small business and big business are competitors, just ask yourself what small retail businesses probably think of Amazon and Walmart. Then ask yourself whether very many small businesses benefit from ERISA.

Since almost all interstate employers already buy insurance for their employees under coverage of the ERISA law, representatives of large employer groups want their competitors, especially foreign-owned, to experience equal expense. Big employers would thus be pleased with an employer mandate: employers who do not provide employee health benefits would be fined. Big employers are not so much threatened by little ones, as anxious to avoid government regulations which ultimately favor smallness as a preferred business model. By contrast, small employers are resistant to employer mandate, amplifying the political perspective that increased cost would particularly hurt new employment in the present recession. Small employers enjoy, and would hate to lose, the reputation of being the largest source of new jobs in our economy. Employer mandate might indeed insure some uninsured people but the remaining uninsured would be unaffected. An employer mandate solves some purposes of big business, but probably injures small business to a degree offsetting the cost-shifting argument. So, although an employer mandate was on the table, Senator Baucus proposed the individual mandate which Representative Pete Stark of Berkely, California had been advocating for years. That is, every person found without health insurance would be fined. Recall now, that Chief Justice Roberts introduced the qualification that the fine must remain small to be called a tax. Presumably, compliance would be even less than the widely-evaded mandate for automobile liability insurance.

One cannot leave the subject of mandates without the impression that there is some poorly understood connection with the Henry Kaiser income tax preference for employers who provide employee health insurance. Almost nothing can illustrate the intensity of warfare between big business and small business than this. Large employers definitely do not want to share this benefit with their smaller competitors, and definitely do not want to say so in public. To the rest of the public, big business is taking the wrong side of the fairness argument, to say nothing of the Constitutional argument about equal treatment. But there is no other source visible for the seventy-year defense of the indefensible which has long convinced Congress that the tax inequity is politically impregnable, and cui bono will have to suffice. As long as this remains the case, there is some hope that some Congressman will be willing to fight it out.

Individual mandate creates a somewhat different political problem of what to do about recalcitrants who are both sick and uninsured, who must now fear punishment as much as their illness when they appear for treatment. They are unlikely to forget which congressman voted to create the vexing outcome of fearing-to-seek-treatment. The Congressional Budget Office summed it all up: we started with forty million uninsured, but it is most likely we will be left with thirty million uninsured (and now resentful) persons, including 7 million who are in jail, an equal number of mentally retarded or disturbed, and 11 million illegal immigrants. The very vocal remainder are hard to classify, and hard to count. But the CBO is probably right, it's hard to see how insurance reform of any description will get the number much below 30 million.

{top quote}
Give the tax exemption to everyone, or give it to no one. {bottom quote}

A second difficulty with individual mandate is that it exposes the long-standing inequity in the Henry Kaiser tax law. The main reason we continue a largely employer-based system is that purchase cost is effectively reduced by the tax discount when an employer buys it for an employee. Self-employed or unemployed persons do not now receive this tax-discount. For seventy years it has been desirable to extend this tax exemption to everyone equally, both for fairness, and to create portability mitigating the pain of pre-existing condition exclusions. Pre-existing condition exclusion always existed, but it is the linkage to portability between jobs that makes it such a wide-spread issue. But the employer-based system might lose its main reason to continue, so that particular consequence has yet to be addressed. Inverting the traditional relationship between being sickly and paying higher insurance premiums has never sounded completely plausible, but we are now going to see what happens if we try it that way. Additionally, the political consequence of not equalizing the tax preference would get worse. Compelling millions to buy individual insurance, while at the same time denying them everyone else's tax exemption for it -- is not likely to survive long once it gets public attention.

Give tax exemption to everyone or give it to no one; or give it for a lesser amount, but give the same thing to everyone if you hope for re-election. While tax equity is not in the current legislation, it might as well be, and the CBO should be asked to score it as part of the eventual cost. And finally, no mandate in sight during a recession would insure illegal immigrants, who are a large part of the uninsured problem in certain regions. It is reported that sixty percent of uninsured persons are concentrated in Florida and the four states bordering hispanic America, a fact that ten senators and several dozen congressmen are sure to notice. Proponents of amnesty for illegals have undoubtedly thought about this matter. Opponents of amnesty are apt to see immigration reform as just a way to cloak the costs of Obamacare as an unrelated issue.

Now turn to the other main objective of reform legislation, to reduce the high costs of medical care. The poster child of this objective, possibly the central issue agitating many politicians, is the approaching bankruptcy of Medicare. To skip over technicalities, accumulated subsidies of fifty years of Medicare recipients have created unfunded liabilities that make Medicare the largest single debtor on the planet, unless someone wants to compete with $250 billion a year. If you think about it, Medicare would have no debts at all if it were self-supporting. Until something is changed, the fifty percent subsidy of Medicare by borrowing from general tax revenues is steadily making the problem worse. The understanding of the public is just beginning to realize that Medicare is so heavily subsidized, and this is probably a main source of its popularity. Ignoring how this growing debt was created, it is accompanied by fifty years of promises to every citizen about what they are entitled to. Perhaps it was believed that an uproar over reducing Medicare benefits could be softened by burying it in a nationwide reduction of all healthcare costs, but half the cost of Medicare is a pretty big nut to bury, and fifty years of accumulated debt is just about impossible to hide.

In fact such expansiveness provokes more suspicion that something is being slipped in by the back door. In angry town meetings which frightened congressmen, held during the August 2009 recess, one speaker after another went to the microphone and said something like,"I have excellent health insurance and I wish everybody else had it, too." Following which, something was immediately said equivalent to, "But don't you dare take my good coverage away from me to give it to someone else!" And not invariably, but often enough to make it emphatic, some would add, "I voted for you in the past, but I'd never vote for you, again." No doubt, every one of those congressmen was asking himself how the party leaders could have got him into such a fix. Why don't we try something else? Senator Baucus offered to pay for reform by putting a tax on health care providers, but every worried citizen quickly saw that taxing providers will raise costs, not lower them. Credibility is waning.

{top quote}
The Affordable Care Act would cost a trillion dollars, and still leave 5% of the population without insurance. {bottom quote}
The Congressional Budget Office

An adage is getting hardened: Increasing access to subsidized health care is not compatible with cutting costs, and won't even produce universal coverage. It is increasingly difficult for presidential oratory to reverse that opinion. The Congressional Budget Office has not pronounced the Obama plan to be an unachievable goal, but after examining an enormous pile of studies, it amounts to that. They simply said it would cost a trillion dollars, and would still leave 5% of the population uninsured. In one sentence, the CBO probably killed a lot of strategies.

Still, the Obama administration gamely plunges ahead, seemingly forgetting that defeat of the Clinton health plan was followed by a mass eviction of incumbent congressmen; by their analysis it wasn't a bad plan that made trouble, it was failure to pass the bad plan, which it must be recalled was a universal HMO system. The Clintons avoided public defeat by pulling that legislation away without a floor vote. But at least they did escape the backlash against what would then have been a ruinously unpopular program. It is not unrealistic to surmise that Obama would never have been elected to a first term, if Clinton had not backed away from his version of healthcare reform. Right or wrong, some Democratic congressmen are certainly toying with that heretical idea.

For one thing, the public has always been bewildered by the need for such a rush, such a collision. We are now fighting wars and struggling with the worst depression since 1930. All of those major projects are going poorly. Why in the world would we believe that reforming health care is our major priority, right now?

The following section closes the discussion of the main features of the Obamaplan, and ignores thousands of pages of legislation not yet implemented. The law is mainly made up of earmarks, boondoggles and inconsequence -- the usual contents of an annual budget reconciliation act produced at Thanksgiving or the day before Christmas. We hear nothing about tort reform, which at most will produce a study or a pilot program. Nor the public option, which Senator Baucus said cannot pass the Senate, and about which former Senator Dole said he heard, but scarcely would believe, that the Public Option was just a smoke screen intended to distract the public while the rest of the bill slipped past the uproar of Public Option getting defeated. The fate of the expensive but inconsequential computerized medical record would once have depended on the precarious health of Senator Byrd of Virginia, who had long held a stranglehold on government computer procurements, but which now mainly perplexes us as to what to do with it. Blue-sky yarns about the value of the Electronic Medical Record abound. But except for large group practices which do seem to need it, most doctors see EMR as an expensive way to add two hours a day to their already overloaded workload, and badly compromise patient privacy in the process.

http://www.philadelphia-reflections.com/blog/1728.htm


Higher-cost Health Insurance is What's Mandatory

Obamacare

Millions of people were unexpectedly cancelled by health insurers at the onset of the Obama Insurance Exchanges. The President repeatedly told the public under Obamacare they could keep their old plans if they wished, even after notices to the contrary were mailed out. Insurance spokesmen firmly responded that the terms of the law required they could not keep the old plans for a single day. This promise was reinforced by the original section 1251, but later amended in confusing ways.The public had been told nothing like that during a three-year opportunity to be open about it; in their view, it was sprung on them. Maybe they had even been lied to; more likely, someone objected, causing revision that could be interpreted in several ways. In any event, postponement of the large-employer plans made it moot for the customer but not for the voters. To quell the uproar, the President quickly delayed the cancellations for a year, then extended the suspension, and soon provoking alarmed announcements from the insurance industry that such insurance would lose money. It suddenly became a question whether he could make the insurance companies take them back, and some said they wouldn't, even for just one year. It all sounds like an uproar on the other side of the curtain. The irresistible conclusion emerges there is more to this arrangement than is revealed, with further surprises to be feared. After all, the old rates had been set by the insurers, so something extra must have been added by someone else, but possibly it triggered some clause in the risk corridor provisions. Long accustomed to caveat emptor from salesmen, the public will have trouble getting over the assumption that insurers had been promised more expensive products to sell, in return for doing something of value for the Obama administration we haven't yet learned about.

In a world long accustomed to government anti-trust constraints, that higher prices with less competition could be mandated by law was almost too good for insurance companies to imagine. But now, after the deal is suddenly "postponed", any other industry groups who may have negotiated secret accords, are warned of the price: they must expect to absorb some costs whenever this President is forced to abandon his side of a bargain. The National Journal , recently quoted an interview with an insurance lobbyist that large amounts of insurance money helped finance Tea Party meetings, suggesting internal dissension within the industry.

In any event, the cancelled policies were almost entirely individual policies in the end, and the ultimate goal is speculative. A different way of expressing the thought is, a large collective of individual policies can more easily resist pressures to cross-subsidize other favored clients. One thing is almost uniformly true of persons who hold individual (as opposed to group) policies: they pay for health coverage with after-tax dollars, and therefore are out of pocket by 20-30% extra for equivalent insurance. Many of them may well resist higher-priced products for that reason. Eliminating individual policies would cost the government considerable tax money and indirectly raise premiums. There must be some other motive for animosity toward individual policies, but we will have to wait to find out what it is. It may be just as simple as reducing the visible cost gap between the old system and a new one.

http://www.philadelphia-reflections.com/blog/2580.htm


Only Three Things Wrong With American Healthcare

{William Bingham class=}
American Healthcare

Although Congress is offering several thousand pages of proposals for healthcare "reform", none of them even mentions the three main difficulties, to say nothing of fixing them. Let's be terse about this:

1. Health insurance is fine, but if you make it universal, there is no impartial way to determine fair prices. Somebody must haggle with the vendor in order to introduce the issue of what is the service worth? The customer doesn't care what it costs to make, or whether the vendors are being paid fairly. If everyone is insured, no one cares what it costs. Not only do all costs rise, but they rise without coordination, without a sense of what each component is worth, relative to alternatives.

2. Employer-based insurance is fine, but it ends when employment ends. You just can't stretch employment-based insurance because you can't stretch employment.

3. State Medicaid programs are fine, but just about all fifty states are going broke trying to pay for it. Extending it to more people by raising the income limits just makes things worse. Items 2. and 3. are related. Trying to do both -- expand Medicaid as employment shrinks -- during a recession is incomprehensible. Item 1. (price confusion) gets drawn into this because the States try to pay less than it costs, hoping to shift the deficiency through hospital cost-shifting, utterly confounding the information which prices provide. The doctors have no way to tell which is the cheapest approach to a problem, so they don't try. Without control over prices, we can only control volume.

That's really all there is to this mess. Not one word of the current legislation even mentions these problems, so of course the legislation blunders. Even a child can see that compulsory expansion of benefits to universal coverage will fail if you can't pay for what you already have. No one will make sacrifices for a new system if the sacrifices seem futile. They are futile, so leave me alone.

The current administration has been compared with bank robbers who see they are trapped, and decide to shoot their way out. Let's see them try to shoot their way past the first Tuesday after the first Monday in November.

http://www.philadelphia-reflections.com/blog/1754.htm


Rationing, No Matter What You Call It.

{Arthur L. Caplan}
Arthur L. Caplan

The Right Angle Club of Philadelphia was recently addressed by Arthur L. Caplan, Director of the Center for Bioethics of the University of Pennsylvania. His topic was Healthcare Rationing. It was interesting to hear the viewpoint of someone who views the 2010 mandatory health insurance system primarily through the lens of its ethics; just like the Tea Party objectors on the other extreme of politics, he sees the new law as merely a rationing system. However, his initial salvo is similar to that of the bill's proponents before it was enacted: "Every system always rations in some way or another." If you expected the outcome to be rationing from the beginning, your focus is naturally fixed on just what sort of rationing you get, perhaps measured by whatever kind of rationing you had formerly hoped for.

Ethics is, after all, a system of constraining native, unconstrained, outcomes into something deemed more suitable. That's a definition which could be equally well applied to reform of all sorts, and repeatedly tends to cast reformers as underdogs fighting the establishment. Since the American healthcare system in 1950 could fairly be described as rationing healthcare with money, and its history from then to now has been one of jumbled similarity to 1950, most discussion accepts a financial rationing description for what Obamacare changed. There is much uneasiness about totally supplanting the marketplace with insurance, since universal insurance leaves no room for setting prices -- except by government proclamation, filtered through some sort of insurance bureaucracy. There was a time when many people thought that was better than paying for it yourself, but now that it's here, there are growing doubts.

{UPENN}
UPENN

There's surely going to be a last-ditch effort to overturn Obamacare, whether through Congress or the Courts, and failing that, through stalling it until the President can be replaced in 2016. Let's assume for the moment that such efforts fail, and are not followed by armed rebellion. If the central issue is how do we find more acceptable methods of rationing, two proposed methods have begun to seem attractive. The first is proposed by Congressman Ryan of Wisconsin, to the general effect of taking what we now spend, chopping it up, and issuing vouchers for the same amount less net middle-man costs. This approach stops the rise of costs right where they are, and thus pleases Congress. But the thing to be rationed is redefined as well. It rations future cost rises, net of any savings wrung out of the system by competition for voucher money. It's fair to claim this system should not deny the present level of care to almost anyone. It has a price, however. If you want future miracles, you have to pay for them.

http://www.philadelphia-reflections.com/images/missing_img.gif
Obama Care

A second proposal depends on the observation that most healthcare costs are concentrated in the first year of life, and the last year of life. Strip those costs out, and what is left would almost surely be manageable, particularly in view of how the concentration of costs in those two areas steadily increases. Essentially, this system promises to take generous care of the helpless when they are born and when they die. Healthcare costs during the years of school and employment, however, could more confidently be left to people who are sentient and reasonably healthy, so that's where the inevitable rationing would be concentrated. Once more, the payment system has been modified to avoid such third-rail issues as euthanasia for Grandma or for self-inflicted diseases, or even for abortion. Those would be left to the public to manage during stages of life where there is reasonable likelihood that the patient's own wishes can be paramount. For now, we pass over the technicalities of last-year-of-life insurance, but it could fairly begin with reliance on reimbursing Medicare after the fact, while traditional first-dollar insurance for pregnancy and newborns, or even mandatory government reimbursement, might seem acceptable even to strong conservatives.

So, what's proposed here is a substitute for both the traditional system, and the bewildering command and control system of Obamacare. It shifts the subject matter for rationing away from those areas that frighten the public the most, toward either: rationing future unknown scientific advances, or, rationing healthcare during the years when it is comparatively predictable, and involves patient cooperation during the years of reason. That's the summary; other proposals are welcome.

Regrettably, after each November election, we first must potentially endure a lame-duck Congress, followed by two years of White House-Congress gridlock. There will unfortunately be scant tolerance for ethicists, during those grievous national experiences.

http://www.philadelphia-reflections.com/blog/1993.htm


ZNOTE: Obamacare Examined

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======================== which in turn exercised powerful control over the hospital industry, grown prosperous and monopolistic as a result of, first health insurance, and then government programs. New aspirants for power could be accommodated in a growing medical economy, so nurses and unions aspired for position and prosperity. For a while, union representatives took over board positions at health insurance companies, then hospitals, as business lost interest in what for them began as a charity. Academia enlarged its beach head of the Flexner Report of 1914 and largely fell into the dominant position in the medical profession by extending the power of teaching hospitals, fed by insurance, research indirect overhead money and philanthropic gifts. Meanwhile, the medical profession largely abandoned its professional control, as overwhelmingly increased practices presented an irresistible alternative for their spare time. The consequence of all these changes was a loss of control by the profession. As the center of political control shifted from state capitols to Washington DC, it became impossible for doctors to take time off from a practice to drop in on political allies, and consequently many fewer physicians sought office in state legislatures. In most states, there are scarcely more than one or two physician legislators, whereas there are now over twenty physicians in Congress, and the turnover is rapid. By contrast, most of the Physician-run Blue Shield organizations were started by physicians in the legislature, and most of them have been merged out of existence by hospital-run Blue Cross Organizations, which are in turn bought up by health insurance companies dominated by health insurance professionals. Suddenly making all of this worse was the Supreme Court Maricopa Decision, which by a 4-3 decision upholding a writ of summary judgment, found physician control of HMOs to be an anti-trust violation; no trial of the evidence was ever held.

Thus, federal anti-trust laws entered this murky picture, and quietly big business extended its control of health insurance with the ERISA law, which was fast becoming the dominant health insurance of employed persons, at least until the Affordable Care Act threw matters into limbo. Meanwhile, just about everyone else had to pay income taxes on the money used to pay for health insurance, but employer and ERISA plans have not, for at least seventy years. All of these actions have served in one way or another to shift control and regulation from totally state dominated to steadily increasing federal control of health care. And it continues; recent savings in healthcare costs have been totally absorbed by the Federal Treasury, in spite of piteous pleas from state governments to share some of them.

At least until the recent small decline in spending, no one contended that Federal control was cheaper than State control. In a a recent symposium on healthcare costs, there were twelve speakers, not one of whom was a physician. Otherwise, it might have been mentioned that life expectancy has been extended by thirty years, and at least fifty diseases have been practically eliminated. It's hard to see how insurance executives could accomplish this, but nowadays anything is possible.

http://www.philadelphia-reflections.com/blog/1903.htm


Some Unintended Opportunities

The present state of healthcare legislation is, to put it delicately, immature. Both Health Savings Accounts and the Affordable Care Act are the law of the land, but the Obama Administration defiantly slipped in some regulations, and quietly slipped in others, which have no precise authorization in the law. Everything may claim to be mandatory, but until enforcement begins, neither enforcement nor appeal to the Supreme Court about constitutionality seems completely feasible. When no one has been injured, no one has "standing" in the eyes of the courts.

Funding the Deductible. For example, every one of the governmental "metal" plans has at least a $1250 front-end deductible, going up to $6300 for full coverage. Meanwhile, non-government health insurance is rapidly replacing copay with high deductibles, too. (Co-pay is the main cause of supplemental insurance, a doubling of administrative burden.) Unless a person is eligible for subsidy, this mandatory large deductible makes the insurance hard to use unless the individual has saved up some cash for his deductible, somewhere else. So why not provide a tax incentive to have the deductible in escrow? At the moment, Health Savings Accounts are the only feasible approach to this goal, but that does not exactly mean they have been authorized to do so, since double coverage is more or less frowned upon. The deductible means nothing until you get sick, so Obamacare gave itself a few years to figure this out, but the public is apparently in jeopardy if it tries to invent a work around. It begins to look as though the voters may not give the originators of this plan enough time in office to see this as a problem they must address. So, if this is going to be everybody's problem, why not see if the Health Savings Account can offer to do it. By doing so, the individual apparently must drop his existing insurance, so go figure.

{top quote}
By accident or by design, All Obamacare policy choices have high deductibles. {bottom quote}
The Bronze Plan is Cheapest

People who have no illnesses, naturally have little present concern with ambiguities in health insurance. But health inurance will matter as soon as illness appears. Therefore, the present state of limbo will increasingly be of concern to more people. Seemingly, there is a race between the three branches of government to start an action. Either a compromise must be reached between the Executive and Legislative branches, or else the Courts will be forced to intervene by some injured person. Curiously, the only Justice to express displeasure with the present Constitution is Ruth Ginsburg, whose two cancers make her likely to be the next Justice to retire.

A piggy-bank for Millennials. Whatever someone may think of Obamacare, the front-end deductibles provide a pretty substantial incentive to maintain at least $1250 per person cash reserve somewhere, and an HSA would be just a wonderful place to keep it. If that is somehow blocked, an IRA would be almost as satisfactory. If Congress addresses the matter, an IRA could later add a feature to roll over the deductible from such IRAs to HSAs. If the individual avoids spending what is in the HSA, it eventually will revert to an IRA on attaining Medicare eligibility, anyway. Calculating a 10% investment return, age 25, and assuming no medical expenses, it might then have grown to $51,000 taxable, or somewhat less if lower interest rates are assumed. For someone who stays healthy, its minimum distribution as an IRA at age 65 would start paying a taxable retirement income of over $775 a year. That's pretty good for an investment of $1250. Obviously, everybody older than 25 gets less, but in no case does anyone get less than the $1250 he/she put in, just to cover a possible deductible. The issue of the high investment return is taken up in Section Four. As will then be seen, there are two issues: whether such a return can be safe and consistent; and whether hidden fees will undermine the return.

It's true you can't spend the same money twice. If the fund is depleted by spending for a deductible, it must be promptly and fully replaced to keep the fund growing. However, Aetna studied and GAO confirmed, that only 50% of enrollees in employer-sponsored HRAs withdrew any of their funds (which might have been used for outpatient as well as high-deductible purposes). Apparently these clients were more anxious to preserve the tax shelter, than to protect their health, which is a slant I hadn't considered. This was true, even though the employers' efforts to enhance the compound income were not particularly strenuous. In a sense, it is a flattering sidelight on the frugality of many Americans. But the power of compound interest lies in re-investing the profits, so reasonably prompt restoration of the enhanced principal would not materially reduce the final outcome, just so long as internal profits remained untouched. It would be fairly simple to impose this requirement, creating a distinction between "balance" and "available balance", but doing things for people's own good, is always a questionable adventure.

We mentioned earlier, Roger G. Ibbotson, Professor of Finance at Yale School of Management has published a book with Rex A. Sinquefield called Stocks, Bonds, Bills and Inflation. It's a book of data, displaying the return of each major investment class since 1926, the first year enough data was available. A diversified portfolio of small stocks would have returned 12.5% from 1926 to 2014, about ninety years. A portfolio of large American companies would have returned 10.2% through a period including two major stock market crashes, a dozen small crashes, one or two World Wars hot and cold, and half a dozen smaller wars involving the USA. And even including one nuclear war, except it wasn't dropped on us. The total combined American stock market experience, large, medium and small, is not displayed by Ibbotson, but can be estimated as roughly yielding about 11% total return. Past experience is not a guarantee of future performance, but it's the best predictor anyone can use. The supply of small-cap stocks is probably a limiting factor. As we will see, your money earns 11%, but that isn't necessarily how much its owner will earn. But inflation throughout the period remained close to 3%. In this sense, the income net of inflation was never higher than 9%, so we have to presume 9% sets a theoretical limit to what can be achieved by passive investment, even after heroic efforts to reduce middle-man costs. Most of our estimates are based on 6.5%, and most investment managers produce less than that. Nevertheless, very substantial program gains are possible in every tenth of a percentage point which can be further squeezed out. The next candidate for streamlining cost is the Catastrophic insurance premium.

Catastrophic insurance has not been popular for many decades, so presumably there is room for competition to reduce premiums, marketing costs, profit margins, and other conventional competitive tools. The reimbursement to hospitals has suffered from favoritism directed toward some of its client corporation groups, who indirectly force Catastrophic to absorb some of their costs. And finally, there is likely to be overlapping provision for the same costs in a year-to-year system, which might be wrung out by five-year, ten-year or even lifetime policies. One can see potential economies on every side, but they will not come easily. In the long run, a perfect system might generate the revenue equivalent of 10.5% as a top limit instead of 9%. As everybody came up to speed, the potential is there for easily managing what might now be borderline achievable results. In fifteen years, that is. In the meantime, we will have to be satisfied with less ambitious projections for our present approach of term insurance.

So, in the meantime, we take things in a different direction, based on the whole-life insurance model. But one point may not be so clear: the Savings Account part of HSA is already lifetime, in the sense of rolling over and accumulating after-tax income for the rest of life. So for that matter, Catastrophic high-deductible insurance would be an easy next step, requiring only some adjustment of the present unfortunate tendency to assume an equivalence between "mandatory" and "exclusively mandatory". Money is money, and the courts will have to decide what sort of entirely fungible money is satisfactory for meeting minimum, maximum or any other coverage requirements. Since the "metals" plans all have high deductibles, but also have unduly high premiums, it seems likely the idea was to force insurance premiums to cover the subsidies for the uninsured. Such confusions of language and intent are ordinarily corrected by technical amendments. At age 66, right as it now is, every HSA turns into an IRA for retirement purposes. But up until age 65 it can be used for medical expenses, getting a second tax deduction. We are close enough so that changes to enable a whole-life approach are imaginable, but not yet feasible.

http://www.philadelphia-reflections.com/blog/2584.htm


How to spend

------------------------------------------------------------------------------------------------------- Throughout this discussion of the design of Health Savings Accounts, lifetime version, we have attempted to follow the underlying design of what we already do. That is, parents usually pay for children, old folks usually pay out of savings. So, once the money is in the Account, we try to imagine how it is now usually disbursed for healthcare, and even occasionally what the sources of it are. Our general choice is to follow established patterns where we can. Nevertheless, we favor debit cards in place of insurance claims forms, for all outpatient claims which fail to trigger the re-insurance deductible. Paying 10% for someone to pay your bills for you, is just unacceptable.

Children almost always have their medical bills paid by their parents, or their parents' insurance. Where to place the upper limit on childhood is a puzzle, but recent law has included children up to age 26 on their parents' health insurance. Since that seems to meet general approval, we adopt it, although it might be wise to allow emancipated children to opt out. Regulations on the use of parents' HSAs for their children are a little unclear, but we assume they would be easily changed if they conflict with reasonable practice. That parents-pay-for children system does complicate a smooth estimation of the future growth of the parent's Account however, particularly in the event of a divorce of two parents with such accounts. It also interferes somewhat in the child's future right to claim compounded growth, so there is a brief temptation to give it to all three at once. However, the deposit was only one deposit.

In some ways, it is easier to have both parents contribute to the child's one-time initial deposit, in order to have longer for their compounding to continue, and to have the child's account begin with their contributions. This makes a $150 contribution at birth become $300, and you really can't keep responding to problems that way, without destroying the universal appeal of the plan. However, it is easier to imagine acceptance of double contribution with later rebate of half of it, than to imagine a single contribution later cut in half. Perhaps it is easier to give people their choice of the two approaches, but it certainly muddles future projections. We opt for double contributions, with an optional rebate of half at the child's 26th birthday, if the parents have had a falling out. With double contributions, there should always be a small surplus in the child's account, whereas sharing even minimal deficits is apt to cause more trouble in an already strained marriage. Double deposits as a default, single deposits as an option. Optional rebate at child's age 26.

Immediately we must expect an outcry about poor mothers who can't afford it. But every other proposal suggests a government subsidy for this purpose, and so do we. The ultimate savings to the government of putting up $150 per baby, would be enormous, but they would not be totally realized until the child was forty, and the government would be "loaning" the expenses in the meantime. An important reservation is the health expenses of the indigent are usually higher than average, obscured by the fact that many of them are not paid.

Grandparents. Children are repaying a debt to their parents, which parents frequently forgive; the parents initially pay it out of their own accounts. With the elderly, there are often no children or grandchildren; the elderly either have some savings, or they are indigent. Where there are descendants, they are not always willing to back the defaults of the elderly. If they bought out Medicare (with roughly $40,000, adjusted) after attaining age 65, they will in summary stop paying Medicare premiums, pay outpatient costs with a credit card, and their catastrophic insurance will pay the hospital an updated (we hope) version of the Diagnosis Related Groups (DRG) for inpatients. To adjust for contingencies the insurance might make a deposit in the patient's HSAccount for other medical costs (ambulances, for example), which the patient pays by credit card. Emergency care may well fall into this ambiguous category. The catastrophic insurance company is expected to have negotiated reasonable charges with the hospital, and to defend the patient against unreasonable ones. Rent-seeking in the outpatient area is more the patient's responsibility to detect, to object to, and to negotiate below a certain amount. Generally, the principle sought is to assume no responsibility for recognized overcharges, unless they have been agreed to in advance of the service.

Working people, age 26-65, and/or their employers. At present, much of the health care of working people is voluntarily paid for by employers. Therefore, it is their choice what to do about a diminishing cost, absorbed in this system by their employees. Since the source of most of this windfall is investment in the stock of their companies, perhaps everyone will benefit. Time alone will answer that issue, and perhaps it is too early to be making decisions about it. So for the moment we abstain from the fairness issue, and do not greatly object to a gradual adoption of the HSAccounts for Lifetime Health Insurance, which is inherent in making it voluntary. However, it is clear that the employees are often spending for what they formerly got free, and as a beginning might well be gratified to have a roll-over of their Flexible Spending Accounts into Lifetime Health Savings Accounts. That would require the passage of no law, and perhaps ought to be requested politely. A surrender of industry's stance against income tax equity on health expenses would be nice, even though the Editorial Page of the Wall Street Journal cautions restraint in this effort, even restraint of the Tea Party members of the Republican Congress. I'm afraid I disagree on this significant point, which seems to put me to the right of the Tea Party.

That would seem to leave working-age people paying for themselves, their children, maybe their parents, and the indigents. Before that, for many of them it was once all free. With that description, it is natural to expect some grumbling. But the cost to them is only a fraction of the former cost to the nation, and they get a great deal more control over an important part of their lives. It must be obvious that the old way was too expensive to continue, and it won't continue long. If for no other reason, unions will demand that everyone else feel some pain. Working age people will end up with a bill of thirty or forty dollars a month, an undisturbed medical system, and no more yearly health insurance premiums. The employer has the employee health insurance cost gradually lifted from his back, and know very well that he will be pressed to spend some part of it for employee costs. Let him pay some into the HSAccounts, particularly during the early transition stage, when there will be very little investment "cushion".

And finally, it must be pointed out the federal government has been supporting a lot of this cost for nearly fifty years, but their instinct is to hide it. Fifty percent of Medicare costs are paid for with general tax money, quite effectively concealed in the budget term "Transfers from the General Account". Borrowing from foreigners is largely traceable to this source, and no one can be sure what will happen to world finance if it stops. Because this fifty percent subsidy would have to be extended to every citizen if we adopted a Single Payer system, even extreme liberals hesitate to press that solution, or imaginary solution to our problems. For now, leave it alone, and see how things are progressing.

Premiums and payroll taxes* Catastrophic Insurance= Debit Cards* Revised DRG= Personal funds* Direct Marketing= Internal loans* Escrow funds* Federal Reserve monitoring and midcourse adjustment. Deliberate overfunding of HSA*

http://www.philadelphia-reflections.com/blog/2647.htm


Data Sources for Health Care

OTHER REVENUE PROVIDERS WITH POTENTIALLY USEFUL MEDICAL DATA, MOSTLY UNUSED

Although some research discoveries are stumbled on by accident, most of the important ones derive from asking the right questions. If you don't ask the right question, you can wander around in a laboratory white coat for a lifetime without discovering much that is worth knowing. We already have huge stores of data, much of it in electronic form, about the health system. It mostly comes from people paying bills:

Health Insurance

Health Savings Accounts

Payroll deductions for Medicare

Medicare premiums

Military Medical Systems

Veterans Administration

Government subsidies to Hospitals

Medicaid (50-70% Federal)

Social Security

Life Insurance

Premium Investment Income

Cash payments (weak source)

Unclassified Remainder

To summarize the data sources already in existence raises questions of privacy and overwhelming government intrusion into the lives of citizens. That might well be a threat in forty or fifty years, but the disaster of the Health Insurance Exchanges trying to use a small particle of this data is reassuring, in a discouraging sort of way. These systems were originally devised to ask questions of no great relevance to national health costs, so they pose no great temptation to a wandering medical snooper. But they almost always have to meet some sort of an annual budget, so the answer to the question we are now asking is mostly available to everybody, on the Internet. It should be comparatively easy to learn, with adequate accuracy, how much is being spent on what kind of person, right now. If the total comes anywhere near 18% of GDP, we have as much detail as we need for this book to defend the conclusions it draws. We can tell the gross amounts, and by dividing by 350 million, get the average per person costs. Apportionment by age is somewhat less precise, but the numbers are so large, age stratification can be fairly accurately estimated. Let's start with a question we think we know the answer to.

http://www.philadelphia-reflections.com/blog/2683.htm


Direct Marketing of Health Insurance?

New blog 2014-01-07 21:29:34 contents

http://www.philadelphia-reflections.com/blog/2612.htm


Indemnity and Payment by Diagnosis: Fair Prices For Healthcare

In America, the closest thing to an oriental bazaar is the auto showroom, where a salesman will spend an hour evading the price question, knowing some customers will eventually buy a car rather than spend unlimited time shopping. Lack of price transparency favors the merchant, so prices are higher. It probably does follow that healthcare prices would be lower if prices were more widely advertised and therefore, more standard.

But healthcare also varies in quality and effectiveness, so prices need to be flexible enough to compensate. Even eminent practitioners therefore squirm at the idea of price transparency. Flexible pricing is in fact a useful thing, without it prices do rise, but not as much as supposed, and not without some justification. The practitioner is tangled in a web of comparisons, with his colleagues, with clinics and institutional salaries, with memories of other prices for nearly the same thing, with all the other alternatives available to a customer who can walk around and shop. Under the circumstances, the patients generally want to have a fond relationship with a doctor they can trust to know what the market is saying, and trust him to make the best guess about what his own services are worth. Therefore, a physician is a fiduciary, expected to put the patient's interest ahead of his own. Insurance is not a fiduciary:Our modern third-partysystem systematically replaces trust with: standard prices, blind faith in low prices as always better than higher ones, and determination that medical quality had better always be top-notch, or else we will sue.

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Competitive market solutions are never an even match, once someone takes away your clothes. {bottom quote}
Our system of third-party payment has firmly fixed its goal on a single price for the same service, no matter what its quality may be. By its very nature, a remote third-party payer cannot judge which person wasted the doctor's time, which doctor took extra care, which offices are shabby and which are unnecessarily plush. A surgeon leaves his showroom office empty most of the time he is in the operating room, while a dermatologist barely moves his feet for eight hours in the office; both of them are paid uniform rates. Any effort to modify the price in response to variables, is only listened to, if the outcome is to lower the price. The industry term for this process is "service benefits". A physical exam is a physical exam, a history is a history, a gastrectomy is a gastrectomy. Oh, yeah? If you believe that, said the Duke of Wellington, you will believe anything.

The best way to handle the situation is to pay, in part, by indemnity. In effect, indemnity makes the promise to pay $800 for a gastrectomy. If the surgeon thinks he is worth more than that, it must be agreed to by the patient in advance, and paid out-of-pocket. Not paid in advance, agreed to in advance, with the implicit understanding it can be reduced by sincere dispute, after the fact, and without recourse before the fact. Back at the beginning of the system, this feature was bargained away. I cannot resist telling the story of my father-in-law's advice to me, doctor to doctor, at the time of my wedding. "Never let your wife keep your books," said he. "To you, the patient is a poor old devil down on his luck. To your wife, he just represents a steak dinner, if she can collect the bill." Our third-party payment system has succeeded in projecting the image of protecting the patient against voracious "providers of care", just the reverse of their natural postures, and something my father in law never dreamed of. It's very simple: basic payment by indemnity, extras by negotiated patient supplement. Since consumer representatives are so intransigent about "give-backs", it might at well include a COLA on the basic, and otherwise put inflation into the patient supplement.

{top quote}
It's very simple: basic payment by indemnity, extras by negotiated patient supplement {bottom quote}
At this point, we should probably pause and notice that the imperfect DRG system for inpatients, has nevertheless proved to be an extremely effective rationing tool. It quite effectively put an end to relying on the bed patient to be unable to walk away. In a little research project of mine, the eighteenth century patients were in the hospital bed for exactly the same reason they are today: they couldn't walk, or couldn't be allowed to walk. Competitive market solutions are never an even match, once someone takes away your clothes. If the DRG system could be improved by substituting a better coding system (SNODO recommended), it would answer every objection except one. That objection is the relentless instinct of Society organized as institutions to squeeze payments and quality, once the helpless patient is out of sight of visitors.

At present, DRG is mainly forcing patients out who were once enticed into the hospital by the previous payment system. Once that backlog is exhausted, the DRG pressure will start to hurt, since all rationing systems lead to shortages. Like the Volstead Act, this government mandate was successful in its original purpose, but the unintended consequences were worse. When DRG starts to hurt, a new coding system had better be ready. Because the resultant growth of hospital outpatient services has been so extreme, it will cause a bigger bubble to burst unless attention is given to service benefits inflating the cost of outpatient care. To repeat, the cure for medical cost inflation is not to apply rationing, it is to improve the payment methodology so that rationing is unnecessary. The current repetitious chorus denouncing fee for service, is just a cry of desperation from people too unimaginative to devise any substitute more sophisticated than salaried rationing. The problem here is not fee for service, it is service benefits. And the problem lies, not with the provider, but with the carefree beneficiary -- carefree because he is insured. And furthermore the solution is not salaried practitioners bossed by salaried politicians, it is a hybrid of indemnity with basic pricing. Under Health Savings Accounts, we bring the public into power over its own affairs. The remaining problem is to let the individual control his own monster, by making waste and luxury his affair, not an affair of the public at large. A good beginning would be to forbid the use of collection agencies, forcing the institution to confront its irate customers.

http://www.philadelphia-reflections.com/blog/2655.htm


Welcome to Welfare

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Percent of Their Hospital Cost Reimbursed: Medicaid 70%, Medicare 106%, Private Insurance 150%, Uninsured 400% (?) {bottom quote}
Hospital Cost Shifting

There's lots more; in politics there always is. The Pew Foundation, which now includes public opinion polling in its tasks, has pointed out 80% of the public does not share the polarization now so blatantly agitating the political class. Hence, some commentators have questioned the prevailing opinion of gerrymandering as the main source of it. These observers point to a world-wide decline in party affiliation; "independence" of party affiliation is claimed by nearly half of American voters when asked. Perhaps we have things backward, and gerrymandering is merely one effort, along with growing dependence on financial contributions by wealthy donors, to rescue party power. Television (and especially the Internet) prompts the voter to hang back before making decisions, hoping to decide something without pressure from party leaders. The growing tendency to vote straight party ballots is not taken by a few commentators as evidence of true voter wishes, but rather as evidence of the futility of resisting a two-party system. Some sophisticated observers feel straight ballots result from plurality ("first past the post") counting of votes, but this (unfortunate) trend seems more likely to be stimulated by (too) early voting by mail.

Since a two-party system favors moderate candidates over extremist ones, it may not be a bad system, but rather a good system adjusting to circumstances. A hidden cause of the present crisis in health care financing comes from the Medicaid programs, run by the states, but mostly (and inadequately) financed by federal taxes. A two-party system disciplines the nominating process by raising doubts about the ability of extremists to win the general election. Consequently, the final two candidates are often so similar the chance of a loser bolting the process, becomes small. In a proportional voting process, splinter parties cannot be silenced in the primaries, because political deals take place after the election, when the public has become irrelevant to the voting outcome. Threats of public disaffection are therefore disregarded. This hidden feature went unrecognized at the Constitutional Convention, as indeed was the whole party apparatus. But it has to be counted as one of our greatest strengths, placing a much higher value on unity than dogma. If you follow this reasoning, you would have to conclude the present level of divisiveness will not persist. Because each generation has to learn its own lessons, it may recur, but it will not persist.

Nursing homes were not originally included in the 1965 legislation, but most states receive strong pressure to pay for elderly indigents in nursing homes, stranded by running out of savings. Perhaps it would be a good thing to include nursing home coverage in a reform bill, but nursing homes bear too much resemblance to work-houses to generate much demand to be in one. In variable degree the circumvention has grown up of paying for nursing homes with money intended for hospitals, but necessarily underpaying the hospitals. The hospitals make up the deficit by overcharging for outpatient services, as everybody will recognize who has been charged for the same service, both as an inpatient and an outpatient. By prevailing estimates the Medicaid programs only pay hospitals about 70% of their actual costs. Hospitals escape insolvency to minor degree by raising reimbursement demands on Medicare (to about 106% of costs) and more appreciably through private insurance (to something approaching 150% of costs). Teaching hospitals have some opportunity to raid funds intended for indirect research overhead, for resident stipends, and for disproportionate shares of indigent, "self-pay" patients. Various accounting tricks account for the rest. For example, the transfer of schools of nursing from hospitals to universities has emboldened universities to seek the equivalent of traditional hospital reimbursement schemes, merely and mostly triggering new arenas for dispute, because the hospitals had hoped to profit from the transfer. Since Medicare somewhat overpays hospitals for its own patients, in recognition of the underpayment by states for indigents, current jargon blames the "government programs" for underfunding hospitals. A better summary of the situation is: Medicaid under-reimbursement is the largest source of hospital financing problems, but other problems are less resistant to change. That's pretty significant, in view of the Obamacare plan to put millions of uninsured into Medicaid, some of whom never asked to be insured at all, and most of whom have no previous experience with "welfare", so they need to start reading some books by Charles Dickens.

Governor Christie of New Jersey

The outcome of all this is nursing homes are in effect supported by Blue Cross and other private insurers of younger people, raising premiums to employer groups and individuals by something estimated like $900-1500 a year per subscriber. That's because Medicare is busy subsidizing Medicaid's hospital patients, the main source of hospital deficits. Because this juggling lacks straight-forwardness, results are inefficient; only about 42% of hospitals actually break even. As might be expected, knowledgeable employer Human Resources departments and hospital administrations know about and object to this system. They are cooperating with Obamacare more than might be otherwise expected, probably in the hope this cost-shifting can be adjusted more in their favor, when it is less in the public eye. Mandating all employers to participate would of course increase the base of people sharing this exaction, but would ultimately link corporation treasuries to government deficits. The dream of the service unions would be to use this excuse to mandate unionization of hospital employees. Governor Christie of New Jersey quickly saw a way to split the Union movement into public and private compartments through this. "Every time they get a raise, you get a tax increase," he told the unions of the private sector.

The participation of physicians in the Obamacare effort is riven by their own politics. For surgeons, the premiums for Malpractice insurance can sometimes run to $200,000 a year. An appalling proportion of obstetricians have been sued by their patients, to the point where women have no doctor to deliver their babies in certain parts of the country. For doctors in this high-risk category, relief from the plaintiff lawyers is the most pressing of all problems. On the other hand, many physician specialties have almost no malpractice risk, and are much more exercised about the SGR reimbursement freeze, which has been in effect since the administration of Lyndon Johnson, and has been severely undermined by inflation ever since then. With physician ranks divided by two different priorities, the way is open to promise both and reward neither.

{top quote}
The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people. {bottom quote}
Tenth Amendment

Urban-rural differences remain important in health care. Senators Baucus, Grassley and Snowe come from sparsely settled states. Former Senator Daschle is from South Dakota; there are perhaps twenty states potentially in this category. With a sparse population, it is difficult to develop sufficient insurance business for the law of large numbers to establish actuarial safety; these states need to combine into regional areas to reduce the competitive size of their loss reserves. On the other hand, populous states like New York, California, etc. are often adamantly opposed to regional groupings, for opposite reasons. These population disparities create differing attitudes about modifying the 1945 McCarran Ferguson Act, which limits federal insurance regulation and enables state regulation, thereby making it difficult for small states to agree to interstate health insurance sales and portability. The fact that large employers have already achieved this freedom through ERISA also makes them unwilling to see the problem, or waste political capital achieving it for others. And thereby diminishes the power of low-population states to resist national healthcare insurance, which is their natural position.

And finally, Obamacare raises some questions about judicial remedies. Certain Op-Ed commentators have raised a question of the constitutionality of federal mandates or pre-emptions of state laws, depending on how they are phrased. The U.S. Constitution was only narrowly ratified in 1789, in large part because the states were fearful of federal government getting bigger and more powerful than necessary. In response to this strong feeling, the Tenth Amendment reinforces in no ambiguous words, that anything not specifically assigned to the national government is to be in the province of the state or local governments. If ever there was original intent, it was that one.


REFERENCES


Never Enough: America's Limitless Welfare State amazon

http://www.philadelphia-reflections.com/blog/2670.htm


Co-Insurance (2)

New blog 2013-07-01 16:26:04 contents

It's a convenience for the insurance company perhaps, since it reduces the insurance cost by 20% and is easily figured on the back of a salesman's envelope. Therefore it helps in the three-way negotiation between the employer, the insurance company, and the union. The union calculates how much income tax the employees save by how much income is split between the "fringe benefits" (non-taxable) and the "pay packet" (taxable), and the negotiations shift around these offsets, usually at the end of grueling collective bargaining.

It was once explained to me that Co-pay was very popular with negotiators for unions and management, because it was easy to calculate the total cost of it for an entire self-insured corporation. If a proposed budget for the employees was known, and the budget for health benefits was agreed, the arithmetic was easy. If the company has a 20% co-pay, it can reduce the company's total insurance cost by 20%, and if it doesn't come out right, you can negotiate 18% or 22% or whatever. Late at night when these negotiations characteristically get serious, the cost of the offer and counter-offer can be quickly calculated. By contrast, if a deductible is proposed, you have to know how many people use the program, how often they would get sick per year, and even so the calculation is difficult, requiring actuaries or at least accountants. So, the explanation ran, everybody likes co-pay, and everybody hates deductibles. The insurance people present especially like co-pay, because there will soon be a demand to add it to the package as a second insurance, and the premiums for that are also easily quoted, up or down as the negotiations proceed. When it got to involve Medicare and Medicaid, the Congressmen were in essentially the same position of only wanting to know what bulk costs of the whole program would be. In short, co-pay is easy to "score". But the best that can be said for it is, it's just another short-term benefit for which long-term costs are increased because there are diminished incentives for the third-party to hold them back. Just kick the can down the road.

It has never seemed completely credible that anyone would base expensive decisions on considerations so trivial, but you never know. Having invented Medical Savings Accounts with John McClaughry in 1980, for me the mysterious resistance to high deductibles has never seemed adequately explained. Negotiators must easily see that two (or three) insurance policies will be more expensive to administer than just one. They must immediately acknowledge that being 100% insured will increase costs by making the beneficiary ignore the cost, and they are probably willing to accept (off the record) the American Actuary Association's estimate that costs are thereby increased 30%. That much alone would free up about 5% of the Gross Domestic Product, since we are currently spending 18% of GDP on Health care. There has almost seemed no point to go on that wages could be increased by diverting this wasted money to the pay packet, to say nothing of the frustration many doctors feel at having no idea of the true cost of what they order, and hence little interest in making the number smaller. Obviously, if true costs are concealed, they go up. This blinding of the doctor to true costs is what makes cost-shifting easy to do without criticism. The absence of a pool of deductibles makes it impossible to generate compound interest, and that in turn makes it less practical to consider "portability" of health insurance from one employer to the next. It is at the very root of fictitious costs for medical care of all sorts, which somehow seem to the advantage of many participants in the health field. Eliminating co-pay would result in a small saving, and it probably would result in a big saving in healthcare costs. The aggregate national savings would be astonishing. Health Savings Accounts are slow to be adopted, not because they fail to save money, but because state laws have imposed mandatory insurance benefits for small-cost items, apparently passed for the main purpose of undermining deductibles.

Most people initially resist the idea of a high deductible on the ground that poor people can't afford it. When it is explained that what is intended is basically to give the poor the money to pay for it, most resistance disappears. A more correct description is that some method is constructed to give them the money, but in a way that allows them to spend money left over from healthcare, for something else they want to buy. The ability to buy something else is not the same as wasting it, and safeguards are only prudent. Retirement is the use most commonly considered. Because interest rates are being suppressed by the Federal Reserve, this proposal may be somewhat retarded for a year or two, until interest rates return to normal levels. Addition of an inflation-protection feature (like TIPS) might well enhance its attractiveness. Ultimately, the first step would be to eliminate Co-pays. Completely and permanently.

http://www.philadelphia-reflections.com/blog/2484.htm


What Obamacare Should Say But Doesn't

{Privateers}

1a. TAX EQUITY. All tax exemptions stimulate overuse, because they amount to a discount. For example, federal tax exemptions now mainly extend to two consumer purchases: health insurance and home mortgages. We currently have national crises in both at the same time. The tax-subsidized home-mortgage housing bubble played a major role in the 2007 financial panic, while tax-subsidized health care threatens to lead health costs into a second unsupportable bubble. Higher education seems to be going the same way, and it becomes difficult to imagine what would result if two or three of these bubbles merge. The expression "Children playing with matches" comes to mind. Giving a tax advantage to one group but not to its competitors is essentially just a variant, containing the paradoxical advantage that the competitors will object to it if they can't extend it to themselves.

Giving a tax subsidy to employees but not to self-employed or unemployed persons nevertheless created a uniquely American system of employer-based health insurance, and lobbying now perpetuates this rather odd system. Noting the allegedly temporary origins of this tax quirk (as a wartime expedient), merely dramatizes its lack of justification for seventy years afterwards. It should not be necessary to describe collateral damage like job lock and internal hospital cost shifting. The issue of equal justice alone should be enough to justify the abolition of this unfairness. To mandate individual coverage but differentially exclude large subpopulations from tax exemption, is to invite a Supreme Court case. And since such a law has been passed, the sooner a damage case is granted certiorari , the better. To achieve equity, it does not matter whether tax exemption is given to everyone, denied to everyone, or limited to part of the cost (reducing the exemption for some, partly extending it to those who do not have it). Any choice between these three would make it equitable, although gradual elimination would be better, still.

{top quote}
If health insurance is mandated, its tax treatment must be uniform. {bottom quote}
Hidden Cost

Once the tax is equalized, this proposal clears away the main obstacle to

1b. INDIVIDUAL OWNERSHIP OF HEALTH INSURANCE POLICIES, already proposed in Congress; but seemingly without hope of adoption. Determined opposition from the current owners of "self-insured" groups, the employers, or the unions who have acquired this function from employers. Since most such arrangements are de facto "administrative services only", insurer protests of higher administrative costs for individual ownership are often just relics of ancient combat between Blue Cross and commercial insurers.

Regardless of the internal structuring of incentives, healthcare reform cannot be permanently settled without individual ownership. It must be understood, however, that eliminating the tax preference could be resisted at first by patients who acquire it, because of fear the eliminated tax would in some way be shifted to them. That need not be true, if consideration is given to the relative size of the losers and gainers. Since the membership of group policies greatly outnumber individual policy holders, the redistributed revenue cost of tax equity would be considerably smaller than 50/50. The CBO should provide a sliding scale estimate for negotiating purposes.

1c. ENCOURAGE WIDE-SPREAD DIRECT MARKETING OF HEALTH INSURANCE. Since Health Savings Accounts and Catastrophic High-Deductible Health Insurance are libertarian ideas without religious overtones, it is uncomfortable to advocate them as mandatory, even passing laws to that effect. However, libertarian doctrine does not seem to preclude creating incentives to universal adoption. This doctrinal attitude imposes slower adoption than mandating them, although a better product results from more trial and error as the idea spreads. Therefore, readers may be surprised to see me advocate electronic insurance exchanges as a way to speed up trial and error spread of the idea's adoption. It is a way of preserving flexibility of deductibles, benefits, alternative uses of surpluses, and vendor arrangements. It is also a way of narrowing the conflict with the Tenth Amendment, combining state regulation with inter-state marketing. If multiple alternative details prove necessary, direct computer marketing would be a quick way to discover what the permissible alternatives would be. Finally, the wide spread examples of other interstate marketing can be employed to search out how to convert marketing from intra-state to interstate, rather than assume certain commerce is inherently (and permanently) interstate or inherently within-state.

An accidental feature of Health Savings Accounts is that the account can be growing for a number of years before the re-insurance feature is frequently needed. Indeed, young people may need a certain form of reinsurance protection, and a different form as they grow older. The important feature is to have permanently stable savings vehicle in place while different forms of re-insurance are proving themselves. It seems heresy to say so, but we might even discover niches of the marketplace where first-dollar coverage or service benefits have some useful temporary role.

{top quote}
The States Are in the Road {bottom quote}

1d. PRE-EMPT STATE LAWS WHICH INHIBIT CATASTROPHIC COVERAGE. State mandated benefits now severely limit high-deductible insurance in many states, and are the main reason Health Savings Accounts have been slow to spread. The provisions of ERISA shield employer-based health insurance from the unfortunate health coverage mandates in question. ERISA could not have been successful without this pre-emption, so unions and management unite in absolute concern to isolate ERISA from congressional meddling, although for different reasons.

1e. REVISIT McCARRAN FERGUSON ACT . This act effectively makes the "business" of insurance the only major industry restricted to state rather than federal control. It should be amended to permit the sale and portability of health insurance policies across state borders and interchangeability of individual policies when people change state residence, thus greatly increasing competition and reducing prices. Once more, present law discriminates in favor of the employees of interstate corporations, who are also exempted by ERISA.

1f. MANDATE DISPLAY OF DIRECT COST MULTIPLES NEXT TO PRICES (FEDERAL PROGRAMS ONLY) (whenever prices are displayed, as in bills, price lists, etc.) FOR ITEMS COVERED BY HEALTH INSURANCE. Some high mark-ups are justified, but the public has a right to criticize them. This would not prohibit, but would considerably hamper, cost-shifting. It should be presented to provider groups as forestalling the prohibition of cost-shifting because of abuse. For this and other reasons, it would enhance provider competition.

1g. REIMBURSE HOSPITALS ONLY ON RECEIPT OF ASSURED POST-DISCHARGE HANDOVER OF MEDICAL RESPONSIBILITY (FEDERAL PROGRAMS ONLY). Unfortunately, hospitals do need increased incentive to improve post-discharge communication, which now increasingly occurs on a Saturday. Payment by diagnosis, otherwise a seemingly attractive idea, results mostly in sequestration of medical charts within the accounting department. That's undesirable at any time, but is most destructive at the vulnerable moment of hand-over.

1h. Similarly, REIMBURSE HOSPITALS FOR LAB WORK ON THE LAST DAY OF HOSPITALIZATION ONLY AFTER DEMONSTRATION IT HAS BEEN REPORTED TO A RESPONSIBLE PHYSICIAN. Such lab work, frequently obtained within hours of discharge, is sometimes overlooked and may even be unobtainable for the previously mentioned reasons, which in this case also apply to the hospital's own physicians.

1i. RESTORE ORIGINAL FORM OF PROFESSIONAL STANDARDS REVIEW ORGANIZATIONS (PSRO). These physician organizations effectively regulated many issues which are now the subject of complaint. They were lobbied into ineffectiveness in 1980, and together with "Maricopa", essentially turned medical oversight over to insurance companies who thus receive no physician advice except from their own employees.

{top quote}
Treat liabilities like debts. And transfers from the general fund as liabilities. {bottom quote}
Accounting, for Congressmen

1j. ENCOURAGE THE ESTABLISHMENT OF REGIONAL BACKUPS FOR AMBULANCES DRAWN OUT OF AREA. At present, ambulances are limited to going to the nearest hospital, rather than to the hospital of patient preference. The main justification for such behavior is the possibility that a second call might come while the ambulance was in a distant area. Fire departments have long solved this problem by shifting reserve vehicles into an overstrained area, to cover that area while the home vehicle is temporarily unavailable. In some areas, a reserve vehicle backup might require additional ambulances, but mostly it requires a mobile phone network. In areas of extreme distances between ambulances, the main need would be to relax regulations which exclude volunteer vehicles from serving that function. In densely settled urban areas, we now have the preposterous situation of mothers in active labor being stranded at the wrong hospital, only a few blocks away from the obstetrician who has their records. When such situations are repeatedly encountered, the current IRS exemption from financial reporting should be rescinded from the ambulance sponsor.

1k. As a general principle, when a service, device or drug is used in both the inpatient area, and the outpatient one has its price exposed to regular market forces in the outpatient arena, the same price should be applied to it in the inpatient arena. It would be sensible to add a (separately negotiated) inpatient overhead adjuster reimbursement which generally applies to inpatients, and a second adjuster for the emergency room. There will be some services which are totally unique to inpatients or emergency rooms, which will have to be treated as outliers. In this way, a mutually reinforcing restraint is placed on such dual-use items -- with the market holding down outpatient costs, and the DRG ultimately holding down inpatient/emergency costs including outliers. As a general rule, the overhead cost-multiple established for dual-use, should apply to the single use items of either in-patient or out-patient. The key to all of these balancing limits is to permit open competition between hospital emergency services and private competitors, and an absolute prohibition of linkages between providers and emergency vehicle operators. After a brief trial, all such price constraints should be exposed to re-negotiation with an eye toward establishing transparent regional norms.

{top quote}
The Supreme Court Needs Help, Too {bottom quote}

2. LEGISLATE OVER-RIDE OF 1982 MARICOPA CASE. This unfortunate U.S.Supreme Court 4-3 decision, was never tried and upholds only a motion of summary judgment about a per se violation. It prohibits physician groups from agreeing on lower prices, and has been taken to mean physicians are excluded from exercising control of HMOs and Managed Care. It also perpetuates the notion of individual competitors in a profession which is rapidly acquiring larger groupings as units of competition. By some quirk, the full tape recording of the 1982 U.S. Supreme Court arguments can be heard on the Internet. It is "above this author's pay grade" to know whether it would be better to ask the Supreme Court to review its earlier decision, or to make legislative changes in the antitrust law which would somehow result in a better outcome.

http://www.philadelphia-reflections.com/blog/1730.htm


Enforcing the Constitution: Civil Monetary Penalties (CMP)

Founding Fathers

The 1787 Constitution created three branches of government along with their defined powers, but described no remedy for a branch overstepping its boundaries. Gradually, a system evolved for declaring some laws unconstitutional, one by one, clarifying individual issues along the way. By contrast, the founding fathers viewed the President as an agent of Congress, expecting Congress to devise controls if needed. George Washington had an intense distaste for monarchs, and eight years as Commander in Chief had exposed no taste for conflict with the Continental Congress. Unfortunately, this has proven to be unusual for Presidents, especially as popular sovereignty appears to expand the Presidential mandate. Moreover, Washington himself developed more friction with Congress during his two terms as President.

In retrospect, the main factor behind Presidential restlessness is the experience of misinterpreting the meaning of a broader electoral mandate, which can more properly be traced to hasty repair of the defects of the 1800 election process. Experience has shown that while ignoring rules invites anarchy, impeachment of a President usually seems too drastic a remedy for unwelcome innovation, while impeaching the whole Legislative Branch for failure to supervise in a general way, is incomprehensible. The President needs some sort of supervision. While the original intent was to have Congress do the supervising, the Supreme Court is now probably better suited for judging the issue of unconstitutional behavior, except for the awkwardness that the President appoints the Supreme Court. These are the simple ingredients of a solution, preferably unwritten and revolving around conferring special "standing" in special circumstances.

{William Bingham class=}
Chief Justice, John Marshall

At present, grievances tend to accumulate until someone acquires "standing" by being injured. At present it is generally true a grievance scarcely matters if no one is injured, but the exception is the lack of redress for injury to the Constitution, whereby everyone may be injured. Furthermore, actual experience with creeping boundary encroachment has mostly proved to be nuanced, rather than confrontational, gradual rather than abrupt. The descriptive example is that of a frog in a gradually heated pan of water, whereby the frog is cooked faster than he realizes he is in danger. Otherwise, the courts have evolved an unspecified balance which has proved remarkably serviceable.

It took thirty years for John MarshalI to formulate the general approach needed. In Marbury v. Madison , his first action after becoming Chief Justice, John Marshall suggested a writ of Mandamus (i.e. "We command...") from the Court might well be the first step in what he coyly described as only a hypothetical situation. Only lawyers were expected to recognize fully that If the President ignored the writ, then the grounds for impeachment might escalate, with the President forced into the role of flouting a decision of the Court. Regardless of how it stood on the original issue, the public would likely support a Court in performing its duty to make difficult decisions.

One way or another, the national issue would become one of whether the nation wished to continue with its Constitution; Marshall had only outlined the steps the process would probably take. At several points along the way, the Chief Justice would have a chance to back off. But Marshall's lifelong hatred of his cousin Thomas Jefferson was so well known there was little doubt he was serious. Knowing of his cousin's hatred for him, President Jefferson let the matter drop; subsequent Presidents followed his example. Generations of lawyers have studied this case and pondered its implications. The solution to the problem of extending it from unconstitutional laws to unconstitutional behavior, probably already exists in many minds.

http://www.philadelphia-reflections.com/blog/2659.htm


Strange Interlude

Once a bill is signed by the President after enactment by both houses of Congress, it is normal procedure for the Executive branch to devise regulations (with the force of law) to implement its intent. Commonly, this process uncovers unintentional flaws in the statute, which is then returned to Congress for "technical" amendments. When there is a politically divided government however, suspicions can be instinctive in the Supreme Court that regulations or technical amendments might be written to conflict with the original will of Congress. Before matters get to that point, however, differences between House and Senate versions must be reconciled, and then identical reconciliations must be agreed by both houses. In the case of the Affordable Care Act, widely differing versions between the two houses were tolerated or even encouraged, but the House version was withdrawn in order to jam through an identical version of the Senate bill in its place. This did avoid the need for a reconciliation. However, the maneuver was so hurried it required more than average corner-cutting, and potentially had to accept some un-removable booby traps in the surviving Senate version.

Republican Senator Scott Brown

A situation of this complexity would be difficult under any circumstances. But the Senate required a supermajority of 60 to evade a filibuster of the reconciliation. The Democrats had a bare sixty, including some with deep reservations which could only be pacified by accepting unwelcome provisions. And, it included at least two Senators in poor health. Consequently, differing Obamacare bills had been passed while there was a safe Democratic majority in the House of Representatives, but only one-vote Democratic filibuster control in the Senate. Democratic Senator Edward Kennedy then died, and an elected Republican, Scott Brown, replaced him. With Democratic Senator Richard Byrd in poor health the original plan to cherry-pick a clever administration hybrid out of differing versions in front of the House-Senate conference committee, became unfeasible, if not dangerous. About the only option seemingly available to the Democratic floor leaders was to adopt one version or the other, and then achieve consent for an identical bill from the other house. The Senate version was chosen to survive and be forced through the House in a matter of hours, even though almost no Congressman had read it; and this behavior was conducted under full television coverage by C-Span. Television viewers probably did not have enough information to understand why things were being handled so roughly, but it added to public distaste for the brutal tactics they could readily observe the leadership had been applying. Although it has been useful to blame excessive partisanship for this mess, it would not be difficult to name a dozen majority leaders in the past who might have surmounted such difficulties with more instinctive ease.

Democratic Senator Richard Byrd

The Republicans were given no face-saving consideration in any of these matters, and reacted with outrage. The obedient Democrats were humiliated by the public watching their abject subjugation. As one consequence, the November 2112 election administered a heavy defeat to the Democrats, while sending a large contingent of freshmen Republican Congressmen with what they considered to be a strong public mandate to disrupt or even repeal Obamacare. Most of these new Congressmen belonged to the "Tea Party", had little experience with the "inside baseball" of Congress, and found they disliked the environment. Many of them had the inclination to repeal this one Act, followed by resigning from Congress after a single two-year term. Their fury at discovering the legislative straight-jacket they were in, must have contributed greatly to the polarization which was already notable. Naturally, the White House bureaucrats destined to write the Obamacare regulations were watching, dismayed by the prospect of claiming controversial opinions to be the "will of Congress". At this writing, it seems likely at least some regulations will come under consideration by the U.S. Supreme Court, for failing to follow the intent of Congress, for following an unconstitutional intent, or for failing to implement statutory sections of the law at all. Therefore, it would not be surprising to find some regulations which were then written, contained some "booby traps" for the Supreme Court. All of this would seem to predict epic contests between Chief Justice Roberts and President Obama, both of them constitutional strategists.

Meanwhile, many Republicans and some Democrats are calling for the President to postpone implementation, ostensibly until the enrollment computers are fully functional, but really hoping to get past the November, 2014 elections. The approaching State of the Union address might have been an opportunity to blow the trumpet of compromise. But Barack Obama has proved to be an unusually stubborn person, and the prospect of facing an opposition majority in Congress does not seem to bother him. If he chooses to tough it out, perhaps we can finally learn exactly what he had in mind for the Law. If it is of any consequence to him, he had managed to get this far without fully revealing what he was trying to achieve. Almost before Senators Kennedy and Byrd died, the Tea Party gained control of the House, and Obama was forced to work his own way out of a hodge-podge.

A major tactical part of this strange interlude grew out of what lawyers and courts call "Standing". The Supreme Court, in particular, is rigid in refusing to hear a case where no one has been injured. Anxious to avoid hypothetical arguments more properly the province of the Legislative Branch, the Court insists on hearing real cases of injury by one party against another. When a new law has not yet been completely implemented, there is likely to be an interval when no one can claim he has been injured by it. That is, no one at all has "Standing". As we will see in a minute, various state governments took the position that the law injured them by invading what the Constitution declared was the province of the several states. And therefore, the states had been injured by the law, even though no insurance policies had been issued. It will be noted the Court's decision in the case confined itself to this argument. Obviously, it reserves the right to take up the case a second time, after millions of people acquire standing, and the Court can choose which argument, by which person with Standing, it chooses to hear.

http://www.philadelphia-reflections.com/blog/2595.htm


Cost Shifting: Indigent Care Out, Outpatient Revenue, In

http://www.philadelphia-reflections.com/images/missing_img.gif
Safeway Store

The CEO of Safeway Stores recently offered his company's preventive approaches as an example of what the nation can do to reduce health costs. He's undoubtedly sincere, but quite wrong; Safeway just shifted costs to Medicare. This is only one of several ways, major ways, cost-shifting is misleading us. Let's explain.

Average life expectancy is increasing at more than two years per decade, but of course people eventually die. Since health care costs are heaviest in the last year or two of life, extending life will soon push nearly all those heavy terminal costs from employer based insurance -- into Medicare. To die at age 64 costs Blue Cross a lot; but to die at 65 gets Medicare to pay for it. Either way, the cost is exactly the same, it doesn't save Society as a whole any money at all. Let's put it another way: dying at age 64 costs the employer and the employees; but dying at 65 costs the taxpayers. This means Medicare costs will surely rise, but in this case it's a reason to rejoice.

Increasing longevity is constantly pushing more costs from employers to Medicare, and not just in Safeway; the prospect is that soon substantially all major sickness costs will shift into Medicare. (To explain the failure of most employer insurance premiums to fall comparably in response to this shift, one must look elsewhere). But just a minute. Medicare is 50% subsidized by the government, and the employer writes off half of the cost as a business expense. That ought to mean it doesn't make much difference to anyone involved, except for one thing. Some employers have two employees and some have two hundred thousand employees. The amount of tax write-off is multiplied by the number of employees, so some employers can only write off a little, while an occasional employer might even make a profit on using health insurance for calisthenics. Economists agree that fringe benefits eventually and proportionately come out of the pay packet, so ultimately the employed patient benefits from the reduced bill, his employer pays less, and the Medicare costs the taxpayers more.

http://www.philadelphia-reflections.com/images/missing_img.gif
Medicare

But instead of going down that trail, let's look at a second form of cost-shifting. Government payers and a few other monopolists are able to pay hospitals less than actual costs, and get away with it. The worst offenders are state governors administering Medicaid, where the underpayment is roughly 30%, in spite of federal reimbursement to the states for most of it, at full price. The resulting profit is used for various state purposes, mainly nursing home reimbursement. For the most part, such diverted funds are used for purposes not easily eliminated, so it is unlikely there will be much cost reduction for government if the scam is acknowledged and merely shifted to a different line in the ledger. To avoid bankruptcy, hospitals raise the rates for other health insurance plans -- and the uninsured. Employers are paying for most of it, so they stand to gain from reform, only to face higher state taxes as matters readjust. We have yet to learn where these costs will shift if the federal government takes over the costs of the uninsured; the current Obamacare plan is to shift 15 million uninsured persons to Medicaid. To a major degree, the federal government and its taxpayers are already paying for a lot of this uninsured cost, through the Medicaid shift. So its present dilemma is whether to continue to pay for it twice.

There's still a third cost-shift. In 1983, Medicare stopped reimbursing hospitals fee-for-service (itemized inpatient bills are still prepared but are meaningless fictions) and for thirty years has paid by the diagnosis, not the service, for inpatients. Consequently, per beneficiary inpatient costs have only risen 18% in five years, while outpatient costs have risen 47%. Costs are not the same as prices, which are even worse distorted. To a large extent, changes in costs are really changes in accounting practices, driving changes in actual practices. Skilled nursing and home care costs are rising even faster. When you hear fee-for-service payments attacked, it is this apparent overpayment of outpatient costs which is the source of complaint. But to pay out-patient medical costs in any way other than fee-for-service would imply an almost unimaginable restructuring of the medical system, without any proof it would save money. It will be very interesting to learn what contorted proposal is about to emerge.

{top quote}
Medicare +6% Medicaid -30%
Private Insured +32% {bottom quote}
58% Hospitals Lose Money

Not only do these shifts provoke inpatient nursing shortages, they start a war for patients between hospitals and office-based physicians. Hospitals are winning this war for business, but are losing money doing so. If the public ever demands a stop to loss-leaders, net insurance premiums will probably rise. The difference between a hospital which makes money and one which loses money is based on whether there is enough extra out-patient revenue to compensate for the hidden tax which the state effectively imposes on hospitals in order to pay for nursing homes. The obscurity of the present payment system is quite expensive, and the present beneficiaries of it are the Medicaid nursing homes. Obamacare essentially provides health insurance to 15 million uninsured by the process of placing them on Medicaid, so the consequences are going to be an interesting juggling act to watch.

{top quote}
5-year Change:
Inpatient +18% Outpatient +47% {bottom quote}
5-Year Hospital Costs

Just notice, for example, that neither Medicare nor private health insurance pays below costs, if you look at total national balances. Private insurers are paying hospitals 32% more than actual inpatient costs, while Medicare is paying 6% more than national cost. And yet 58% of hospitals are losing money. The magic in this formula lies in the losses incurred by state Medicaid but shifted to other payers. It could fairly be said we are just looking at a maldistribution of the uninsured, as a cost, and a maldistribution of non-inpatient revenues, as a profit, among the nation's hospitals. To what extent such maldistribution reflects uneven patient quality, as the loser hospitals claim, or provider inefficiency, as the winner hospitals would say, -- merely starts a distraction of attention which could last twenty years while we examine it.

And disruptions enough to take decades to fix.

http://www.philadelphia-reflections.com/blog/1696.htm


Cost Effect of Increasing Longevity

Since healthcare is more expensive in older people, Medicare costs should rise in the future, right? Well, actually that could be disputed. Medicare costs may rise as a result of new and more expensive treatments, but increasing longevity by itself can lower costs. Since it surprises most people to hear it, follow the logic carefully.

It costs about $171,000 per lifetime to run Medicare, or about $13,000 per year at a life expectancy of 78. That's the figure of the census bureau all right, but it's the life expectancy at birth. Life expectancy for a person age 65 is in the 80s, so the average yearly Medicare cost is closer to $5000. If we look ahead a few years, it is easily possible to foresee a life expectancy of 91. That would be a yearly cost of around $6000. But you would have to pay medical bills for an extra few years, so costs wouldn't go down, right? There are three possibilities.

One possibility is that the costs of the elderly are mostly terminal care costs. Since you only die once, increasing longevity may mean that you typically increase the length of being old but healthy, followed by a single terminal illness. In that case, average yearly costs should go down with increasing longevity. Another possibility is that living six or so years longer just gives you the time to run up more bills for more illnesses. You might have time for two fatal illnesses, from one of which you recover. There's still a third possibility. A lot of people in their late fifties may store up illnesses as a backlog which emerges while Medicare begins paying the bills, but gradually subsides. What does the data show?

The data shows that aggregate costs are slowly growing at a rate well below 6%, so if your savings are growing at 6%, you are gaining on it as you get older. If you invest $85,000 at 6% on your 65th birthday, Medicare will consume the whole amount by age 78. But on the other hand, if you invest $40,000 at age 65, Medicare will only consume it (half as much, notice) by the age of 91. It should certainly be clear that Medicare costs are growing considerably more slowly than 6%. They are growing, but a shrewd investor could certainly beat them. And since the Federal Reserve targets a deliberate annual 2% inflation of the currency, Medicare costs net of inflation are growing considerably slower than 4% a year, for whatever reason. If Medicare costs should rise, or if the economy worsens, there's probably a tipping point where increased longevity becomes a bad thing for your financial health. But we haven't reached that point, yet.

If some young math genius invests $310 every year at 6% from age 25 to age 65, he could buy out his Medicare entitlement for $50,000. When life expectancy was 78, he could have bought it out for $85,000. Pre-payment would have cost $520 per year, 25 to 65, at 6%. If some enlightened government would stop collecting Medicare premiums and Medicare payroll deductions, our math genius could have it for half the price. And the government? They could stop borrowing from the Chinese, an amount equal to half the cost of the program, so it's a win-win situation, right? Maybe it's even better than another sustainable growth factor.

http://www.philadelphia-reflections.com/blog/2705.htm


What Part of Medicare Gets Paid?

Unthinkingly, many people believe Medicare completely pays all medical costs for 44 million eligible recipients. Not by a long shot. In the first place, many medical costs are ineligible for Medicare reimbursement; the largest is nursing home care. About 5 million recipients are "dual eligible", which means they get both Medicare and Medicaid coverage, and then state Medicaid programs do pay for nursing homes to a variable degree. The federal government excludes "custodial" care, but to some degree does pay for "skilled nursing care" , so the nursing home matter often seems ambiguous, and becomes the source of some resentment.

Beyond that, patients are responsible for annual cash deductibles, hospital daily deductibles and about 20% co-insurance, all of which are really Medicare-related. The 20% coinsurance was allegedly meant to generate cost concern by demanding patients "have some skin in the game", but the great majority of patients promptly took out a second, co-insurance, coverage, so any cost restraint has long been eliminated for them. They have to pay a second insurance administrative cost, plus its profit margin, however. A 20% co-payment isn't enough to influence behavior, while the ability to budget retirement costs is more important to elderly people on a fixed income. They soon see the foolishness of buying a 20% insurance to cover a 20% discount on the first insurance, but the reaction is not that it's stupid, but rather, that Medicare is stupid. Furthermore, if the individual has Major Medical Insurance coverage, some additional odds, ends and outliers are covered, but with with a third insurance layer of cost and profit added. Once it was discovered that insurance profitability was also enhanced by a great many people neglecting to file a Major Medical claim form, the incentive of the insurance industry to protest the situation was effectively smothered. In summary, by addressing the total costs of the elderly rather than Medicare alone, we can claim the elimination of this triple insurance cost, which somehow escaped the attention of the designers of Obamacare for their scheme. In fact, it can be suspected that many advocates of "single payer" are imagining the elimination of this duplication.

In addition, the Medicare patient pays premiums, which amount to a quarter of Medicare cost, and derived from young working person from age 25 to 65, the 2.9% payroll deduction contributes another quarter. We can't both collect it, and still assume it as a cost for the taxpayer to assume. The remaining 50% of the Medicare cost results in a deficit, paid for with debt, largely owed to the Chinese. There's a lot of rounding error and approximation in the reports, but the impression is gained that the U.S. government doesn't pay very much of Medicare costs at all, except for its administrative costs and the debt service. But in fact until those debts are finally settled, no one can say how much the government pays for Medicare.

Since our present purpose is not to pay the costs but to approximate them for discussion of alternatives, rounded-off costs, are perfectly adequate. Approximations only contribute serious errors, if applied in different ways to different payment systems. The individual and his employer are now paying somewhat more than half of Medicare costs, which are perhaps 70% of the total medical costs of the elderly, and the remaining 30-40% is a government obligation whose ultimate settlement is not yet determined. It's not easy (impossible?) to say what we might be paying if these costs were borne by a new financing arrangement. Most economists say the employer contribution is adjusted in fact by lowering wages by an equal amount, and that in turn is recouped in part by income taxes. Furthermore, the Chinese loaned us the money with the expectation of being repaid, so there are outstanding debts from the past which must be figured into the calculation.

Under these circumstances, it seems appropriate to start with a way to pay the total program costs of Medicare. We'll start with that, making a mental note that there's probably 25% (?) more, and try to cope with these other leads and lags, by trying to offset them during the transition, or just by letting the Government Accounting Office figure out the rest. Medicare program costs are a known quantity for use in a program re-design, while other unknowns are for others to conjure with.

http://www.philadelphia-reflections.com/blog/2691.htm


How Do I Pay My Bills With These Things?

To summarize what was just said, we noted the evidence that a single deposit of about $55 in a Health Savings Account in 1923 would have grown to more than $300,000, today in year 2014, because the economy achieved 10% return, not 6.5%. Therefore, with a turn of language, if the Account had invested $100 in an index fund of large-cap American corporate stock at a conservative 6.5% interest rate, it might have narrowly reached $6000 at age 50, which if re-invested on the 65th birthday, would have been valued at $325,000 at the age of 93, the conjectured longevity 50 years from now. No matter how the data is re-arranged, lifetime subsidy costs of $100 can be managed for the needy, the ingenuity of our scientists, and the vicissitudes of world finance-- within that 4% margin. We expect that subsidies of $100 at birth would be politically acceptable, and the other numbers, while stretched and rounded, could be pushed closer to 10% return. Much depends on returns to 2114 equalling the returns from 1923 to 2014, as reported by Ibbotson. At least In the past, $55 could have pre-paid a whole lifetime of medical care, at year 2000 prices, which include annual 3% inflation. An individual can gamble with such odds, a government cannot. So one of the beauties of this proposal is the hidden incentive it contains, to make participation voluntary, and remain that way. No matter what flaws are detected and deplored, this approach would save a huge chunk of health care costs, even if they might not be stretchable enough to cover all of it.

And if something does go wrong, where does that leave us? Well, the government would have to find a way to bail us out, because the health of the public is "too big to fail" if anything is. That's why a responsible monitoring agency is essential, with a bailout provision. Congress must retain the right to revert to a bailout position, which might include prohibition to use it without a national referendum, or a national congressional election.

This illustration is, again, mainly to show the reader the enormous power of compound interest, which most people under-appreciate, as well as the additional power added by extending life expectancy by thirty years this century, and the surprising boost of passive investment income to 10% by financial transaction technology. The weakest part of these projections comes in the $300,000 estimate of lifetime healthcare costs during the last 90 years. That's because the dollar has continuously inflated a 1913 penny into a 2014 dollar, and science has continuously improved medical care, while eliminating many common diseases. If we must find blame, blame Science and the Federal Reserve. The two things which make any calculation possible at all, are the steadiness of inflation and the relentless progress of medical care. For that, give credit to -- Science and the Federal Reserve.

Blue Cross of Michigan and two federal agencies put their own data through a formula which creates a hypothetical average subscriber's cost for a lifetime at today's prices. All three agencies come out to a lifetime cost estimate of around $300,000. That's not what we actually spent, because so much has changed, but at such a steady rate that justifies the assumption it will continue for the next century. So, although the calculation comes closer to approximating the next century than what was seen in the last, it really provides no method to anticipate future changes in diseases or longevity, either. Inflation and investment returns are assumed to be level, and longevity is assumed to level off. So be warned.

The best use of this data is, measuring by the same formula every year, arriving at some approximation of how "overall net medical payment inflation" emerges. That is not the same as "inflation of medical prices" since it includes the net of the cost of new and older treatments, and net effect of new treatments on longevity. Therefore, this calculation usefully measures how the medical industry copes with its cost, compared with national inflation, by substituting new treatments for old ones. Unlike most consumer items, Medicine copes with its costs by getting rid of them. Sometimes it reduces costs by substituting new treatments, net of eliminating old ones. It also assumes a dollar saved by curing disease is at least as good as a dollar saved by lowering prices, and sometimes a great deal better, which no one can measure. Our proposals therefore actually depend on steadily making mid-course corrections, so we must measure them.

Our innovative revenue source, the overall rate of return to stockholders of the nation's largest corporations, has also been amazingly steady at 10% for a century. National inflation has been just as non-volatile, and over long periods has averaged 3%., perhaps the two achievements are necessary for each other. Medical payments must grow less than a steady 10%, minus 3% inflation, before any profit could be applied to: paying off debt, financing the lengthening retirement of retirees, or shared with patients including rent seekers. But if the profit margin proves significantly less than 10%, we might have to borrow until lenders call a halt. No one can safely say what the two margins (7% + 3%) will be in the coming century, but at least the risks are displayed in simple numbers. Parenthetically, the steadiness of industrial results (in contrast to the apparent unsteadiness of everything else) was achieved in spite of a gigantic shift from control by family partnerships to corporations. Small businesses (less than a billion dollars annual revenue) still constitute half of the American economy, however, and huge tectonic shifts are still possible. Globalization could change the whole environment, and the world still has too many atom bombs. American Medicine can escape the international upheavals in only one way -- eliminate disease. Otherwise, the fate of of our medical care will largely reflect the fate of our economy. To repeat, it is vital to monitor where we are going.

Revenue growing at 10% will relentlessly grow faster than expenses at 3%. Our monetary system is constructed on the gradations of interest rates between the private sector and the public sector. It would be unwise to switch health care to the public sector and still expect returns at private sector levels. Repayment of overseas debt does not affect actual domestic health expenditures, although it indirectly affects the value of the dollar. Without all its recognized weaknesses, a fairly safe description of present data would be that enormous savings are possible, but only to the degree we contain last century's medical cost inflation closer to 3% than to 10%. The simplest way to retain revenue at 10% growth is by anchoring the leaders within the private sector.

How Do You Withdraw Money From Lifetime Health Insurance?

Four ways should be mentioned: Debit cards for outpatient care, Diagnosis pre-payment for hospital care, Transfers from escrow, and Gifts for specified purposes.

Special Debit Cards, from the Health Savings Account, for Outpatient care.Bank debit cards are cheaper than Credit cards, because credit cards are a loan, while the money is already in the bank for a debit card. Some pressure has to be applied to banks or they won't accept debit cards with small balances. Somehow, the banks have to be made to see that you start with a small account and build up to a big one. So it's probably fair for them to insist on some proof that you will remain with them. The easiest way to handle this issue is to make the first deposit of $3300, the maximum you are allowed to deposit in one year. That's difficult for little children and poor people, however, so there must at least be some way to have family accounts for children. You just have to shop around, that's all.

After that, all you do is pay your medical outpatient bills with the debit card, but we advise paying out of some other account is you can, so that the amount builds up more quickly to a level where the bank teller quits bothering you. Remember this: the only difference between a Health Savings Account and an ordinary IRA for practical purposes, is that medical expenses are tax-exempt from an HSA. Both of them give you a deduction for deposits, and both collect income tax-free. If for some reason you do not expect a tax deduction, don't use the HSA, use something else like an IRA. Alternatively, if you can scrape together $6000, you are completely covered from deductibles, and co-payment plans are to be avoided, so then an HSA with Catastrophic Bronze plan is your best bet. If you have a bronze plan, you probably get some money back if you file a claim form, but those rules are still in flux at this writing. The expense of filing and collecting claims forms is one of the reasons the Bronze plan is more expensive, but that's their rule at present.

1. Spend it on medical care. Specially modified benefit packages are possible.

2. Spend less, but spend the savings on something else. The program should not be permitted to do this, but Congress should do it in the general budget.

3. Borrow it, and inflate it away on the books. But inflate the borrowings at some lower rate. The customary techniques of a banana republic.

4. Fail to collect the premiums/payroll deductions.

After 1., which is the essential purpose of the whole thing, the most attractive choice is 4. because a gradual transition is needed, with incentives offered only to those who choose to participate. However, borrowing may be necessary to transfer surplus revenue to age groups in deficiency.

Spending Health Savings Accounts. Spending Less. In earlier sections of this book, we have proposed everyone have an HSA, whether existing health insurance is continued or not. It's a way to have tax-exempt savings, and a particularly good vehicle for extending the Henry Kaiser tax exemption to everyone, if only Congress would permit spending for health insurance premiums out of the Accounts. To spend money out of an account we advise a cleaned-up DRG payment for hospital inpatients, and a simple plastic debit card for everything else. Credit cards cost twice as much as debit cards, and only banks can issue credit cards. Actual experience has shown that HSA cost 30% less than payment through conventional health insurance, primarily because they do not include "service benefits" and put the patient in a position to negotiate prices, or be fleeced if he doesn't. Not everybody enjoys haggling over prices, but 30% is just too much to ignore.

No Medicare, no Medicare Premiums. We assume no one wants to pay medical expenses twice, and will therefore drop Medicare if investment income is captured in lifetime Health Savings Accounts. The major sources of revenue for Medicare at the present time fall into three categories: half are drawn from general tax revenues, a quarter come from a 6% payroll deduction among working-age people, and another quarter are premiums from retirees on Medicare. All three payments should disappear if Medicare does, too. Therefore, the benefit for dropping Medicare will differ in type and amount, related to the age of the individual. Eliminating the payroll deduction for a working age person would still find him paying income taxes in part for the costs of the poor, as it would for retirees with sufficient income.

Retirees would pay no Medicare premiums. Their illnesses make up 85% of Medicare cost, but at present they only contribute a quarter of Medicare revenue. However, after the transition period, they first contribute payroll taxes without receiving benefits, and then later in life pay premiums while they get benefits, to a total contribution of 50% toward their own costs. But the prosperous ones still contribute to the sick poor through their income taxes. There might be some quirks of unfairness in this approach, but its rough outline can be seen from the size of their aggregate contributions, in this scheme. At any one time during the transition, working-age and retirees would both benefit from about the same reduction of money, but the working age people would eventually skip payments for twice as long. Invisibly, the government subsidy of 50% of Medicare costs would also disappear as beneficiaries dropped out, so the government gets its share of a windfall, in proportion to its former contributions to it. One would hope they would pay down the foreign debt with the windfall, but it is their choice. This whole system -- of one quarter, one quarter, and half -- roughly approximates the present sources of Medicare funding, and can be adjusted if inequity is discovered. For example, people over 85 probably cost more than they contribute. For the Medicare recipients as a group, however, it seems like an equitable exchange. This brings up the subject of intra- and extra-group borrowing.

Escrow and Non-escrow. When the books balance for a whole age group, the managers of a common fund shift things around without difficulty. However, the HSA concept is that each account is individually owned, so either a part of it is shifted to a common fund, or else frozen in the individual account (escrowed) until needed. It is unnecessary to go into detail about the various alternatives available, except to say that some funds must be escrowed for long-term use and other funds are available in the current year. Quite often it will be found that cash is flowing in for deposits, sufficient to take care of most of this need for shifting, but without experience in the funds flow it would be wise to have a contingency fund. For example, the over-85 group will need to keep most of its funds liquid for current expenses, while the group 65-75 might need to keep a larger amount frozen in their accounts for the use of the over-85s. In the early transition days, this sort of thing might be frequent.

The Poor. Since Obamacare, Medicaid and every other proposal for the poor involves subsidy, so does this one. But the investment account pays 10%, the cost of the subsidy is considerably reduced. HSA makes it cheaper to pay for the poor.

Why Should I Do It? Because it will save large amounts of money for both individuals and the government, without affecting or rationing health care at all. To the retiree in particular, he gets the same care but stops paying premiums for it. In a sense, gradual adoption of this idea actually welcomes initial reluctance by many people hanging back, to see how the first-adopters make out. Medicare is well-run, and therefore most people do not realize how much it is subsidized; even so, everyone likes a dollar for fifty cents, so there will be some overt public resistance. When this confusion is overcome, there will still be suspicion that government will somehow absorb most of the profit, so government must be careful of its image, particularly at first. Medicare now serves two distinct functions: to pay the bills, and to protect the consumer from overcharging by providers. Providers must also exercise prudent restraint. To address this question is not entirely hypothetical, in view of the merciless application of hospital cost-shifting between inpatients and outpatients, occasioned in turn by DRG underpayment by diagnosis, for inpatients. A citizens watchdog commission is also prudent. The owners of Health Savings Accounts might be given a certain amount of power to elect representatives and negotiate what seem to be excessive charges.

We answer this particular problem in somewhat more detail by proposing a complete substitution of the ICDA coding system by SNODO coding, within revised Diagnosis Related Groupings,(if that is understandable, so far) followed by linkage of the helpless inpatient's diagnosis code to the same or similar ones for market-exposed outpatients.(Whew!) All of which is to say that DRG has been a very effective rationing tool, but it cannot persist unless it becomes related to market prices. We have had entirely enough talk of ten-dollar aspirin tablets and $900 toilet seats; we need to be talking about how those prices are arrived at. In the long run, however, medical providers are highly influenced by peer pressure so, again, mechanisms to achieve price transparency are what to strive for. These ideas are expanded in other sections of the book. An underlying theme is that market mechanisms will work best if something like the Professional Standards Review Organization (PSRO) is revived by self-interest among providers. Self-governance by peers should be its theme, ultimately enforced by fear of a revival of recent government adventures into price control. Those who resist joining, should be free to take their chances on prices. Under such circumstances, it would be best to have multiple competing PSROs, for those dissatisfied with one, to transfer allegiance to another. And an appeal system, to appeal against local feuds through recourse to distant judges.

Deliberate Overfunding. Many temporary problems could be imagined, immediately simplified by collecting more money than is needed. Allowing the managers some slack eliminates the need for special insurance for epidemics, special insurance for floods and natural disasters, and the like. Listing all the potential problems would scare the wits out of everybody, but many potential problems will never arise, except the need to dispose of the extra funds. For that reason, it is important to have a legitimate alternative use for excess funds as an inducement to permit them. That might be payments for custodial care, or just plain living expenses for retirement. But it must not be a surprise, or it will be wasted. Since we are next about to discuss doing essentially the same thing for everybody under 65, too, any surplus from those other programs can be used to fund deficits in Medicare. But Medicare is the end of the line, so its surpluses at death have accumulated over a lifetime, not just during the retiree health program.

http://www.philadelphia-reflections.com/blog/2646.htm


Reducing Health Care Costs, by Reorganizing Them (Lifetime Health Savings Accounts)

Lifetime Insurance: Deriving National Health Costs Indirectly.

It's traditional to estimate future health costs by listing the ingredients of cost, then adding them up. How many physicians do we need? How many hospitals? What diseases will have expensive cures, which ones will disappear entirely? And so on. For a century these questions have produced a single answer: It is impossible to foresee the volume or price of ingredients, so it must be impossible to predict overall costs.

Footnote:That isn't quite the case however. Since third party payers were placed in the middle of the transaction, and particularly after electronic computers arrived, piles of payment data made analysis irresistible. That approach was soon discredited when everyone with a computer found increased volume of the wrong data never compensates for its lack of relevance. The watchword became GIGO, garbage in, garbage out. Expanding the dataset with large volumes of medical data is a dream lingering on, but eventually runs up against a new stone wall. It makes no sense to shift the clerical data-entry burden to a physician, the most expensive employee in the system. Although the Affordable Care Act mandates something close to that, it is safely predicted it will restrain the impulse when the cost is fully appreciated. Meanwhile, the utility of just applying more advanced mathematics to simple data, opened up a vista of revising the health insurance system. In a sense, this book is a product of that sort of thinking. Its difficulty is a radical idea can be developed in six months, but it may take decades to judge if it had the predicted effect.

Let's start with the final answer to the test. In year 2000 dollars, the average American spends an average of $325,000 on health care in a lifetime. Women spend about 10% more than men.To insure the whole lives of 340 million Americans, the cost would be trillions of dollars. That's 110,500 trillions in fact, give or take a few trillion, or 110 of whatever is one thousand times bigger than a trillion. These mind-boggling figures were developed by Michigan Blue Cross from its own data and confirmed by several federal agencies. By the end of this book we will have suggested it should be possible -- to cut that figure in half. It is entirely legitimate to be skeptical, since a ninety year lifetime involves a great many diseases we don't see any more, afflicting many people who would have been readily cured with present medications except they weren't yet invented. It would involve predictions about the health costs of people who are still alive, destined to be treated with drugs we don't yet have. It is roughly estimated that fifty percent of the drugs now in use, were not available seven years ago. Since we have to go back ninety years to get the data about the childhood illnesses of our presently oldest citizens, the unreliability of looking ninety years forward from 2014 is pretty clear. But some things change slowly, so the problem is how to select.

The value of these calculations is considerable, nonetheless. They give us a technique which the statistical community agrees is reasonable, which tells us lifetime insurance would require something like $300,000 per person. Future trends can be calculated, indicating whether costs are going up or down, and roughly by how much. When you consider they had to account for inflation, you begin to appreciate the achievement. A penny in 1913 money is worth a dollar today, just for illustration. Naturally, we then assume a dollar today will be worth 100 dollars, a century from now. Regardless of numbers games, we have an accepted tool to estimate the general magnitude of health costs, and by how much they will likely change. It's useful, even if its answers are appalling.

Indeed, at first the health insurance industry skipped the computer details and invented "Risk Adjustment", essentially just basing next year's premium on last year's results. If future medical care changes direction drastically, its payment system might be forced to change. But if health care doesn't change much, the payment system won't need to predict the future. That reasoning reflected the insurance industry's own history, where the marketing department eventually asserted dominance over the actuaries, by declaring it was more important to predict usefully, than with precision. With increasing longevity, all life insurance has to be like that.

The approach has its limits. Insurance did underestimate how much the payment system could warp the medical one over long periods, because it gradually misjudged who its customers were. Payment methodology was relentless in affecting its true customers, who were businessmen in the human relations departments of large corporations. Looking back over an expedient system designed for short-term goals, a shocked realization dawns: most current "reform" thinking is about how to twist the medical system to fit some unrelated budget. Even more shocking is that the business customers discovered how modified tax laws could let them buy health insurance with a sixty-cent business dollar. When passed to the employees, another 15 or 20 cents could be clipped off.

Gradually we reach the point of rebellion; if it is legitimate for insurance executives to tell physicians how to practice medicine, it must be equally legitimate for physicians to re-design the payment system. So let's have a go at it.

Footnote: In the thirty years since I wrote The Hospital That Ate Chicago about medical costs, the newspapers report physician reimbursement has progressively diminished from 19%, to 7% of total "healthcare" costs, so perhaps now it's legitimate for some other professions to answer a few cost questions, too.

As patient readers will gradually see, considerable extra money is already in the financial system, leaving difficult problems of how to get it out and spread it around. This isn't snake oil, or a mirage. The beneficiaries would scarcely see any difference in medical care if Health Savings Accounts fulfilled their promise. But frankly, the insurance providers would have to make some wrenching changes. Since millions make their living from the present system, it is undoubtedly harder to design a new system which would please them.

Medical care now costs 18% of Gross Domestic Product (GDP) and 18% is pretty surely crowding out other things we might prefer to buy. In a sense, the political beauty of the premium-investment proposal we are about to unfold, lies in its primary aim of only cutting net costs by adding new revenue.

Lifetime Health Insurance: General Idea Behind the Proposal.

Let's get more specific than GDP, which is a pretty vague concept. A new primary goal of the Lifetime Health Savings Account proposal is to collect interest on idle insurance premiums, as has been done for decades whenever whole-life insurance replaces one-year "term" life insurance. If the recovered money flows to the management, it increases profits. If it goes to lower prices, the recovered money flows to the consumer. Since this tension always exists between the two counterparties, the final direction of funds-flow begins with subtle differences in the whole design of the insurance, made right at the beginning of the program.

The longer we wait to make drastic changes, the more difficult they become, and more proof of benefit will be demanded. In the proposed case of switching health insurance from term insurance to whole-life, almost a century of health insurance development is threatened. But remember, the past fifty years have seen plenty of dissatisfaction come to the surface, only to be dashed by a (generally correct) opinion that the gain was not worth the pain; the old system was working better than the proposed one. So this time, let's start in advance with establishing a monitor center where our control data is extensive -- the cost of terminal illness in the last year of life. It happens that every American has Medicare, and every American must some day die. It also happens that nearly everybody who dies, does so as a Medicare recipient. Not quite, but in a population of 350 million people, it's close enough for information needs. Conversely, in a population this large, enough people of younger ages will also die; so we could still extrapolate what difference our proposals are making to costs, for the beneficiary to have attained almost any age. At least then, the public could base its opinion on what is currently happening, and actually happening, instead of having to rely on the anguished pronouncements of political candidates.

Footnote: An experience forty years ago makes me quite serious about this monitoring issue. While I was on another mission, I discovered that Medicare and Social Security are on the same campus in Baltimore, with their computers a hundred yards apart. So I proposed to the chief statistician that the Medicare computers contained the date and coded diagnosis of every Medicare recipient who had, let's say, a particular operation for a particular cancer. Meanwhile, the Social Security computer contains the date of everybody's death, with the Social Security number linking the two data sets. So, why not shuffle one data set against the other, and produce a running report of how long people are living, on average, after receiving a particular treatment or operation. He merely smiled at the suggestion, and I correctly surmised he had no intention of following up on it. This time, I resolved to write a book about it, and see if that has more effect.

SOME BASIC QUESTIONS

No matter what payment system we use, the accounting system has to be clear on a few facts. For example, who produces revenue, who gets subsidized? At least in the healthcare system, it is unwise to assume that everyone pays for what he spends. Even if he does, he may well pay at one age and receive subsidies at other ages.

Answering the revenue question starts out pretty easy, but quickly gets harder. Children under roughly age 25 are subsidized by their parents, and retirees over 65 are living on their pensions and savings. Working people, roughly between the age of 25 and 65, are paying for the entire medical system, directly or indirectly, even though the money comes from the employer, who controls the terms through health insurance family plans. Legally speaking, parents are making an untaxed gift to their children when they pay for the child's healthcare bills. But it often gets further muddled by divorce and orphaning, and divorce at least is getting pretty common. For our purposes here, it is unnecessary to get into biological and legal complexities, to make a broad statement: the whole medical system is in some way supported by people with a paycheck, who are therefore aged 25 to 65. That's the healthiest component of society, so it can be increasingly unstable to base healthcare costs on family values, in a divorce-prone society, further clouded by payment of insurance by employers. Because of the tax laws, employers intrude their wishes, and may sometimes act as pawns for labor unions. But even with all this intrusion, society seems to feel the parent or parents are the best overseers of the kind of healthcare to use for all three living generations, even though effective employer and government control is perilously close to the surface. To some extent, this may reflect the fact that every sick person could become dependent on the assistance of others, and to that extent needs their consent. An employer-based health insurance system may not be the best, so the looser the family control, the more unstable employer-basing may become. Nevertheless, it is also reasonably accurate to say the upper limit of health revenue is ultimately traceable to people 25 to 65, and is probably going to remain that way.

Footnote: For children, medical costs can usually be traced to some sort of gift or loan from the pool of working people. And in a general sense, the revenue which pays for Medicare beneficiaries is also indirectly derived from the pool of working people, in this case themselves at a younger age. In the case of divorce, should the new father or the actual father be assigned these costs? It might simplify things if childhood costs were assigned to the mother. This is the sort of issue we assign to judges in the Orphan's Court, but there is an even more perplexing issue: what do we do with the costs of a pregnancy, share it one way, two ways, or three? If there is a reimbursement, who should get it? Is that a cost to the child, leading to a debt to the mother, or is pregnancy a cost to the mother, unshared by the child? It was not so long ago that all pregnancy costs would have been legally assigned to the father. From the way things are going, it looks as though the insurance ought to regard pregnancy costs as a cost of the child, with a loan or gift coming from one or both natural parents. But in reality the legislature or the Congress will make the best decision it can, and tell the insurance company what they decided. In considering it, the Congress or Legislature might remember that insurance companies have generally preferred to use family-plan insurance, reimbursing whoever paid for the family insurance at the workplace; and thus it gets back to the employer, even though that is not a socially useful outcome.

Since we confess we are here trying to demonstrate how universal lifetime Health Savings Accounts might support the whole system, let's skip over the sensitive issues and temporarily agree to imposing the revenue limits of the maximum HSA deposits permitted under present law. Anyone 25 to 65 is permitted to contribute $3300 a year to a Health Savings Account. They are also permitted not to contribute that much, or even anything, but suppose for present purposes that everybody did. Ignoring any periods of illness or hardship, the average person is therefore permitted to contribute a maximum of $132,000 in a lifetime. Supppose for further example sake, there is no other source of medical revenue. Would that amount of money suffice to carry the entire nation's health costs, from cradle to grave? To that, the astounding but gratifying answer is a qualified Yes. So with that mildly reassuring news, let's look at the issues related to selecting a new HSA account.

Tax Exemption First of all, every bit of HSA deposits, both contributions and compound income. is tax-exempt to the individual owner. That immediately makes it possible for anyone to claim the discriminatory tax exemption for health costs which Henry Kaiser devised for employees of profitable corporations. True, unless it is contributed by an employer, employer deductions are still omitted, although that is a separate issue. Big solvent business employers can take a 60% corporate tax deduction in addition to what the rest of us non-employees have been denied for seventy years, by purchasing HSAs for employees. If the employer is already struggling to meet the payroll, of course he won't do it. Extending this deduction to HSAs makes employers more likely to offer them, although the present confused state of employer mandate under the ACA makes it uncertain. To a certain extent, it continues to be unfair to confer such a huge tax advantage to a corporation based on the number of employees it has, although even this feature can be overlooked during periods of high unemployment.

A related mathematical issue is that a deposit when you are young is much more valuable than the same deposit later. Since young people are relatively healthy, while older ones are relatively sick, a deposit by a young person has many decades to grow before it is used for health care. True, young people have colleges and cars and houses to compete for their savings, but just listen to this: If it were allowed by the fund managers, you could pay for a 90-year lifetime with a deposit of less than $100 at birth. The contrast is so staggering, that even raging hormones cannot compete with it in any rational analysis. Therefore, pay for administration and trivial medical expenses from some other account (in order to build this tax-sheltered one up), whenever you can do so without running up high interest charges. By the same reasoning, discounted tax-exempt bonds might lock it up until an investment manager would charge reasonable fees to manage it as a fair-sized HSA. But let's not exaggerate. The main financial differences between an HSA and an IRA, are that an HSA is tax-exempt when you withdraw it for health purposes, whereas the IRA has a top limit of $6000 (for persons over age 50, $5000 below that age), not $3300, for annual contributions. The big obstacle is that IRA contributions are limited by the amount of money paid by an employer in that year, something a newborn obviously cannot match. Therefore:

(Proposal 7a) Waive the limit to annual HSA contributions for underaged subscribers, for single-premium contributions of less than a thousand dollars. While resistance to this provision might focus on class distinctions, the subsequent benefit to Medicare and/or Medicaid might ultimately be so large as to overcome it.

Portable, without Job-lock. No matter where you move, or where you work, this fund moves with you. Or leave it where it is, and communicate by mail.

Individually owned and selected. If you don't like one advisor or his results, choose another.

Investment Control. Here, we advise caution. If you surrender control of investments, there is some danger the broker could select an investment that gives him a kickback. Although they should be, stock brokers are not fiduciaries. A common overcharge is excessive commission for liquidating withdrawals, which ought to be no more than $7.50 per trade. Your goal should be to get a 10% annual return, safely, before making withdrawals to pay medical expenses, which will be discussed separately. (Unless you control fees, or deal with a fiduciary, you will be lucky to net 1%) Even during an economic recession with negligible interest rates common stock total return is 5%, and a recession is an especially good time to buy stock and hold it, where 30-50% becomes conceivable. In a tax-exempt fund, ignore dividends. Buy and hold, is the thing, with no commissions above $10 a trade (either buy or especially on sell), highly diversified for safety, index funds of common stock. Either hold back a little cash for medical issues, or pay small medical bills with other funds. At least until you are sixty, try not to spend HSA money unless you have no other source of funds.No advice is absolute, but the reasoning behind this little homily appears in other sections of the book.

(Proposal 7b) Limit eligible investment agents who handle HSAs to legally defined fiduciaries. Needless to say, the brokerage industry will oppose this, and should be asked if they can suggest alternatives.

Pooling of funds. Pooling is what you only partially get with the present H.S.A as provided by present law. The law requires that an H.S.A. be accompanied by a high-deductible or "catastrophic" health insurance, which is expected to pool the experience of subscribers. But really suitable low-cost high-deductible policies are not provided by Obamacare. For cost comparisons, we initially pretend that you do not have Catastrophic re-insurance, although in real life and for the present, the best available alternative is the Bronze plan. For outpatient expenses, you are expected to pay out of your own funds, or else draw on the H.S.A. to cover them. When the law was written, the big expenses were hospital expenses, but the prepayment system enacted in 1983 limited their profitability, so hospitals have tended to shift from inpatient toward outpatient care where profits are more unconstrained. There was a time when fixing hernias and removing gall bladders as an outpatient was unheard of, but that has changed, so a pooling system for outpatient costs would be a desirable addition. There might be plenty of money in this approach which could be pooled, but a comfortable average will still be disrupted by an occasional high-cost outlier. For example, major auto accidents might run up a very high accident room cost which would not be covered, even though the average was well in surplus. A credit card would cover such eventualities, but their interest rates are high, and it might be better if investment houses provided loan funds for this purpose at lower cost. If you must borrow, liquidate the loan at the earliest possible moment.

Compound Investment Income. Here, we have the heart of the whole arrangement. It's not a bonus, it is the source of the new revenue to pay for burdensome health care expenses. Call it the Ben Franklin approach, that allowed him to retire at the age of 41 and live comfortably for another forty years. John Bogle's discovery of buy-and-hold index fund investing is safe and effortless. It makes it unnecessary to rely on a high-commission stock picker to achieve first-class results. So trust, but verify. If you are prudent, a cash deposit of $132,000 spread over 40 years, can pay for $325,000 of lifetime health care, the present national average. That's not exactly free, but it represents an average saving of $192,000, multiplied by 350 million people, which seems to mean $68 trillion in health revenue released for medical use. These back-of-the-envelope calculations are so dizzying that, pick all the nits you please, and the same conclusion would emerge. We'll return to that after going into more description of how the proposal should work.

Caution About Averaging. Remember, it does you no good at all to have $10 in your account and receive a bill for a $1000. That is just as true if the national average of HSAs contain $50,000, which unfortunately isn't yours. Money to pay your bill is in the system, but you can't get at it. The first thing to point out, is that the national curve of health accounts shows most expensive illness takes place after the age of 60, when chronic diseases and terminal disease makes an appearance, and where funds in HSAs ought to be ample. Therefore, you are cautioned to pay medical bills from any source of money you have, in order to avoid depletion of the HSA later in life, when it really ought to have money to spare. And within reason, even borrowing (short-term, and at low interest rates) is usually better than depleting the account for diseases that won't kill you soon. Since most high medical bills are caused by hospital care, the catastrophic insurance requirement was added. Ordinarily, that feature has been fortuitous, but the migration to outpatient surgery caused by DRG payment is threatening, and the inflation of normal outpatient prices, as well as monopoly new-drug pricing, threaten to upset the payment system before it can adjust. Short-term loans from a premium pool, or else a new layer of semi-catastrophic insurance inserted between the two existing classes appear to be a coming necessity. In the meantime, short-term borrowing at what we hope are bearable rates, seems to be the only available expedient.

SOME BRIEF EXAMPLES, EXPLAINING LIFETIME HSAs .

Obamacare does not include Medicare recipients. However, it is a familiar topic, and its data are fairly accurately available in a unified form. So future Obamacare costs are readily understood by subtraction of Medicare costs from lifetime totals, and future changes can be more readily integrated. The average lifetime medical costs are roughly $325,000, as calculated by Michigan Blue Cross, who devised a system for adjusting costs to year 2000. The results have been verified by several Federal agencies, although the method includes diseases and treatment which we no longer see, and adjusts for inflation to a degree that is startling. Medicare data are more precise, but have the same trouble adjusting for the changes of half a century. By this method, we get the approximation of $209,000 for Medicare. By subtraction we get the data approximating what Obamacare would cover, slightly confounded by including the small costs of children. That is estimated by subtraction to be $116,000. The revenue to pay for these costs is assumed to come entirely from the working years of 25 to 65. In the examples which follow, the Health Savings Account data are the maximum annual allowable ($3350) multiplied by 40, representing the working years, so they represent the maximum contribution, adjusted for compound investment income at 6.5%, and paying for lifetime costs.The aggregate cash contribution is thus $134,000, which without being disturbed by withdrawals, at 6.5% would hypothetically grow to the astonishing figure of $3.2 million by age 93. A more conservative interest rate of 4% would reach nearly a million dollars. The conclusion immediately jumps out that there is plenty of money in the approach, with the main problem remaining, somehow to devise a way to get it out in adequate amounts when the average is adequate but an occasional outlier cost is extreme. In these examples, inflation in revenue is assumed to be equal to inflation in costs, an assumption which is admittedly arguable.

HSA and ACA BRONZE PLAN: A FIRST LOOK. Although a catastrophic high-deductible plan must be attached to a Health Savings Account, and the Affordable Care Act provides a catastrophic category, those plans are not available after age 30 except in hardship cases. Therefore, at the present writing it is necessary to select the plan with the highest deductible and the lowest premium, which happens to be the Bronze plan. "Lifetime" coverage with this, the cheapest ACA plan, would amount to $170,000, or $38,000 more than the most expensive HSA allowed by law. That's about a 22% difference. And furthermore, the bronze plan does not allow for internal investment income accumulation, which could amount to five times the actual premium revenue if held untouched until the end of projected life expectancy.

A more conservative analysis would end at age 65, because that is where the Affordable Care Act presently ends. Stopping the investment calculation at age 65 would lead to the same $170,000 for the bronze plan, compared with an adjusted price of HSA of $132,000, less a 6.5% gain of $xxxx, or $xxxx. To be fair about it, the gain would have to be adjusted for inflation, which at 2% would amount to $xxxx, a xx% difference. Let's make a more dramatic assertion: The difference between the most expensive HSA and the cheapest Bronze plan, would be $xxxx. In a minute we will discuss the reasoning applied to Medicare, but it will show that a deposit of $80,000 at the 65th birthday would pay for the entire average lifetime of twenty years as a Medicare recipient. In a manner of fast talking, you get a lifetime of Medicare coverage free, somehow buried within the HSA approach. That's an exaggeration, of course, but at a quick glance it could look that way. We haven't accounted for Medicare payroll deductions or premiums. Or government subsidies. And we haven't depleted the fund for the medical expenses it was designed to pay.

HSA AND MEDICARE. Medicare Part A (the hospital component) is free, and the system while generous, is pretty ramshackle. Furthermore, it isn't free, since it collects a payroll tax from working people, and collects premiums from the beneficiaries. Almost no one understands government accounting, but it has the unique feature that its debts are often described as assets. That is, transfers from another department are assets, so money which is borrowed, from the Chinese let's say, is placed in the general fund and transferred internally, so such debts are assets. And the annual report (available from CMS on the Internet) shows that 50% --half-- of the Medicare budget is such a transfer asset, otherwise known as a subsidy. Medicare is a popular program, because a fifty percent discount is always popular; everybody likes a fifty-cent dollar. Unfortunately, the elderly Medicare recipients perceived the Obamacare costs were underestimated, and became suspicious Medicare would be raided to pay for it. Therefore, every elected representative regards Medicare as the "third rail of politics" -- just touch it, and you're dead.

THE OUT-OF-POCKET CAP FUND. The Affordable Care Act contains two innovative insurance ideas for which it should be given full credit: the electronic health insurance exchanges which unfortunately caused such havoc from poor implementation, nevertheless have great potential for reducing marketing costs with direct marketing, and should be given full credit. And secondly, the cap on out-of-pocket payments is really a form of re-insurance without the cost of creating a re-insurance middleman. It is this which is the present focus. Three of the "metal" plans have deductibles of about $6000, and two of the plans have $6000 caps on out-of pocket cash expenses by the beneficiary. How these two features will be co-ordinated is not yet clear, and does not concern the present discussion.

The point which emerges is the original Health Savings Account was based on the concept of a high deductible, matched with enough money in the fund to pay it. Effectively, it provided first-dollar coverage without the cost-stimulating effect, and experience in the field showed it worked out that way. However, the forced match of HSA with one of the metal plans interfered to some unknown degree with the comfort of virtual first-dollar, and the cost reduction of a psychological high deductible. The premium is higher, because an increased volume of small claims is covered, and may be exploited. And an increased pay-out means less cash is available for investment. The result could be either higher costs or lower ones. And therefore, the idea arises of a single-payment fund of initially $6000, deposited at age 25 (Since that might well be a hardship for many young people, an additional feature is required). But the power of compound interest is such that this reserve would eventually become seriously overfunded. If the hypothetical client deposited $6000 at age 25, he would have accumulated $80,000 from this source alone. That's enough so that if it were paid to Medicare on the 65th birthday, it would pay for Medicare for the rest of the individual's life. But since it would not be needed from age 50 to age 65, further compounding (at the arbitrary rate of 6.5%) to $320,000 or some such amount, at age 65. Therefore, the following uses can be envisioned: ( 1.) Lifetime health insurance without premiums after 65. (2.) Since Medicare premiums would not be required, the Medicare premiums would not be required and should be waived. Money which flows in from earlier payroll deductions could be diverted to paying off the Chinese Medicare debt. (3.) We have glossed over this matter, but everyone was born at someone else's expense, and should pay off his debt for the first 25 years of his own life. (4.) If circumstances permit, the client should be able to transfer $6000 to other members of his family for the same funding as he got it. (5.) Surpluses might persist in exceptional circumstances, and the option to supplement his own retirement funds might be offered. Eventually, it seems inevitable that the premiums for "metal" plans would be reduced.

At the very least, one would hope that this dramatic example of the power of compound investment income would encourage wider use of the principle.

How Certain Numbers Were Derived

These are important numbers to know, but difficult for most people to understand what they mean. That will of course depend on how they are derived, a subject of much less interest to many people. Therefore, the more controversial numbers are discussed in this chapter, which the reader may skip if he chooses.

WHAT IS THE AVERAGE LIFETIME HEALTH CARE COST, PER PERSON, AT PRESENT RATES?

Most people in the past did not live as long as they do today, so the "average person" is a composite of older people who had illnesses as children which we seldom see today, plus some who may well live beyond recent expectations, but who live beyond the age of death of their parents. One surmises this tends to include among "average" some or many hypothetical people who had both more illnesses as children, and who will have more illnesses as retirees. This would lead to an average with more illness content than the future likely contains.

Prices in the calculation have been adjusted to 2000 prices, slightly less than 2014. Furthermore, there has been a 2% inflation adjustment, which reflects that a dollar in 1913 is now worth a penny, so we expect the penny to be worth 0.0001 cents in 2114. It is hard for most people to wrap their heads around such calculations. There is a $25,000 lifetime difference between the sexes, but the highly hypothetical result is this statement: The Average Person Can Expect Lifetime Health Costs of $325,000. Since most assumptions lead to an overestimate of future real costs, this number is conservatively on the high side. Comparatively few people would think they can afford that much. That is, plenty of people are going to feel stretched to adjust their savings to that level of inflation. It's the best estimate anyone can make, but by itself alone it seems to justify organizing a government agency office to match average income with average expenses, and to make the ingredient data widely available to many others outside the government on the Internet, to maximize the recognition of serious errors, unexpected financial turmoil, the development of new treatments, and changes in disease patterns. Inevitably, these calculations will be applied to other nations for comparison, but that is a highly uncertain adventure.

HOW DO YOU CALCULATE CHILDREN'S HEALTH COSTS?

Like Archimedes announcing he could move the World, if he had a long enough lever and a place to stand, accomplishing this little trick could arrive at impossible assumptions. Our basic assumption is that paying for your grandchildren is equivalent to having your parents pay for you, even though the dollar amounts are different. It's an intergenerational obligation, not a business contract, and you are just as entitled to share good luck as bad luck when the calculation is shaky at best. Since children's costs are relatively small, little damage is anticipated from taking present costs, adjusted for inflation, for both past and future.

Is it reasonable and/or politically possible to lump males and females together, when females include all the reproductive costs, and have a longer life expectancy? How do we apportion the pregnancy costs between mother and child, with or without including the father? What is fair to those who have no children? What costs do we include as truly medical? Sunglasses? Plastic Surgery? Toothpaste? Dentistry? The recent hubub about bioflavinoids threatens to convert what was mainly regarded as a fad, into a respectable therapy for allergy. When allergists and immunologists agree it is a fad, you don't pay for it; if substantially all of them think it is medically sound, pay for it. The opinion of the FDA informs the profession, it does not substitute for that opinion. Quite aside from cost issues, all of these issues affect the statistical ground rules, and may not have been treated identically among investigators. Unverifiable 90-year projections must be thoroughly standardized to be useful, and that's one committee I shall be glad to avoid, because I do not believe the improved accuracy is worth the dissention. When somebody discovers a cure for cancer or Alzheimers, rules may have to be revised, net of the cost of the treatment, and net of the increased longevity. Government accounting, private accounting, and non-profit accounting are three different schools of thought for three different goals; when a government borrows outside of its accounting environment to reimburse providers of care, misunderstandings of the "cost" consequences result, in the three definitions of medical costs. In short, only broad qualitative trends can be credible at the moment.

CRUCIAL FINAL QUESTION: FUNGIBILITY (Shifting money around)

Some of the foregoing examples are lurid, and perhaps a little dramatized for effect. But the effect of compound investment income is so impressive, that there really is little question there is plenty of money to do just about everything which needs to be done in health financing. The problem, however, is how to get enough money to pay the right bills, at the right time. The temptation to steer the money into the wrong places has been present since Isaac and Esau, and while the pooling principle of insurance (and government) solves that problem, excessive use of that flexibility is what mainly got us into the present mess. The intrusion of government can be traced to the "pay as you go" system, which amounts to paying long-term debts with current cash flow. This money has been present right along, but political considerations created pressure to begin the government system, right away, and for everyone right away. The citizens are partly responsible, since they have taught politicians they must respond to people taking off their shoes and pounding the table with them. So, yes it's true that compound interest gives an advantage to frugal people, and to some extent to people who are already prosperous. But egalitarianism doesn't justify refusing to do what is in the general interest of everyone. We are currently in a pickle because we took egalitarian short-cuts in 1965, and have preferred to borrow money for healthcare, ending up paying many times what we need to pay, rather than yield to mathematical principles discovered by Euclid, or perhaps it was Archimedes.

But while Health Savings Accounts, individually owned and selected, have more investment flexibility to take advantage of the necessarily higher returns of the private sector, and the flexibility to choose superior investment techniques as they are invented, and the flexibility to adjust to personal circumstances rather than universal absolutes,-- they lack the flexibility to pool resources between different persons and times. Perhaps this flexibility could be extended to whole families, since there are shared perplexities of pregnancy, age group and divorce which must be addressed in a communal forum, and perhaps churches or clubs could fill that role. But in our system sooner or later you get mixed up with a lawyer, judge or investment advisor. And therefore must contend with moral hazard, and disloyal agents. By this time, I hope we have learned the weaknesses of that new branch of government, the government agencies. As Adlai Stevenson quipped, "It used to be said, that a fool and his money are soon parted. But nowadays -- it could happen to anyone."

So I recognize that although some people in a Health Savings Account system will have barrels of money, while others will be desperately in need, the fact that on average there is plenty of money to fund everybody isn't quite good enough. Somewhere a pooling arrangement must be created, and the fact that the people running it will be overcompensated must be shrugged off as inevitable. But since the people who trust it will be fleeced, they might as well be the ones to create or select it.

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How Do I Pay My Bills With These Things?

To summarize what was just said, on the revenue side of the ledger, we noted the evidence that a single deposit of about $55 in a Health Savings Account in 1923 would have grown to more than $300,000, today in year 2014, because the economy achieved 10% return, not 6.5%. Therefore, with a turn of language, if the Account had invested $100 in an index fund of large-cap American corporate stock at a conservative 6.5% interest rate, it might have narrowly reached $6000 at age 50, which if re-invested on the 65th birthday, would have been valued at $325,000 at the age of 93, the conjectured longevity 50 years from now. No matter how the data is re-arranged, lifetime subsidy costs of $100 can be managed for the needy, the ingenuity of our scientists, and the vicissitudes of world finance-- within that 4% margin. We expect that subsidies of $100 at birth would be politically acceptable, and the other numbers, while stretched and rounded, could be pushed closer to 10% return. Much depends on returns to 2114 equalling the returns from 1923 to 2014, as reported by Ibbotson. At least In the past, $55 could have pre-paid a whole lifetime of medical care, at year 2000 prices, which include annual 3% inflation. An individual can gamble with such odds, a government cannot. So one of the beauties of this proposal is the hidden incentive it contains, to make participation voluntary, and remain that way. No matter what flaws are detected and deplored, this approach would save a huge chunk of health care costs, even if they might not be stretchable enough to cover all of it.

And if something does go wrong, where does that leave us? Well, the government would have to find a way to bail us out, because the health of the public is "too big to fail" if anything is. That's why a responsible monitoring agency is essential, with a bailout provision. Congress must retain the right to revert to a bailout position, which might include prohibition to use it without a national referendum, or a national congressional election.

This illustration is, again, mainly to show the reader the enormous power of compound interest, which most people under-appreciate, as well as the additional power added by extending life expectancy by thirty years this century, and the surprising boost of passive investment income to 10% by financial transaction technology. The weakest part of these projections comes in the $300,000 estimate of lifetime healthcare costs during the last 90 years. That's because the dollar has continuously inflated a 1913 penny into a 2014 dollar, and science has continuously improved medical care, while eliminating many common diseases. If we must find blame, blame Science and the Federal Reserve. The two things which make any calculation possible at all, are the steadiness of inflation and the relentless progress of medical care. For that, give credit to -- Science and the Federal Reserve.

Blue Cross of Michigan and two federal agencies put their own data through a formula which creates a hypothetical average subscriber's cost for a lifetime at today's prices. All three agencies come out to a lifetime cost estimate of around $300,000. That's not what we actually spent, because so much has changed, but at such a steady rate that justifies the assumption it will continue for the next century. So, although the calculation comes closer to approximating the next century than what was seen in the last, it really provides no method to anticipate future changes in diseases or longevity, either. Inflation and investment returns are assumed to be level, and longevity is assumed to level off. So be warned.

The best use of this data is, measuring by the same formula every year, arriving at some approximation of how "overall net medical payment inflation" emerges. That is not the same as "inflation of medical prices" since it includes the net of the cost of new and older treatments, and net effect of new treatments on longevity. Therefore, this calculation usefully measures how the medical industry copes with its cost, compared with national inflation, by substituting new treatments for old ones. Unlike most consumer items, Medicine copes with its costs by getting rid of them. Sometimes it reduces costs by substituting new treatments, net of eliminating old ones. It also assumes a dollar saved by curing disease is at least as good as a dollar saved by lowering prices, and sometimes a great deal better, which no one can measure. Our proposals therefore actually depend on steadily making mid-course corrections, so we must measure them.

Our innovative revenue source, the overall rate of return to stockholders of the nation's largest corporations, has also been amazingly steady at 10% for a century. National inflation has been just as non-volatile, and over long periods has averaged 3%., perhaps the two achievements are necessary for each other. Medical payments must grow less than a steady 10%, minus 3% inflation, before any profit could be applied to: paying off debt, financing the lengthening retirement of retirees, or shared with patients including rent seekers. But if the profit margin proves significantly less than 10%, we might have to borrow until lenders call a halt. No one can safely say what the two margins (7% + 3%) will be in the coming century, but at least the risks are displayed in simple numbers. Parenthetically, the steadiness of industrial results (in contrast to the apparent unsteadiness of everything else) was achieved in spite of a gigantic shift from control by family partnerships to corporations. Small businesses (less than a billion dollars annual revenue) still constitute half of the American economy, however, and huge tectonic shifts are still possible. Globalization could change the whole environment, and the world still has too many atom bombs. American Medicine can escape the international upheavals in only one way -- eliminate disease. Otherwise, the fate of of our medical care will largely reflect the fate of our economy. To repeat, it is vital to monitor where we are going.

Revenue growing at 10% will relentlessly grow faster than expenses at 3%. Our monetary system is constructed on the gradations of interest rates between the private sector and the public sector. It would be unwise to switch health care to the public sector and still expect returns at private sector levels. Repayment of overseas debt does not affect actual domestic health expenditures, although it indirectly affects the value of the dollar. Without all its recognized weaknesses, a fairly safe description of present data would be that enormous savings are possible, but only to the degree we contain last century's medical cost inflation closer to 3% than to 10%. The simplest way to retain revenue at 10% growth is by anchoring the leaders within the private sector.

How Do You Withdraw Money From Lifetime Health Insurance?

Four ways should be mentioned: Debit cards for outpatient care, Diagnosis pre-payment for hospital care, Transfers from escrow, and Gifts for specified purposes.

Special Debit Cards, from the Health Savings Account, for Outpatient care. Bank debit cards are cheaper than Credit cards, because unpaid credit card payments are a loan, whereas the money is already in the bank for a debit card. Some pressure has to be applied to banks or they won't accept debit cards with small balances. Somehow, the banks have to be made to see that you start with a small account and only later build up to a big one. So it's probably fair, for them to insist on some proof you will remain with them. The easiest way to handle this issue is to make the first deposit of $3300, the maximum you are allowed to deposit in one year. That's difficult for little children and poor people, however, so some way must be devised to have family accounts for children. At the moment, you just have to shop around, that's all.

After that, you should pay your medical outpatient bills with the debit card, although we advise paying out of some other account if you can, so the balance can more quickly build up to a level where the bank quits pestering you for more funds. Remember this: the only difference between a Health Savings Account and an ordinary IRA for practical purposes, is that medical expenses are tax-exempted, when paid with money from an HSA. Both of them give you a deduction for deposits, and both collect income without taxes. If you can scrape together $6000, you are completely covered from Obamacare deductibles, and since co-payment plans are to be avoided, an HSA with Catastrophic Bronze plan is your present best bet. If you have a bronze plan, you probably get some money back if you file a claim form, but those rules are still in flux at this writing. The expense of filing and collecting claims forms is one of the reasons the Bronze plan is more expensive, but that's their rule at present.

There are some other important things to say about outpatient vs. inpatient care, but it seems best to describe how inpatient care is envisioned to work in this system, before returning to the tension between the two. As will then become apparent, increasing the ease of use might create the problem of making it a little too easy to spend money.

Payment by Diagnosis Bundles, for Outpatient care. In 1983 a law was included as an unnoticed part of the annual Budget Reconciliation Act, which nevertheless later proved to have a huge effect on the health financing system. The proposal was to stop paying for Medicare patients on the basis of the itemized services each patient received as a bill, but to pay a single lump sum for the main diagnosis of each patient, using the argument that most cases of a given diagnosis were pretty much the same, and what variation there was, would soon average itself out after a few cases. Such a meat axe approach to complexity was justified by the argument that a patient sick enough to be in bed in a hospital, was too overwhelmed by his frightening situation and too uneducated in its issues, to be able to dispute what was done to him. Market mechanisms, in short, were futile is situations with such imbalances of information and power. Consequently, a great deal of money was being wasted on accounting systems to arrive at prices which were ultimately set in an arbitrary way.

This argument prevailed in Congress, which was becoming desperate about relentless cost increases in Medicare, even sweeping aside the grossly primitive details of a system defining the solvency of vital institutions. The misgivings from economists that the accounting system was a large part of the internal hospital administrative information system, were also treated like mutterings of pointy-heads. To the extent these objections were valid, they would probably lead to collapse of the experiment, so why worry about it. In fact, the expedient emerged that the prices of the DRG ( diagnosis "related" groupings) were simply revised to result in a 2% profit margin on the bottom line, no matter what the medical issues happened to be. It was a highly effective rationing system, not terribly far removed from a lump sum payment with a 2% markup, so live with it. Since the Federal Reserve targets 2% annual inflation, 2% profit is no real profit at all.

The hospitals might have rebelled, or might have collapsed. Instead, they accepted 2% for inpatients, and set about adjusting the subsidies, aiming for 15% profit margin on the Emergency Room, and 30% profit on outpatient services. Subsidies from such accounting were difficult to achieve at first, so Emergency rooms were enlarged, and much expanded outpatient facilities were built, requiring hospitals to purchase physician practices to keep them filled. The entire healthcare system was put under strain, and hardball was the game of the day. New lifesaving drugs were priced at $1000 per pill, institutions were merged out of existence, the office practice of medicine was in turmoil, and a year in business school could make you a millionaire if you could appear calm in the midst of confusion.

I tell this story to explain why, with great reluctance, I advise the managements of Health Savings Accounts to base their inpatient payment system on some variation of Diagnosis Related Groups. It's a terrible system, designed by rank amateurs, which results in distortions of a noble profession. But there is no other rational choice. It does protect the paying agency from being fleeced, once it gets past negotiation of a small list of prices which aggregate to a profitable bottom line. By protecting the payment system, it protects the patients from a chaotic price jungle which, unchecked, will rapidly destroy health care. If we experience more than 2% inflation, the destruction will be quicker.

Resolving Tension Between The Two Payment Systems. Evidently, some clear thinking by some smart people has brought them to the ruthless conclusion that a two-class system of medical care is preferable to the way we are otherwise going. Rich people will have their way if their own health is at stake, and poor people will have their way if they exercise their votes. Both of these conclusions are correct, but they lead to Medieval monks retreating into monasteries. The cure of cancer and a few brain diseases might make monasteries unnecessary, and so would a drastic reduction in health care costs. Huge research budgets and major regimentation are big-government approaches, of willingness to accept some loss of freedom to achieve equality of outcome.

But we can't completely depend on either choice, so the remaining choice is to undermine a lot of recent culture change, by devolving back to leadership on the local level of small states and big cities. This is a small-government approach, willing to accept wider inequalities in order to seek freedom to act. Mostly using the licensing power, competition will reappear if retirement villages and nursing homes are licensed to be hospitals. If not, nurses and pharmacists can be licensed as doctors. Some of this could become pretty brutal, and all of it leads to patchy results. But of its ability to restrain prices, there can be little doubt.

Escrow Subaccounts within HSA Accounts. Whether anything can restrain reckless spending of "found" money, is quite a different matter, however. It may be that supply and demand will balance, even if it takes generations. There is some hope to be gained from watching reckless teenagers become penny-pinching millenials, but there remain dismal reminders of improvidence to be found in ninety year-old millionaires marrying teen-aged blondes, further reinforced by watching the blondes run off with stable-boys. The net conclusion is that if certain portions of a Health Savings Account must be set aside for mandatory later expenses, then the money should be set aside within partitions, as an escrow account. Even that will have limits to its effectiveness, as I have noticed when trust-fund babies in my practice worked around the restraints their grandfather's lawyer took care to put in place.

Specified Gifts to be Encouraged. Only limited restraints on spending the client's own money can ever be justified, but certain types of gifts can still be better justified than others. One of them would be the special $6000 escrow fund for deductibles and caps on out-of-pocket spending. Particularly in the early transitional years, the fund's solvency may be threatened by leads and lags, where these escrow funds could save the day. Therefore, if someone accumulates large surpluses in his account by the fortuitous conjunction of events, he should be encouraged to consider donating a $6000 escrow to one of his grandchildren or other impecunious relatives. Quite often, a prudent gift to a grandchild can lighten the burdens of his parents or other members of the family. If they wish, any number of $6000 transfers to the escrow funds of others should be encouraged.

Spending Health Savings Accounts. Spending Less. In earlier sections of this book, we have proposed everyone have an HSA, whether existing health insurance is continued or not. It's a way to have tax-exempt savings, and a particularly good vehicle for extending the Henry Kaiser tax exemption to everyone, if only Congress would permit spending for health insurance premiums out of the Accounts. To spend money out of an account we advise a cleaned-up DRG payment for hospital inpatients, and a simple plastic debit card for everything else. Credit cards cost twice as much as debit cards, and only banks can issue credit cards. Actual experience has shown that HSA cost 30% less than payment through conventional health insurance, primarily because they do not include "service benefits" and put the patient in a position to negotiate prices, or be fleeced if he doesn't. Not everybody enjoys haggling over prices, but 30% is just too much to ignore.

No Medicare, no Medicare Premiums. We assume no one wants to pay medical expenses twice, and will therefore drop Medicare if investment income is captured in lifetime Health Savings Accounts. The major sources of revenue for Medicare at the present time fall into three categories: half are drawn from general tax revenues, a quarter come from a 6% payroll deduction among working-age people, and another quarter are premiums from retirees on Medicare. All three payments should disappear if Medicare does, too. Therefore, the benefit for dropping Medicare will differ in type and amount, related to the age of the individual. Eliminating the payroll deduction for a working age person would still find him paying income taxes in part for the costs of the poor, as it would for retirees with sufficient income.

Retirees would pay no Medicare premiums. Their illnesses make up 85% of Medicare cost, but at present they only contribute a quarter of Medicare revenue. However, after the transition period, they first contribute payroll taxes without receiving benefits, and then later in life pay premiums while they get benefits, to a total contribution of 50% toward their own costs. But the prosperous ones still contribute to the sick poor through their income taxes. There might be some quirks of unfairness in this approach, but its rough outline can be seen from the size of their aggregate contributions, in this scheme. At any one time during the transition, working-age and retirees would both benefit from about the same reduction of money, but the working age people would eventually skip payments for twice as long. Invisibly, the government subsidy of 50% of Medicare costs would also disappear as beneficiaries dropped out, so the government gets its share of a windfall, in proportion to its former contributions to it. One would hope they would pay down the foreign debt with the windfall, but it is their choice. This whole system -- of one quarter, one quarter, and half -- roughly approximates the present sources of Medicare funding, and can be adjusted if inequity is discovered. For example, people over 85 probably cost more than they contribute. For the Medicare recipients as a group, however, it seems like an equitable exchange. This brings up the subject of intra- and extra-group borrowing.

Escrow and Non-escrow. When the books balance for a whole age group, the managers of a common fund shift things around without difficulty. However, the HSA concept is that each account is individually owned, so either a part of it is shifted to a common fund, or else frozen in the individual account (escrowed) until needed. It is unnecessary to go into detail about the various alternatives available, except to say that some funds must be escrowed for long-term use and other funds are available in the current year. Quite often it will be found that cash is flowing in for deposits, sufficient to take care of most of this need for shifting, but without experience in the funds flow it would be wise to have a contingency fund. For example, the over-85 group will need to keep most of its funds liquid for current expenses, while the group 65-75 might need to keep a larger amount frozen in their accounts for the use of the over-85s. In the early transition days, this sort of thing might be frequent.

The Poor. Since Obamacare, Medicaid and every other proposal for the poor involves subsidy, so does this one. But the investment account pays 10%, the cost of the subsidy is considerably reduced. HSA makes it cheaper to pay for the poor.

Why Should I Do It? Because it will save large amounts of money for both individuals and the government, without affecting or rationing health care at all. To the retiree in particular, he gets the same care but stops paying premiums for it. In a sense, gradual adoption of this idea actually welcomes initial reluctance by many people hanging back, to see how the first-adopters make out. Medicare is well-run, and therefore most people do not realize how much it is subsidized; even so, everyone likes a dollar for fifty cents, so there will be some overt public resistance. When this confusion is overcome, there will still be suspicion that government will somehow absorb most of the profit, so government must be careful of its image, particularly at first. Medicare now serves two distinct functions: to pay the bills, and to protect the consumer from overcharging by providers. Providers must also exercise prudent restraint. To address this question is not entirely hypothetical, in view of the merciless application of hospital cost-shifting between inpatients and outpatients, occasioned in turn by DRG underpayment by diagnosis, for inpatients. A citizens watchdog commission is also prudent. The owners of Health Savings Accounts might be given a certain amount of power to elect representatives and negotiate what seem to be excessive charges.

We answer this particular problem in somewhat more detail by proposing a complete substitution of the ICDA coding system by SNODO coding, within revised Diagnosis Related Groupings,(if that is understandable, so far) followed by linkage of the helpless inpatient's diagnosis code to the same or similar ones for market-exposed outpatients.(Whew!) All of which is to say that DRG has been a very effective rationing tool, but it cannot persist unless it becomes related to market prices. We have had entirely enough talk of ten-dollar aspirin tablets and $900 toilet seats; we need to be talking about how those prices are arrived at. In the long run, however, medical providers are highly influenced by peer pressure so, again, mechanisms to achieve price transparency are what to strive for. These ideas are expanded in other sections of the book. An underlying theme is that market mechanisms will work best if something like the Professional Standards Review Organization (PSRO) is revived by self-interest among providers. Self-governance by peers should be its theme, ultimately enforced by fear of a revival of recent government adventures into price control. Those who resist joining, should be free to take their chances on prices. Under such circumstances, it would be best to have multiple competing PSROs, for those dissatisfied with one, to transfer allegiance to another. And an appeal system, to appeal against local feuds through recourse to distant judges.

Deliberate Overfunding. Many temporary problems could be imagined, immediately simplified by collecting more money than is needed. Allowing the managers some slack eliminates the need for special insurance for epidemics, special insurance for floods and natural disasters, and the like. Listing all the potential problems would scare the wits out of everybody, but many potential problems will never arise, except the need to dispose of the extra funds. For that reason, it is important to have a legitimate alternative use for excess funds as an inducement to permit them. That might be payments for custodial care, or just plain living expenses for retirement. But it must not be a surprise, or it will be wasted. Since we are next about to discuss doing essentially the same thing for everybody under 65, too, any surplus from those other programs can be used to fund deficits in Medicare. But Medicare is the end of the line, so its surpluses at death have accumulated over a lifetime, not just during the retiree health program.

That may not be more accurate, but it displays its assumptions better. Michigan Blue Cross has calculated we calculate lifetime costs and Obamacare costs by starting with lifetime average health costs of $325,000 and subtracting Medicare. Although Medicare is reported by CMS to have average costs of $xxxx, for which we prefer to assume a Health Savings Account "present value" cost of $80,000 on the 65th birthday (at a 6.5% interest rate). At the same 6.5% rate, a $3300 annual deposit from age 25 to 65 (the earning years) would total $132,000 of deposits. Preliminary goals for a hypothetical average person are: To accumulate $80,000 in the Medicare fund by the age of 65, to pay off the 25-year health costs of 2.0 children per couple as a gift to them, and to pay his own relatively modest average healthcare costs from 25-45, somewhat higher costs 45-65. The Medicare goal of $80,000 is what is estimated to be what is required for a single-deposit investment fund (paid on the 65th birthday) to pay the health costs for an average person aged 65-93,(a guessed-at future average longevity), with an estimated compound investment income of 4%, also guessed, but conservative. Inflation is ignored, assuming revenue and expenses will inflate at the same rate. Our average consumer will have to set aside $1250 per year from age 25 to 65, and earn 4% compounded, to do it.

Those who disagree with the underlying assumptions should feel free to substitute their own assumptions. The interest rate of 4% is deliberately low, in order to make room for disagreements which are higher. The upper limit is set to match the HSA contribution limits of 3300 times 40, becoming hypothetically the upper bound of revenue which can ever be anticipated. Anticipating two children per couple and full employment from 25 to 65, this revenue effectively covers one full lifetime, from cradle to grave. Childhood illnesses and elderly disabilities notwithstanding, this is all the revenue we allow ourselves in this example.

Let us assume that an average person can start contributing to an H.S.A. at the age of 25, even though perhaps a quarter of the population at that age are burdened with college debts, etc. and cannot. We are well aware of the Pew Foundation poll that xxxx% of those under 30 are still living with their parents, and that xxxx% have college debts. (Congress ought to examine this condition, which could apply at any age, and provide for make-up contributions later.) The present ceiling of $3300 annual contribution is otherwise taken as the upper boundary of what is possible for the sake of example, and theoretical deficits would have to be made up from the $68 trillion dollar surplus created by such legal maximums. To plunge ahead with the example, our average person sets aside $3300, starting at age 25 toward lifetime health costs. To simplify the example, he does so whether he can afford it or not, and what he can't supply himself is provided by a subsidy or a loan. Since present law prohibits spending from the H.S.A. for health insurance premiums (this should be reconsidered by Congress, by the way), an estimated premium of $300 for his own Catastrophic insurance is taken from the set-aside, and the remainder is placed in the H.S.A., paying an estimated 4% tax-free. Within this he eventually needs to set aside a Dependent Escrow premium (remember, this example covers lifetime expenses, even though everyone has Medicare), which for twenty years (until age 45) is zero for Medicare and available for medical gifts to Children, and after that is exclusively used for Medicare, both of which will be explained in later sections.

Health Savings Accounts are tax-exempt, and they can earn investment income. Except it isn't all it could be. Professor Ibbotson of Yale, the acknowledged expert in the long term results of investment classes, has regularly published data going back nearly a century. In spite of military and economic disasters of the worst sort, investment classes have remained remarkably steady throughout the past century, and presumably will maintain the same relationships for some time to come. John Bogle of Philadelphia has translated that into index funds of investment classes, with almost negligible administrative costs. (Caution: Many index funds are sold with very high trading costs, typically in charges when money is withdrawn. Be careful of your counterparty, particularly if he specifies the index fund, because he may limit it to one who gives kickbacks to him.) With this warning, there is a reasonably good chance of getting returns approaching 10% for investments in index funds of well-known American stocks, even though the typical HSA at present is yielding much less. This investment income can grow to the point where it constitutes a fairly large part of the health revenue.

SIX PIECES OF THE LIFETIME PIE

Instead of starting at birth and ending at death, this book will reverse the process. Let me explain. There is a big transition problem in a proposal like this, since the readers will be of different ages, and the system must work without gaps. Everybody has already been born, and for a long time to come, everybody will have a piece of his life behind him that he does not want to pay for. The time is past when Lyndon Johnson could solve the transition problem by simply giving a gift of many years free coverage to most of the new entrants to his system. So, although it will probably spook a number of old folks just to hear the discussion, let's begin for completeness with the Last Year of Life Coverage, and end up with First year of Life coverage. Both of those apply to 100% of Americans in a theoretical sense, and in a sensible system would be the basic coverage. If any health insurance should be universal, these two have the strongest arguments. Unfortunately, they have the least chance of political success. Therefore, it is likely that they will be voluntary and self-pay if they are adopted at all.

http://www.philadelphia-reflections.com/blog/2682.htm


Addressing the Computerized Medical Record Muddle

{Computerized Medical Record}
Computerized Medical Record

Who Should Rule? At first, even physicians were enthusiastic about computers in medicine. The computerized medical record was to have been the smash hit of Obamacare. It promised dozens of efficiencies, vast reductions in cost, and a glittering example of how young minds always see the future clearly while old traditionalists fail to recognize the obvious. However, after the expenditure of millions of dollars of development money, the reaction of doctors to the electronic record now is, "It's a good idea, but it's too much work." What seems to have soured the medical profession most was to discover that the computer designers had cast the model in imitation of the hospital medical record system, largely mirroring the viewpoint of the librarians. Record librarians spend a lot of their time telephoning doctors to come complete their charts, and have little patience with excuses; they write the stuff, we file it.

Computer designers then brightened up, explaining the wonders of "real time". Compose as you work, let the machine reassemble it, go home at five o'clock. Doctors often wrote a separate composition called Physician Notes, nurses wrote on a different colored paper called Nurses Notes. Nurses notes were usually discarded at discharge until the hospital lawyers forced a stop to suppressing evidence. No problem, the computer can easily integrate the two. Unfortunately, the nursing verbiage so heavily out weighed the physician scribble that the dominent emerging discussion consisted of -- what was formerly discarded. The narrative was composed by a couple dozen people, very few of whom read anything written there except the last entry of his own. It was much like the academic scholar approach, in which a scholar with a new book, first looks in the bibliography to see if his name is there. Otherwise, no one reads bibliographies. When last heard from, this "Progress Notes" approach was headed toward extinction in favor of a "Discharge Summary" written by a single physician, although hospital lawyers still generally insist that the underlying notes be stored indefinitely, as a basis for constructing a legal case against the hospital if the outcome is poor.

All of this was quite bad enough, when the system managers started to discover it was easier to get the facts by going straight to the doctor, who promptly labelled the system as "turning the doctor into an input clerk". The famous baseball player Jackie Robinson reached a different conclusion: "Never look back, 'cause something might be gaining on you."

When the computer began to supply a list of medical facts which the doctor had omitted from his recital, refusing to go forward until the missing data got supplied, the situation was getting threatening. One final thing: the medical librarians, naturally seeing the only purpose of filing this data was to retrieve it later, lobbied the reimbusrement system that they needed a new code, the International Classification of Diseases (ICD) which reduced a million diagnoses in the Standard Nomenclature of Diseases (SNOMED3) down to no more than ten thousand, with the rest lumped together as "all other" or "not otherwise classified". Very few people understood what librarians were talking about, but when reduced to its essence, they argued that if a disorder wasn't common, it was easier to go the "boneyard" and go through the charts one by one. This transformation took place at the time these codes began use for reimbursement purposes, resulting in repeated revisions of the code to match the money. It now seems pretty clear that that a list of the commonest conditions must eventually revert to a meaningful coding tree, if we are ever to escape from using endless high-speed iteration (the underlying process in digital computers) as a basis for finding charts on a shelf.

A brief analysis of user complaints is this: most efficiencies involved some shift of data entry from clerks to physicians, with resulting higher input costs. User-friendliness for patients soon dissolved with the public's awakening they too had expected to be helped, not regimented. Evidently, the designers of the software architecture did not adequately value the points of view of either patient or physician, which seldom match those of the third parties. The design of the computerized medical record evokes memories of the collision between the department store and the housewife in 1978, when only one of the two possessed the terrifying power of an expensive computer, and got arrogant about it. In the end, the housewives won that war by fleeing to big box stores in the suburbs. The customer's determination not to deal with a monolithic billing administration under one roof, resulted in redesign of the department store. A substore two blocks long sold nothing but children's shoes, but at least someone knew something about shoes.

The design of these products should begin, and eventually must finish, with the premise that medical care contains variable degrees of labor intensiveness, each degree following the other in quick succession. In addition, there is the Sherlock Holmes fallacy that a diagnosis is frequently based on a mathematical formula, when in fact most diagnoses are instantaneously recognized by an experienced physician based on what the patient tells him in the first five minutes of an interview. To modify slightly the words of Oliver Wendell Holmes, the life of medicine has not been logic, it has been experience. The painstaking recording of the features which led to a diagnosis may well assist a beginning medical student studying the case, but they seem like a preposterous waste of time to a busy practitioner. Another clinical maxim for computer design to grapple with is that "More diagnoses are missed because the doctor didn't look, than because the doctor didn't know." Most of the time the doctor does look, and inking a check-block is merely an irritant. In those cases where he doesn't look, the cause is usually that he was either distracted or overworked, but in any case he doesn't record what he doesn't see. But heaven help us if he records everything he does see. It's easier to let a computer program recite everything which it is conceivable to see. Take for an example the recent discovery that sleep apnea is caused by fatness of the tongue, now easily recognized without an MRI. Of what value are a zillion computerized records that the tongue was "normal to inspection"?

The designers should have begun with what is easily automated, like laboratory results, billing, and prescriptions; and only then constructed a useful system around them. A modest system which delights the medical personnel might then have enlarged its sphere when technology caught up to more difficult tasks like summarizing physicians' notes. With doctors of differing levels of personality and experience, little would have been expected until the system offered more in return. It may seem to others that patients will do anything a doctor tells them. But even in that traditional relationship, salesmanship is fine, rigidity is resented. There are many areas where relevant data entry is already automated, so a partial but greatly enhanced medical record is therefore immediately possible. Step by step, the totally digitized medical record could have advanced amidst general applause. This system should therefore re-begin by offering unchallengeable veto power to a large community of physicians, the early adopters, limited additionally to those who have earned the confidence of their colleagues by making a living as practitioners. They must repeatedly defend themselves to colleagues who are not early-adopters, never will be, in order to defend against the accusation they are hobbyists, or secretly nurse conflicts of interest.

That's on the data input side. On the output side, greater respect must be paid to the ability of electronic printers to produce overwhelming masses of reports. They are neat and uniform, but few doctors have time to read them. Doctors must continually devise concise summarizations, paying respect to the rapid obsolescence of relevant information as the case unfolds, rapidly discarding information which only recently was vital to know. At the same time, the system must tolerate greater repetition of strikingly out-of-bounds reports. Reconciling summarization with redundancy is not an easy task. The ideas for flagging outliers and deleting noise must come from physicians in active practice, who will otherwise resort to adhesive tape, felt pens and alarm clocks. No doubt the requirements of accrediting agencies and the tort industry are in conflict with these notions. If necessary, separate records may be produced for their use, and stored in stand-by locations. No attempt should be made to conceal their acknowledged irrelevance.

The Electronic Medical Record is a fine idea, so long as it limits data entry to material which is already digital, requiring no extra effort to get it into the system. As soon as medical professionals are commanded to touch a keyboard, costs will soar. We have plenty of useful things to do with digital medical data to keep us occupied until medical professional data entry does become feasible, as it must. It might be five years, or it might be ten. But to hurry it up is to cost billions more dollars, producing very little to show for it. Therefore, the following billion-dollar solution is offered for this multi-billion dollar muddle. It's a Hail, Mary football pass, as would be said in college football.

The Big Data Approach. "Big data" is an unfamiliar term for most readers, but it describes the use of many computers to solve a problem whose data is too large for a single computer to handle. The design reduced itself to a single computer program called Hadoop, itself based on a disarmingly simple idea of splitting a vast amount of data into as many pieces as there are available computers. Soon referred to by non-reverent Google engineers as "Map, shake and merge", the program is free, Amazon will rent 50,000 computers to run a program, taking ten hours to run and costing about $12. Once the approach became feasible, many problems were found which could usefully employ fifty thousand computers at once. Just as happened in a number of computer revolutions of the past fifty years, people in charge of big data projects went wild with enthusiasm. A national Presidential campaign was apparently won by Hadoop. There were spy stories of drones picking out bandits five thousand miles away, and blowing them to pieces (Hollywood, please get busy). One man in Connecticut earned $6 Billion in one year, legally and for himself, and by report he was able to make it shake, rattle, and re-merge. Anyone in charge of huge amounts of data is in a position to produce something pretty astounding with it. However, this sort of thing often ends in tears, and all hard reality lies under a mantle of jovial simplicity.

Beyond a certain point, most of the limiting factors preventing still further use of hundreds of thousands of computers reside in coordinating the symphony. If a computer has one electrical failure every thousand hours of use, fifty thousand will have fifty failures per hour, and just fixing the flaws becomes a new problem to address. Even without failures, the computers get out of synchronization pretty regularly. So although big data gets more powerful with increasing size, it develops new challenges. Nevertheless, it turns the science of statistics inside out, since it is often easier to count the whole thing than to take samples and estimate an aggregate result from them. So to speak, it becomes easier to take a preliminary vote of the whole electorate than to use Gallop Polls. Astronomy, chromosome research, weather prediction, opinions, styles and tastes are only a small fraction of areas of interest which generate more data that can be readily managed with a single computer. Obviously, the stock market is another area which generates huge volumes of data, but simultaneously increases the incentives for secrecy, and pays its employees more than colleges can pay professors to popularize the techniques. The huge volume of data which can be expected to emerge from computerized medical records universally applied, will therefore present a huge opportunity, but one now held back by non-scientific incentives as well as serious privacy issues. We assume there is something of value to be learned by mining this data but we cannot be sure of it in advance. Nor can we be sure whether asking trivial questions, like determining the average square root of the nation's Social Security numbers, will make this enterprise the butt of every joke. Big data is the general approach of certain Wall Street hedge funds who have made astonishing amounts of money, much envied and imitated by other Wall Street firms who have only lost huge amounts of money. It is at the heart of the Google search engine, and rumor has it that Amazon is far advanced in the business of assembling and renting out gigantic computer farms to people who think they have a Big Idea and assemble cash to use a computer farm for ten minutes or so.

It seems perfectly certain the Big Data approach will be explored on this tempting mountain of medical data, which no one will be quite sure how to exploit. Much of the future of the approach will depend on its luck in discovering something strikingly useful during the early stages, because the cost of it can be so quickly calculated.

What Purpose is Served? Whether big data techniques have any general utility for medical care is not certain. Big questions, like the distribution of diabetes among people who are overweight, can be answered by occasional investigations, or at most a few institutes committed to the task, and reduced to a few sentences in a textbook. Only if utility in everyday use can be personally confirmed by almost every physician, will the original design of the Electronic Medical Record prove to be useful. No doubt, computers will shrink to the size of a walnut, and no doubt enormous surveillance systems can be designed for uses which plaintiff lawyers, consumer complaints, the patent infringement industry, and reimbursement oversight can best describe. No doubt it would detect the practice of medicine without a license, failure to maintain continuing education credits, and probably a dozen other investigations of suspicions. Bur all of these intrusions will be frustrated until someone devises a way to induce physicians to use computers in their everyday practice. For transmitting laboratory reports quickly, that day has already dawned; physicians would be very grateful to see a system created which would notify them of matters needing instant attention no matter where the doctor happens to be, including the toilet. Even the disruptive effect on family life of being constantly on call can be tolerated if such an important service is created. But the dreams of the electronic record enthusiasts went far beyond that, in two principal ways.

The aspiration to be complete made the doctor into a clerk, cutting out the middleman who happened to be his secretary, nurse or assistant, and furthermore created an easy way to monitor whether he had fallen behind in supervision. And secondly, it created mountains of information which even in summary form, the doctor had no time to read . For doctors practicing in large group practices, addressing these two issues had been a growing necessity for quite a few years, and was now seized upon by such organizations as a way to cope with their largest source of inefficiency. Doctors in private practice usually organized their own systems to avoid such issues, but now a solution for group practices is forcing solo practitioners out of business, because of a perceived need to be universal. At the other extreme, solo country doctors once had no need for such archives, and certainly had no time to cope with such demands on his time. Reducing someone else's profession to a vast array of yes-no answers soon taught the lesson that the task was not likely to be generally satisfactory for another decade, so some reformers were unwise enough to suggest the medical profession should be redesigned top to bottom to accommodate the issue. Making suggestions like that in Alaska, Wyoming, Texas and other far-flung territories only leads to the election of physicians as congressmen in those districts, surely a worrisome thought for progressives. But in other areas, such resistance was seen as a sign that fee-for-service practice was a sign of wickedness. A more reasoned stance would be: Waiting a decade with such suggestions until the doctors in group practices can influence computer re-design, would leave time for the medical profession to adjust to many other urgent matters, first. (The next and final chapter address the direction we might consider, if we really are prepared to redesign the whole system).

http://www.philadelphia-reflections.com/blog/2450.htm


Annotated Table of Contents

CHAPTER ONE: Where Are We, And How Did We Get There?

--- Teddy Roosevelt started it, but politicians have shorter memories than historians. For practical purposes, Obamacare 2012 is an extension of the Clinton health proposal of 1991, with HMOs deleted, and computers added. It is useful to conjecture Bill Clinton's strategy, which would explain much of the present muddle. If Hillary runs, we could even see it tried for a third time.

2589 Clintoncare and Obamacare: Historical Foreword

1729 Picking Out the Raisins From the Pudding

2670 Welcome to Welfare

1714 Reforming Health Reform, New Jersey Style

2622 Children, Playing With Matches

2602 Text of AFFORDABLE CARE ACT, PL 111-148, March 23, 2010, Renamed HR 3590 http://www.gpo.gov/fdsys/pkg/BILLS-111hr3590enr/pdf/BILLS-111hr3590enr.pdf

2594 The Real Obamacare, Unveiled

2672 Text of Section 1501, renamed Section 5000A: MINIMUM COVERAGE

2639 Text of Section 1251 (H.R. 3590):PRESERVATION OF RIGHT

TO MAINTAIN EXISTING COVERAGE 2673 Proposal: Coordinate Sections 1501 and 1251

2676 Health Care and Education Reconciliation Act of 2010

CHAPTER TWO: The Supreme Court Has Its Say

--- The U.S. Supreme Court had nursed certain Constitutional issues since Franklin Roosevelt's court-packing days, but it was state Attorney Generals who propelled States' Rights into the central Constitutional issue of the first few days of Obamacare. Liberal academics have long flirted with remaking the whole Constitution, and President Obama once taught Constitutional Law. While extreme Liberals nurse Constitutional revision, most Liberal politicians would prefer to split Republican voters with a third party. It is too early to predict which party would suffer.

2624 State and Federal Powers: Historical Review 2250 Obamacare's Constitutionality

2289 Roberts the Second

2592 More Work for the U.S. Supreme Court: Revisit Maricopa

2625 What Can Supreme Court(s) Do About Tort Reform?

2613 ERISA Is Thrust Into the Battle

CHAPTER THREE: Sudden Fiasco Of Electronic Insurance

----At first, it seemed a minor programming problem had temporarily inconvenienced the Electronic Insurance Exchanges. The realization soon emerged that the whole program was sloppy and untested, requiring months of repair, if not abandonment of Obamacare. If direct marketing gets discredited, it would be a pity. The underlying idea was good, and achievable. But this implementation was a disaster.

1288 Money Bags

2603 Electronic Insurance Exchanges

2626 Streamline Health Insurance?

2604 Redesigning Electronic Insurance Exchanges

2611 Phasing In A Direct Premium Payment

2615 Creative Destruction for Health Insurance Companies

CHAPTER FOUR: Small, Quick Proposals to Extend Health Savings Accounts

----Here's our alternative proposal, first devised by John McClaughry and George Ross Fisher in 1980, enacted into Law in 19xx by Bill Archer, and now numbers more clients than Obamacare. It requires publicity more than legislation, but six small technical amendments could rapidly turn an experiment into a national program. It seems to save as much as 30% of premiums, without much disturbance of the healthcare delivery system.

2637 FIRST PROPOSAL, Amending HSAs To Include Tax Sheltering

2573 SECOND PROPOSAL:Spending Accounts into Savings Accounts

2611 THIRD : Phasing In Direct Premium Payments

2584 FOURTH : Investments Pay the Bill: Obstetrics Lengthens Duration, Deductible Reserve is the Kernel.

2607 FIFTH: Having Invested, How Do You Reimburse the Providers of Care?

2630 SIXTH: Indemnity and Service Benefits

2585 Foreword: Children Playing With Matches: Investigating and Debating the Healthcare System 09 2636 2606

CHAPTER FIVE: HSAs, Backwards and Forwards

----The above describes the HSA and how it might be more useful if tweaked a little. This next chapter is a much more grandiose version, expanding the simple idea into a proposal for lifetime health insurance and describing enormous unsuspected potential. Ninety-year projections are never accurate, and require many mid-course corrections. We propose a new institution to monitor and steer it, and attempt to describe what might be encountered. The power of compound interest could well pay for most of healthcare, but it is unnecessary to over-reach. Paying for a third of our costs would be accomplishment enough.

2590 Health Insurance Design.

2638 Pay As You Go

2587 Predictions of Future Healthcare Costs: Quis Custodiat Ipsos Custodes?

2628 Average Lifetime Medicare Balance Sheet

2627 Shifting Money Backward in Time: Managing the Transition

2593 Economics of Chronic Disease and Catastrophic Illness

2634 Comments on Diagnosis Related Groups (DRG)

2635 Admonitions: Using the Transition to Lifetime Health Insurance as an Inflation Restraint

2473 An Unending Capacity to Generate New Problems

1734 Healthcare Reform for Lobbyists

2485 Cost Shifting, Reconsidered

2571 Proposed: A Republican and/or Conservative Healthcare Solution

2610

CHAPTER SIX; Reforms More Basic Than Obamacare

----Obamacare is just coverage extension by subsidies. The biggest flaws in our payment system are fifty years old, and are the cause of most of the delivery system flaws.Meanwhile, Science is reducing disease costs by reducing disease, for all income brackets. By switching "medical" care into "health" care we keep authorizing new carpetbaggers to bill the insurance. Physicians received 20% of payments in 1980; now it is 7%, half of which is spent on overhead. Nevertheless, compound interest income could reduce costs greatly without changing healthcare. Lifetime insurance (above) could pay for about a third of future costs; direct cost efficiencies could probably save another third, leaving a third to be paid in cash. But don't make it entirely free, unless you want to make it entirely ruined.

2633 Stepping out of the Obamacare Frame

1730 What Obamacare Should Say But Doesn't

2616 The Coonskin Hat

2404 "They Don't Make That, Anymore"

2564 Last Cow in Philadelphia

2112 Paying for Assisted Living

1431 July 4, 1776: Patients in the Pennsylvania Hospital on Independence Day

1733 Obamacare And Its Repair, Executive Summary

2453 What's The Matter With a Conservative Answer?

http://www.philadelphia-reflections.com/blog/2588.htm


Spending Accounts into Savings Accounts for Retirement? Don't Count On It.

Flexible Spending Accounts

For many years, Health Spending Accounts (now called Flexible Spending Accounts) were confused with Health Savings Accounts. In the previous section, we have just proposed the $500 annual roll-over be made permanent. Naturally, that raises the question of whether a permanent rolled-over account could be made into a supplementary retirement account, but unfortunately the mathematics of that are not nearly so good. Let's consider the most favorable case. As stated, that would be a $500 annual contribution, starting at age 18, paying 10% income return. That would generate a retirement fund at age 65 worth $436,000. That sounds pretty attractive, until you start picking it apart.

In the first place, most people can't start work at age 18 and expect to be continuously employed until 65. There will be periods of unemployment for most people. In the second place, money invested in large-cap common stock will indeed return 10% over a long period of time, but there may well be gaps and periods of catch-up. And if you are not careful, you won't get 10%, even though your money is earning it. The experience with 401(k) accounts has been the financial industry will likely reduce your returns by roughly 2% with an internal assessment called 12b(1), allegedly a reimbursement for sales promotion, but really just 2% for themselves. So, you are down to 8% before you encounter $250 charges per transaction. Some brokers only charge $5.00 for a purchase, and some banks charge nothing to give you your own money back. Very likely, the $250 purchase charge will disappear before the $250 withdrawal fee does, because the withdrawal fee is harder to spot on the receipts. John Bogle recently remarked on television that the financial industry takes 85% of the returns on retail investments before it gives anything back to the consumer, which seems to include rather more than a 8.5% gross margin, so there's probably more fee here than I can account for, which is about half of that. To be conservative, let's say your original return of 10% has been reduced to 5%. So, the expected retirement fund for our hypothetical wage-earner is not $436,000, but $89,000.

Even that haircut is more than our hypothetical is likely to get. With Medicare as a backup, paying for healthcare has been protected during its most expensive period. Retirement, on the other hand, is usually more costly in a retiree's sixties than his eighties. So, while $89,000 might well cover health costs in old age, it will probably fall short of covering retirement. For instance, the average Medicare recipient costs Medicare $11,000 a year. How many retirees do you know who can live on $11,000 a year? We're going to have to leave it at that. By stretching and luck, by arm-wrestling the investment community and counting on continuous employment for forty years, we might scrape together a plan that would cover healthcare as we hope it will cost when we get there. But retirement? My warning is that I don't see how it can be managed, except for one strategy. People are going to have to work longer and retire later. To make ends meet on retirement, the emphasis must shift from demanding retirement as an entitlement -- to demanding our employers themselves get to work, providing more of the jobs old folks can perform, in spite of infirmities. We've got to build houses cheaper to repair, and cars cheaper to drive. We've got to live in houses with elevators, and wear clothes that moths won't eat. But squeezing it out of investment accounts? After we've wrung it dry, paying for healthcare, I doubt there will be much left.

http://www.philadelphia-reflections.com/blog/2573.htm


Congressional Hearing: Health Savings Accounts

Thank you for asking me to describe Health Savings Accounts. In five minutes, I will try to make four points.

HEALTH SAVINGS ACCOUNTS, OLD STYLE.

Thirty years ago, John McClaughry of Vermont and I devised the Health Savings Accounts you may be familiar with, and millions of people have tried them with satisfaction. It has been reported that they can reduce healthcare costs by as much as 30%.

They consist of two ways to pay for Healthcare. Essentially, one is an individual investment account, rather like an IRA, or Individual Retirement Account. The subscriber usually uses a special bank credit card, and receives an income tax deduction if the money is spent on healthcare. The account is individually owned, as an incentive to be frugal and shop wisely, because whatever money is left over he may keep in a regular IRA. He needs to deposit into the account, only such money as he requires for healthcare, depositing less if he has been frugal in the past. If he deposits more than he spends, he gets it back with interest. These healthcare expenditures are usually office or outpatient expenses, subject to shopping around as vigorously as he chooses.

The second form of payment comes from a high-deductible health insurance policy. This policy is ordinarily used for hospital inpatient expenses where the patient has very little ability to choose or to shop, and where payments are usually lump-sums derived from a system called DRG (Diagnosis Related Groups). This has proved to be an effective cost restraint.

Right now, if you don't have an old-style HSA, you probably can't get one. Recent regulations forbid new accounts for persons over the age of thirty, the accounts are only partly tax-deductible, and existing accounts end when Medicare begins. These are artificial, and I hope temporary, barriers which could be swept away in an afternoon of Congress.

HEALTH SAVINGS ACCOUNTS, NEW STYLE. (Lifetime Health Savings Accounts)

To these two original building blocks, I now propose to add two new ones. They both probably require legislation, and they may even need to be considered in separate committees of Congress..

One new feature to Health Savings Accounts is lifetime, or whole-life, policies substituted for present one-year term formats. Not only would that save marketing costs, and permit permanent funding. Obviously, lifetime policies must somehow be portable between states.Lifetime health savings accounts have the surprising ability on paper at least, to pay for most of healthcare costs by themselves. True, the McCarran Ferguson Act is in the way, and maybe even the Tenth Amendment. But major reductions of healthcare costs are too important to ignore, without first examining work-arounds.

The second is passive investing , a Wall Street term for eliminating churning and stock picking by using total-market index funds. This system promises to return 12% per year to the investor, but I quote John Bogle that the financial system extracts 85% of the return before the investor gets it, just as it does in many 401(k) plans. This battle of fees needs to be fought out, because in the case of healthcare, thirty extra years of longevity have greatly increased the return available for disorders of old age, which predominate. In thirty years at only 7%, money will have three doublings, or multiply eight times. You could lose half of it in a stock market crash, and still have 400% of what you started with.

http://www.philadelphia-reflections.com/blog/2743.htm


Examples

First Example, single payment of relatively small deductible. The smallest deductible in the Obamacare Insurance Exchanges is $1250. If a deposit in the HSA is made at age 26 to cover this contingency, but never used, it should rise to $10,000 if invested in U.S. Treasuries at 3.7% -- by age 85. That won't get you where you want to go, but it may be the least that can be afforded.

Second Example, single payment of $6300.The largest deductible in the Obamacare Exchanges is $6300. A single deposit of this size at age 26 will reach $10,000 at age 40. At that point, we can hope that 10% is generally available in the marketplace, and thus would reach $24,000 at age 65. An IRA of $24,000 will start paying pensions at the minimum distribution rate of $960 a year. In a sense, that's not a bad investment of $6300, but everything has to go smoothly (in health as well as finances) for 39 years to achieve it. The point of these first two examples is to demonstrate that HSA is probably not able to overcome current abnormally low short-term interest rates enough to be used solely as a place to park small deductible reserves. At $10,000, it becomes feasible, and when interest rates return to normal levels, it may again be feasible for small savers.

Third Example, single payment of $10,000 (deductible reserve of $6300, plus $3700 cash), at birth. This cash contribution at birth will not only match the $10,000 minimum demanded by brokers for unrestricted investment (i.e. for eligibility for 10% long-term investment return), with an added bonus of reducing premiums for paying a higher deductible. Now, this one is far less accessible, but it illustrates some important points.

At one time, a $25,000 deductible health insurance policy was available for an annual premium of $100; but while times have changed, it still remains true, the higher the deductible, the lower the premium may be. Secondly, the lower the premium, the more is left for investment. This deposit, if placed in an IRA at age 26 at a 10% income rate, would generate a fund of $411,000 at age 65, making possible an annual pension of $15,000. Quite a contrast! The third feature is that starting the compounded income at birth instead of 26, adds nearly four doublings to its investment horizon. The ultimate consequence would be a comfortable retirement fund of $60,000 a year. What's mainly standing in the road of this windfall, is all the current dissension about the place of the family in American life. If it is the parent's duty to supply healthcare for their children from the moment of conception, then the cost is an obligation, and should confer ownership of the benefits. If the child didn't ask to be born, his costs are his own and, while the parents may make a gift or a loan, the benefits are the child's. And if there is a divorce or illegitimacy, the support costs are probably the determining factor. Quite obviously, we are at quite a distance from a basis for settling this issue. If you throw in the costs of an abortion subtracted from the cost of being born, you go off on another tangent, one you probably never return from.

Should we treat Obstetrics and Pediatrics as a loan from parents to child?After all, the insurance location of Maternal/Childhood Coverage Could Add 26 Years of Compounding and solve several problems which are now beyond the scope of this book. It seems like a problem which could reserved for a later time, since lifetime coverage can be addressed without it, no matter if it would be simpler to include it. This is a book about healthcare finance, with every incentive to avoid thorny society problems. However, a collision occurs when we attempt to include the rather considerable costs of obstetrics and/or abortion, and the comparatively minor medical costs of children under the age of 26. The goal is not so much to protect against these costs, as to add 26 years of compounded investment income to the calculations, and the problem is that our society has not completely decided whose financial responsibility such costs belong to. Judges make expedient decisions in divorces and illegitimacy; but issues like this, for them to stick, must really be made by society in general. For purposes of long-term prediction, we will therefore assume that a child is responsible for his own birth and subsequent medical costs, and that someone else in the family is responsible for reimbursing the child. Treating costs as the infant's responsibility is something of a fiction, like pretending each child has a trust fund to pay everybody back at age 26; but it will have to serve.

At the moment, everybody does have some mechanism for paying Obstetrical costs, even while that mechanism is only to rely on charity. The costs have already been assigned to someone. For the most part, Obstetrics is now part of the parents' health insurance policy. It must be admitted that the true costs are not readily available, since the whole matter is tangled in internal cost-shifting by hospitals and insurance policies. However, they are determinable by someone, and eight thousand dollars seems adequate. Two hundred dollars a year seems right for average childhood costs from birth to age 26 but obviously, better data would improve the precision. We take a guess at $8200 for obstetrics and pediatrics combined, or $5200 for pediatrics alone. At 10% investment income, the fund would overtake the pediatrics in 26 years, and possibly allow the fund to break even on the Obstetrical costs over the 26 years. For awhile at least, policies like this should allow the managers to gain experience; if the investment pays the medical costs, then enough of the obstetrics will be double-paid by existing sources to make the whole experiment escape insolvency A pilot study of four or five years, in four or five states, might clarify the issues. After that, it should be possible to establish profitable levels for the package. Somewhere mixed up in this are the inordinately concentrated malpractice costs of obstetricians. We look longingly toward the Chief Justice and the Judicial Council to rationalize this wasteful situation, and then for the ensuing savings at 10% for 26 years to get most Health Savings Accounts off to a profitable level by age 26. This complicated sentence structure may seem a round-about way to streamline transaction costs for HSA brokers, but something like that will have to be done to reduce transaction costs, which are probably roughly equitable in the first and second examples. But nevertheless costs must be reduced, because the tremendous jump in gains in the third example are too attractive to be ignored. In summary, in this discussion we regard the initial high obstetrical costs and the low pediatric costs which follow, as a wash. We can come back later and tinker with details. But the important point at the moment is to stress that we can garner 26 years at 10% compounded investment income, by simply declaring them to be manageable break-even costs.

Fifth Example: Deductible Reserve, Generous Returns, for Twenty-Six Additional Years. All of this begins to merge with the idea of lifetime health insurance, which is the subject of the next Chapter. So we need to add at least one new idea, which is whole-life health insurance. We end this term-insurance line of thought with the stockbroker's hard-nosed assessment that he can't make a profit with this idea, unless he starts with a $10,000 nest egg, or else charges hidden fees. The first $6300 gets provided by Obamacare's discovery they can't make health insurance work without a $6300 deductible. Matching that is my own assertion that no one should risk using $6300 deductibles, unless he can see some source for the money, whether it is a government subsidy or his own personal savings, of enough ready cash to cover one year's deductible. Even so, we have to find another $3700 to get to the safe harbor of ten percent. If such a thing as $10,000 deductible became available, it would close this gap without borrowing, because higher deductibles make lower premiums possible, and eventually you break even. But right now, the individual has to borrow $3700 to make this work. Because the new father and mother are young, they are going to have to pay a higher interest rate, and we might as well assume a loan-rate of 10%. But it's 10% on $3700 of it, which makes the whole fund eligible for 10% return. In round numbers, that's $1000 minus $370, or a net gain of $630 a year; reducing the loan balance to $3100 the second year, $2500 the next, etc., You would have to be working with real Obstetrical costs to know how much it would cost, but this is the general idea behind calling the initial cost a wash.. Now, where does that leave us, with essentially $10,000 to prime the pump, and starting with a growing income of $1000?

Well, it leaves us with $80,000 at age 26, and literally millions at age 65. The numbers are so generous we see no need for precision. We can now see a clear path from a cash contribution you must make, to quite enough money to pay all average lifetime medical costs by the age of 65. All medical costs, so no 6% payroll deduction, no premiums, become a possibility. And with enough extra cash emerging from the calculation to make it unnecessary to use a calculator to be reassuring. Only by getting another 26 years of income does it become possible, but it does make it unnecessary to have quite so many assets when you start being a capitalist at birth.

As a footnote, we find it unnecessary to tell bankers how to smooth out repayment of $10,000 from people who are pretty much guaranteed to have millions before they die; it's what bankers do for a living and they are good at it. But there is one other risk inherent in this discussion: the risk that any particular individual could get very sick several times. In some circles the solution to that contingency would be called "re-insurance", and in other circles it implies "subsidy". But, otherwise, this system has only one remaining difficulty. It would take 80 years to prove itself. That might seem like a great handicap, until it gets compared with the risk of taking on too many complex tasks, too rapidly. One of the great advantages of taking this approach is that its several steps force major readjustments to be gradual.

http://www.philadelphia-reflections.com/blog/2756.htm


Blue Sky Flying for Congress: What to Do With Money Which Health Savings Accounts Drop in Your Lap

Let's be clear about our role. It is to suggest four or five main ways to rearrange health financing, so enormous sums are available to reduce health costs. Once the money is available, only Congress can decide what to do with it. In fact, my prediction is anything else would be brushed aside as an amateur suggestion. Nevertheless, I have given the matter some thought, and offer my ideas. They begin with leaving the practice of medicine alone, on the grounds that the public will not support any major intrusion into what they consider their private affairs. And my suggestions end with the opinion a change such as I propose can only be done once in a century. So please get it right if you do it.

Starting Young, and Playing With Numbers. The power of compounding is brought out by starting really young, possibly even at birth with a gift from parents. At 10%, money doubles in seven years; at 7%, it doubles in ten. In 65 years there are eight doublings at 10%, six doublings at 7%. The real power of compounding comes at the end of the series. The last three doublings were added in the past century. It makes them eight times as valuable to us as to our grandparents. So, something slow, gradual and unnoticed, creeps up on us before opening an entirely new set of possibilities.

{top quote}
Eight times as valuable to us as to our grandparents. {bottom quote}
Three doublings added.

We divide the roughly 85 years of life into three compartments: (1) Children from birth to age 25, whose health expenses are a debt they owe their parents. (2) Working people, from age 25 to 65, who essentially generate all the wealth of society. (3) And over 65, when working income ceases, and living costs are paid from savings generated earlier in life. There are forty years to earn, preceded by 25 years of being supported, and followed by 20 years of living on savings. That's why so much of this book pivots around ages 25, 65, and 85. If you learn it from your parents, you get a head start. If you must learn it for yourself, mostly it's all gone before you react.

{top quote}
Learn from your elders, get a Head Start. {bottom quote}
If You Learn for Yourself, mostly it's gone.

Working backwards from $80,000 at age 65, you need to start with only $200 at birth with 10% working for you, or $1,000 at birth with 7%. What's the significance? If you make a lump-sum payment of $80,000 on your 65th birthday, the lump sum generates what we now assume is the lifetime average cost of Medicare. Translating $200 at birth into $80,000 in 65 years is definitely possible. Figuring out how to translate the money earned into what the average person will spend 65 years later, is too complicated to be precise, but we have learned you always underestimate the change in such a long period. We always underestimate the change, but the cost of it cannot exceed the money we will have. Paradoxically, that may be a little easier. Remember, the stock market averaged 12.7% during the past century, but here we only project 10% return to an investor, therefore few would dispute results of this financial magnitude are a reasonable goal. I'm not entirely sure what we are predicting, but perhaps it is an invisible limit to the rate of inflation a viable economy can withstand. No gold or silver standard, but perhaps a velocity of money standard. Maintaining a future goal of 3% inflation during the next century, for example, seems entirely within the power of one person, the Chairman of the Federal Reserve. He may fail, and the world economy flies apart, but if it holds together, something like this velocity will have to continue, even if we all are commuting to Jupiter for lunch. The final conclusion would be unchanged: a comparatively minor investment at birth could be fairly comfortably projected to pay for average Medicare costs, half a century from now. You might even get all of Medicare for a single $200 payment; now that's really a bargain. Even $1100 (at 7%) is still a trivial price for a retirement with unlimited health care. But remember, we are not promising to pay for it all, just some big chunk that presently isn't paid for. During major inflations such as Germany, Russia and China had, the individual nation disintegrates but eventually catches back up with the rest of the world. Our whole financial system seems to have been stabilized by some such notion for the past four or five centuries.

The Debts of Our Parents. We started by showing it would likely be feasible to assemble $80,000 by the 65th birthday, and that much money on average, would likely pay for Medicare because the relative values will not change unrecognizeably in thirty years. Remember, Medicare is spending $11,000 a year on the average Medicare recipient, for roughly 20 years, or roughly $200,000 during a 20-year lifetime after 65. If you start with a nest egg, sickness will slowly wear it down. At the same time, you do make a certain return on your nest egg. The goal is to build the egg up when you are working, so you have something to spare between the interest you make on your nest egg, and the annual cost of the illness. Eventually, the sicknesses win the race, but your task was to stretch things out as long as you can. Eventually, a few people will have to resort to dipping into the last-year-of-life fund (see below), and if things go badly wrong maybe we can only pay fifty cents on the dollar. There is this contingency provision, but it will not be infinite.

Let's examine the concern, which isn't entirely fanciful. Since earning power starts to disappear around age 65, there will inevitably be some people who throw themselves on the mercy of Society with no hope of paying their substantial medical costs. My suggestion is we anticipate this contingency by initially excluding payment for healthcare in the last year of life, which as I have said many times, comes to everyone. Because nearly everyone who dies, is on Medicare, we have pretty good data about the cost of the last year of life. Setting aside the funds to pay for it would allow us to add the cost to our estate or insurance. For those who have somehow escaped pre-payment however, this remains the last final debt, and a fairly substantial one. Segregating this debt as the last unpaid one, allows for the people who fall through the cracks, to fall through this one, last. Whether we make this deficit into an unfunded debt of society, or a pre-funded responsibility of a benign society's natural obligations to its citizens, or a debt of society to its medical institutions -- makes only a rhetorical difference. The problem has been concentrated in a single focus, where it can be dealt with as generously (or as tight-fistedly), as we choose to appear in the eyes of the world. As envisioned, all other debts are paid before this one, so to some people it will seem like a contribution to the Community Chest, while others will treat it like highway robbery by welshers and ne'er do wells. But at least we have provided for what we all acknowledge is inevitable.

We estimate compounding will add more revenue, roughly matching the costs of robust stragglers who live from 85 to 91. That is, the growing costs of the elderly are like a longer neck on a giraffe -- rather than a bigger belly on a hippopotamus. Average costs actually go down a little after 85. We assume a fair number of them will be healthy during most of the extra longevity, with heavy terminal care costs merely shifted to 91 instead of 85. We started at age 65, with 65 years of health costs already paid; we paid down the estimated costs of twenty years, and the interest on the remainder pays five more. We get there with money left over, we haven't diverted the premiums from Medicare, and we still have to pay for that last year of life . Except we let Medicare calculate the average cost from the people who decline this gamble, and the fund reimburses the hospital or whatever, for average terminal care costs -- during what is only then recognized to have been the last year of life. If the money from fund surplus isn't enough, the agency can look at raiding the Medicare payroll deduction pool. And there can always be recourse to liberalizing or restricting enrollments, to age groups which experience shows will either enhance or restrict the growth of the fund, as predictions come closer to actual costs. And finally, the last recourse is to have the patient pay for some of his own costs, himself, by re-instituting Medicare premiums. Those who feel, paying for all of healthcare with investment income was always a pipe-dream, will feel vindicated. But all this book ever claimed was it would reduce these costs by an unknowable amount, which is nevertheless a worthwhile amount.

Whoops, Medicare is Subsidized. A major explanation for the astounding bargain in Medicare funding can be traced to a 50% subsidy of Medicare by the Federal government, which is then borrowed from foreigners with no serious provision for ever paying it back. Medicare is :
about half paid for by recipients,
about a quarter paid for by payroll deductions from younger working people, and
about a quarter paid for by premium payments from Medicare beneficiaries, collected by reducing their Social Security checks.

A quarter paid in advance, a quarter paid at the time of service, and half of it a subsidy from the taxpayers at large. No wonder Medicare is popular; everybody likes to get a dollar for fifty cents. But the Chinese might be astonished to hear Medicare described as self-funded, sort of ignoring the repayment of their loan.

{top quote}
America's Big Benevolent Gamble. {bottom quote}
Billions for Research
So I'm sorry but if you want to pay your bills, it might cost more than $80,000 on your 65th birthday, based on the assumption that you do want to notice the nation's huge debts run up by your ancestors. And to go further, it will take at least $200 a year, starting on the average person's 25th birthday, even making what some people would say was an optimistic estimate of 10% return. So you might as well call it $500, just to be safe from other rounding errors, and to allow enough time for hesitation lag about doing such a radical thing. No one says you have to do it my way, but this is how you reach a rough approximation of what it will cost, to do what I think has to be done, include paying off our debts.

That's indeed how much it will cost if you do it all by raising revenue. You can also do some of it by cutting costs, where fortunately we are well along on a unique American way to do things. No one else has the money to do it our way, so everyone else tries to cut costs by turning out the light bulbs. But without saying a word, notice how we have united in what the rest of the world thinks is madness.

{top quote}
Americans Unite, Others Think It's Madness. {bottom quote}
Eliminate Costs by Eliminating Disease
Starting about fifty years ago, we began pouring outlandish amounts of money into medical research. In fifty years, we extended life expectancy thirty years, through eliminating dozens of diseases, along with the cost of caring for them. Just think of the money saved in treating tuberculosis alone, tearing down those TB hospitals seen in every city during my student days. Infectious diseases, particularly typhoid and syphilis, consumed the time of a medical student, and much of the budget of every municipality. One of my professors said we had two challenges left: cancer and arteriosclerosis. He was an optimist, because we still have cancer. And the three main mental disorders, schizophrenia, Alzheimers and manic-depressive disorder. But add five more to that list, and cure them in twenty years. After that, our main problem would no longer be dying too soon. It would be, outliving our incomes. Financially, these are features of the same thing, except one pays for Social Security and the other pays for Medicare.

Consider a moment, how difficult it is to say how much medical care will cost. Remember, a dollar in 1913 is now called a penny, and today's dollar is very likely to be called only a penny in 2114. We long ago went off the gold standard, and money is only a computer notation. Looking back, it is remarkable how smoothly we glided along, deliberately inflating the currency 3% a year, and listening to assurances this was the optimum way to handle monetary aggregates. Even more remarkable still, is to hear the Chairman of the Federal Reserve ruminating we don't have enough inflation. It took a thousand years to get used to metal coins, several centuries to get used to paper money, and almost a century to get used to being off the gold standard. The political task of convincing the whole world that inflation is a good thing, sounds very close to starting a world-wide civil war.

But we now have more than a million people over the age of 100. They got cough drops as a baby for a penny, and now hardly blink when a bottle of cough medicine costs several dollars. But instead of that, they are likely to get an antibiotic which was not even invented in 1913, retail cost perhaps forty dollars when it was invented, and now can be bought for less than a dollar. If they got pneumonia in 1935, they probably died of it, no matter how much was spent for the 1935 medicine, so how do you figure that? Or someone who got tuberculosis and spent five years in a sanatorium, who today would be given fifty dollars worth of antibiotics. The problems a statistician is faced with are impossibly daunting.

The current practice, which reaches the calculation of $325,000 for lifetime medical costs, is to take today's health costs and today's health predictions, and adjust the average health care experience for it, both backwards and forwards. Every step of this process can be defended in detail. But the fact is, average lifetime health cost of someone born today is only the wildest of guesses, no matter what kind of insurance is in force, or who happens to be President of the United States. The cost of drugs and equipment go through a cycle of high at first, then cheaper, then they vanish as useless. But adjusting the overall cost of materials and services when only a faint guess can be made about healthcare and disease content, can be utterly hopeless, or it can be quite precise. Unfortunately, even its probable degree of future precision is a wild guess. It's a wonderful century to be living in, unless you are a healthcare analyst. The only safe way to make a prediction is to make a guess that is too high, and count on public gratitude that it actually wasn't much higher than you predicted. But to guarantee a particular average outcome, which an insurance actuary is asked to do, will be impossible for quite a few decades.

So, here is a plan for paying for healthcare, which is nothing if not flexible. If we start running out of money too early, we just don't pay our foreign debt, that's all. Doing it overtly is probably to propose a change in our entire culture, so it would be done by inflation, a dime on a dollar.

If that isn't enough, we inflate some more until we can stop running up foreign debt.

If that isn't enough, we cut costs, inflate some more, and reduce the quality of health care.

And if that isn't adequate, we put a stop to funding biological research, by letting foreigners try their luck at it. Americans would be particularly loathe to do that, because it represents a confession we were wrong about about our boast to put an end to disease.

This four-step process is absolutely mind-boggling to me, absolutely unspeakable, although the Chairman of the Federal Reserve is able to hint around about it. To me, it is so repellant that absolutely no circumstances would allow me to endorse it, and my hope is that just the mention of it will be enough to stir up the newspapers and the Congress. Stir them up, that is, to take some of the harsher measures which are necessary to withstand such suggestions. Meanwhile, we have the satisfaction of generating some compound income on the premiums, which will make the direst eventuality, to be not quite as bad as otherwise.

To keep track of how we are doing, the alternative I propose is to create a semi-permanent agency with adequate resources to oversee the transition, and release honest white papers about how it is going, judge how it must be modified. After that, no doubt, a blue-ribbon oversight board must be appointed with power to suggest to Congress what needs to be modified. The blue-ribbon approach is to designate a couple dozen private institutions to send one representative, and to rotate the appointees among a smaller board than the number of institutions which nominate one. Let's say, twenty positions among thirty institutions, rotating on a three-year cycle, to minimize overlap with Congressional elections. No doubt, that would produce an annual flood of half a dozen books a year by board members, agitating a process which is ultimately decided by elected Congressional representatives.

http://www.philadelphia-reflections.com/blog/2741.htm


How Do You Withdraw Money From Lifetime Health Insurance?

Four ways should be mentioned: Debit cards for outpatient care, Diagnosis pre-payment for hospital care, Transfers from escrow, and Gifts for specified purposes. The comments which follow apply to regular, old, single-year HSAs. The multi-year variety has more similarity to insurance than to retail banking, and probably would favor the "cash balance" approach used to withdraw money from whole-life insurance. In the long run, that would probably lead to lower costs, but actual retail experience does produce a different culture.

Special Debit Cards, from the Health Savings Account, for Outpatient care and Insurance Deductibles. Bank debit cards are cheaper than Credit cards, because unpaid credit card payments are a loan, whereas the money is already in the bank for a debit card. It could be argued credit cards are a little safer than debit cards, because "possession is nine points of the law". Sometimes pressure has to be applied to banks or they won't accept debit cards with small balances. Somehow, the banks must be made to see that you start with a small account and only later build up to a big one. So it's probably fair, for them to insist on some proof you will remain with them. The easiest way to handle this issue is to make the first deposit of $3300, the maximum you are allowed to deposit in one year. Even better would be a family account with a $6000 deductible, which probably gets to the $10,000 threshold in less than two years. That's difficult for little children and poor people, however, so some way ought to be devised to have family accounts for children. At the moment, you just have to shop around, that's all. Unfortunately, the tendency of banks to merge into bigger entities headquartered in another city, leads to powerlessness at the local level.

After negotiating that hurdle, you should pay your medical outpatient bills with the debit card, although we advise paying out of some other account when you can, so the balance can more quickly build up to a level where the bank allows more latitude. Remember this: the only practical difference between a Health Savings Account and an ordinary IRA, is that medical expenses are tax-exempted, when paid with money proven to come from an HSA. Both debit and credit cards are tax-sheltered for deposits, and both (in normal economic times) internally generate income, un-taxed. If you can scrape together $6000, you are completely covered from Obamacare deductibles, and since co-payment plans are to be avoided, an HSA with Catastrophic Bronze plan is your present best bet. If you have a bronze plan, you probably get some money back if you file a claim form, but those rules are still in flux at this writing. The expense of filing and collecting claims forms is one of the reasons the Bronze plan is more expensive, but that's their rule. The bronze plan is thus easier to get, but harder and more expensive to use, and carries a political risk of changing rules with political motives. Another curiosity is that big banks tend to be more customer-friendly than small ones, although that may well be temporary. The tendency of traditional HSAs would be to act like banks: checking accounts with reinsurance in the background for emergencies. The multi-year approach would probably behave like insurance with occasional withdrawal privileges, very likely treating cash withdrawals as a nuisance which increases costs. Their experience is with "cash balances" which are somewhat smaller than true balances, and a preference for big-ticket hospital payments.

There are some other important things to say about outpatient vs. inpatient care, but first it seems best to describe how inpatient care is envisioned to work in this system, before returning to the tension between one-year and multi-year approaches. Increasing ease of use might create the problem of making it a little too easy to spend money foolishly.

Payment by Diagnosis Bundles, for Inpatient care. In 1983 a law was included as a largely unnoticed section of the annual Budget Reconciliation Act, which nevertheless later proved to have a huge effect on the hospital financing arrangement. The proposal was to stop paying for Medicare inpatients on the basis of a bill for itemized services, but rather to pay lump sum based on each patient's elaborated diagnosis. The argument was accepted that most cases of a given diagnosis were pretty much the same, so small variations soon average out. Such a casual approach to complexity was justified by arguing any patient sick enough to be in a hospital bed, was too overwhelmed by his frightening situation to dispute what was done to him. Market mechanisms, in short, were futile is situations with such imbalances of power. Consequently, why waste money on accounting systems to arrive at prices which were actually arbitrary.

This overly simple argument prevailed in a Congress desperate about relentless cost increases. Misgivings that the hospital accounting system was a large part of its administrative information system, were brushed aside. To the extent such objections were valid, they could be addressed later. In retrospect, it can be seen the administrative and medical parts of a hospital act largely independently of each other, communicating through prices as a sort of abbreviated language. The administrative mission of bottom-line efficiency thus became even more insulated from those who saw patient satisfaction as far more important. In fact, the unresisted expedient emerged, for prices of the DRG ( diagnosis "related" groupings) to migrate toward a 2% profit margin on the bottom line, no matter how delicate the medical issues happened to be. You might suppose anyone could see a 2% profit margin was unsustainable during a 2% inflation, but normal hospital behavior is to seek uncomplaining work-arounds.

The hospitals might have rebelled, or might have collapsed. Instead, they just accepted 2% for inpatients as additional administrative nonsense, and set about adjusting the cost-accounting to aim for 15% profit margin on the Emergency Room, and 30% profit on outpatient services. Cost shifting of established cost accounting was difficult to achieve at first, so Emergency rooms were enlarged, and much expanded outpatient facilities were built, requiring hospitals to purchase physician practices to keep them filled. The entire healthcare system was put under strain, and hardball became the game of the day. New lifesaving drugs were priced at $1000 per pill, less expensive institutions were merged out of existence, the office practice of medicine was in turmoil, and a year in business school could make someone a millionaire if he could appear calm in the midst of such confusion.

I tell this story to explain why, with great reluctance, I advise the managements of Health Savings Accounts to base their inpatient payment system on some variation of Diagnosis Related Groups. It's a terrible system, designed for other purposes and adopted for hospital billing by Congressmen. It does protect the paying agency from being fleeced, once it gets past negotiated rebalancing of a reduced list of prices, aggregating toward a politically dictated bottom line. It chases everyone else out of attempting to understand it, with the consequence that a handful of people have brought hospitals dangerously close to quick destruction by a sudden change in the rules. Whatever it may call itself, it is a rationing system. And rationing invariably leads to shortages.

Resolving Tension Between The Two Payment Systems. Evidently, some shrewd thinking by some smart people has brought them to the ruthless conclusion that a two-class system of medical care is preferable to the way we were otherwise going. Rich people will have their way if their own health is at stake, and poor people will have their way if they exercise their votes. Both of these conclusions were correct, but they lead to Medieval monks retreating into monasteries. The cure of cancer and a few brain diseases might make monasteries unnecessary, and so would a drastic reduction in health care costs. Huge research budgets and major regimentation are big-government approaches, of willingness to accept some loss of freedom to achieve equality of outcome.

But we can't completely depend on either choice, so the remaining choice is to undermine a lot of recent culture change, by devolving back to leadership on the local level of small states and big cities. This is a small-government approach, willing to accept wider inequalities in order to find the freedom to act. Mostly using the licensing power, competition will reappear if retirement villages and nursing homes are licensed to be hospitals. If not, nurses and pharmacists can be licensed as doctors. Some of this could become pretty brutal, and all of it leads to patchy results. But of its ability to restrain prices temporarily, there can be little doubt.

Escrow Subaccounts within HSA Accounts. Whether anything can restrain reckless spending of "found" money, is quite a different matter, however. It may be that supply and demand will balance, even if it takes generations. There is some satisfaction to be gained from watching reckless teenagers become penny-pinching millenials, but dismal reminders of improvidence will also be found in ninety year-old millionaires marrying teen-aged blondes, further reinforced by watching the blondes run off with stable-boys. The net conclusion is that if certain portions of a Health Savings Account must be set aside for mandatory later expenses, then the money should be set aside within partitions, as an escrow account. Even that will have limits to its effectiveness, as I have noticed when trust-fund babies in my practice worked around the restraints their grandfather's lawyer took care to put in place.

Specified Gifts to be Encouraged. Only limited restraints on spending the client's own money can ever be justified, but certain types of gifts can still be better justified than others. One of them would be the special $6000 escrow fund for deductibles and caps on out-of-pocket spending. Particularly in the early transitional years, the fund's solvency may be threatened by leads and lags, where these escrow funds could save the day. Therefore, if someone accumulates large surpluses in his account by the fortuitous conjunction of events, he should be encouraged to consider donating a $6000 escrow to one of his grandchildren or other impecunious relatives. Quite often, a prudent gift to a grandchild can lighten the burdens of his parents or other members of the family. If they wish, any number of $6000 transfers to the escrow funds of others should be encouraged.

Spending Health Savings Accounts. Spending Less. In earlier sections of this book, we have proposed everyone have an HSA, whether existing health insurance is continued or not. It's a way to have tax-exempt savings, and a particularly good vehicle for extending the Henry Kaiser tax exemption to everyone, -- if only Congress would permit spending for health insurance premiums out of the Accounts. To spend money out of an account we advise a cleaned-up DRG payment for hospital inpatients, and a simple plastic debit card for everything else. Credit cards cost twice as much as debit cards, and only banks can issue credit cards. Actual experience has shown that HSA cost 30% less than payment through conventional health insurance, primarily because they do not include "service benefits" and restore the patient to a position of negotiating individual item prices, or be fleeced if he doesn't. Not everybody enjoys haggling over prices, but 30% is just too much of a penalty to ignore.

No Medicare, no Medicare Premiums. We assume no one wants to pay medical expenses twice, and will therefore want to drop Medicare if investment income is captured in lifetime Health Savings Accounts. Such a change of attitude might take twenty or more years, however. The major sources of revenue for Medicare at the present time fall into three categories: half are drawn from general tax revenues, a quarter come from a 6% payroll deduction among working-age people, and another quarter are premiums from retirees on Medicare. All three payments should disappear in time, but the 50% subsidy may actually block it. Therefore, the benefit available for dropping Medicare would differ in type and amount, related to the age of the individual. Eliminating the payroll deduction for a working age person would still find him paying income taxes in part for the costs of the poor, as it would for retirees with sufficient income.

Retirees might pay no further Medicare premiums. Illnesses of the elderly make up 85% of Medicare cost, but at present only contribute a quarter of Medicare revenue. They first contribute payroll taxes without receiving benefits, and then later in life pay premiums while they get benefits, to a total contribution of 50% toward their own costs. But the prosperous ones still contribute to the sick poor through graduated income taxes. There might be some quirks of unfairness in this approach, but its rough outline can be seen from the size of aggregate contributions. At any one time during a transition, working-age and retirees would both benefit from about the same reduction of money, but the original working age people would eventually skip payments for twice as long. Invisibly, the government subsidy of 50% of Medicare costs would also disappear as beneficiaries dropped out, so the government gets its share of a windfall, in proportion to its former contributions to it. One would hope they would pay down the foreign debt with the windfall, but it is their choice. This whole system -- of one quarter, one quarter, and half -- roughly approximates the present sources of Medicare funding, and can be adjusted if inequity is discovered. For example, people over 85 might well cost more than they contribute. For the Medicare recipients as a group, however, it seems like an equitable exchange. This brings up the subject of intra- and extra-group borrowing.

Escrow and Non-escrow. When the books balance for a whole age group, the managers of a common fund shift things around without difficulty. However, the HSA concept is that each account is individually owned, so either a part of it is shifted to a common fund, or else frozen in the individual account (escrowed) until needed. It is unnecessary to go into detail about the various alternatives available, except to say that some funds must be escrowed for long-term use and other funds are available in the current year. Quite often it will be found that cash is flowing in for deposits, sufficient to take care of most of this need for shifting, but without experience in the funds flow, it would be wise to have a contingency fund. For example, the over-85 group will need to keep most of its funds liquid for current expenses, while the group 65-75 might need to keep a larger amount frozen in their accounts for the use of the over-85s. In the early transition days, this sort of thing might be frequent.

The Poor. Since Obamacare, Medicaid and every other proposal for the poor involves subsidy, so does this one. But the investment account increasingly pays a larger share, so the cost of the subsidy is considerably reduced. HSA seemingly makes it somewhat cheaper to pay for the poor.

Why Should I Do It? Because it will save large amounts of money for both individuals and the government, without affecting or rationing health care at all. To the retiree in particular, who gets the same care but stops paying premiums for it. In a sense, gradual adoption of this idea actually welcomes initial reluctance by many people hanging back, to see how the first-adopters make out. Medicare is well-run, and therefore most people do not realize how much it is subsidized; even so, everyone likes a dollar for fifty cents, so there will be overt public resistance. When this confusion is overcome, there will still be suspicion that government will somehow absorb most of the profit, so government must be careful of its image, particularly at first. Much depends on allowing individuals to drop Medicare if they wish, rather than eliminating the choice, or even poisoning it with benefits reduction. Medicare now serves two distinct functions: to pay the bills, and to protect the consumer from overcharging by providers. Providers must also exercise prudent restraint. To address this question is not entirely hypothetical, in view of the merciless application of hospital cost-shifting between inpatients and outpatients, occasioned in turn by DRG underpayment by diagnosis, for inpatients. A citizens watchdog commission is also prudent. The owners of Health Savings Accounts might be given a certain amount of power to elect representatives and negotiate as a group what seem to be excessive charges.

We answer this particular problem in somewhat more detail by proposing a complete substitution of the ICDA coding system by SNODO coding, within greatly revised Diagnosis Related Groupings,(if that is understandable, so far) followed by linkage of the helpless inpatient's diagnosis code, to the same or similar ones for market-exposed outpatients.(Whew!) All of which is to say that DRG has been a very effective rationing tool, but it must not persist unless it becomes generally proportional to market prices. We have had entirely enough talk of ten-dollar aspirin tablets and $900 toilet seats; we need to understand how such prices are arrived at. In the long run, however, medical providers are highly influenced by peer pressure, so again, mechanisms to achieve price transparency are what to insist on. These ideas are expanded in other sections of the book. An underlying theme is that market mechanisms will work best if something like the Professional Standards Review Organization (PSRO) is revived by self-interest among providers. Self-governance by peers should be both its theme and its reality, ultimately enforced by fear of a revival of recent government adventures into price control. Those who resist joining, must be free to take their chances on prices. Under such circumstances, it would be best to have multiple competing PSROs, for those dissatisfied with one, to transfer their allegiance to another. And an appeal system, to appeal against local feuds through recourse to distant judges.

Deliberate Overfunding. Many temporary problems could be imagined, immediately simplified by collecting more money than is needed. Allowing the managers some slack eliminates the need for special insurance for epidemics, special insurance for floods and natural disasters, and the like. Listing all the potential problems would scare the wits out of everybody, but many potential problems will never arise, except the need to dispose of the extra funds. For that reason, it is important to have a legitimate alternative use for excess funds as an inducement to permit them. That might be payments for custodial care, or just plain living expenses for retirement. But it must not be a surprise, or it will be wasted. Since we are about to discuss doing essentially the same thing for everybody under 65, too, any surplus from those other programs can be used to fund deficits in Medicare. But Medicare is the end of the line, so its surpluses at death have accumulated over a lifetime, not just during the retiree health program.

That outline may not be more accurate, but it displays its assumptions better. Michigan Blue Cross has calculated we calculate lifetime costs and Obamacare costs by starting with lifetime average health costs of $325,000 and subtracting Medicare. Although Medicare is reported by CMS to have average costs of $11,000 a year, for which we prefer to assume a Health Savings Account "present value" cost of $80,000 on the 65th birthday (at a 6.5% interest rate). At the same 6.5% rate, a $3300 annual deposit from age 25 to 65 (the earning years) would total $132,000 of deposits. The striking fact is, however, that Medicare alone could be pre-paid by an escrow of $150 to $350 a year, from age 26 to 65, providing it can generate 8% compounded investment income. The entire staggering cost of Medicare would hardly add any expense, within a lifecare financing system. Preliminary goals for a hypothetical average person are: To accumulate $57, 000 in the Medicare escrow fund by the age of 65, to pay off the 25-year health costs of 2.0 children per couple as a gift to them, and to pay his own relatively modest average healthcare costs from 25-45, somewhat higher costs 45-65. The Medicare goal of $57,000 is what is estimated to be what is required for a single-deposit investment fund (paid on the 65th birthday) to pay the health costs for an average person aged 65-93,(a guessed-at future average longevity), with an estimated compound investment income continuing at 8%, also guessed. Inflation is ignored, assuming revenue and expenses will inflate at the same rate. Our average consumer will have to set aside $150-350 per year from age 25 to 65, and earn 8% compounded, to do it. Different contributions at different interest rates will produce different results. We defend 8% in a later chapter.

Those who disagree with the underlying assumptions should feel free to substitute their own assumptions. The interest rate of 8% is deliberately high, in order to make room for disagreements which are higher. The upper limit of lifetime insurance ($132,000) is set to match the HSA contribution limits of 3300 times 40, becoming hypothetically the upper bound of revenue which can ever be anticipated, and from which $150-350 is escrowed for Medicare replacement. Anticipating two children per couple and full employment from 25 to 65, this revenue effectively covers one full lifetime, from cradle to grave. Childhood illnesses and elderly disabilities notwithstanding, this is all the revenue we allow ourselves in this particular example. Quite frankly, $3000 per year for age 26-65 is the weakest part of the estimation, because it is most dependent on the general state of the economy, the amount of indigent immigrations we permit, and the competition of other worthy goals for the same resources.

Let us assume that an average person can start contributing to an H.S.A. at the age of 25, even though perhaps a quarter of the population at that age are burdened with college debts, etc. and cannot. We are well aware of the Pew Foundation poll that many of those under 30 are still living with their parents, and many others have college debts. The present ceiling of $3300 annual contribution is otherwise taken as the upper boundary of what is possible for the sake of example, and theoretical deficits have to be made up from whatever surplus is created by such maximums. To plunge ahead with the example, our average person sets aside $3300, starting at age 25 toward lifetime health costs. To simplify the example, he does so whether he can afford it or not, and what he can't supply himself is provided by a subsidy or a loan. Since present law prohibits spending from the H.S.A. for health insurance premiums (this should be reconsidered by Congress, by the way), an estimated premium of $300 for his own Catastrophic insurance is taken from the set-aside, and the remainder is placed in the H.S.A., paying an estimated 8% tax-free. Within this he eventually needs to set aside a Dependent Escrow premium (remember, this example covers lifetime expenses, even though everyone has Medicare), which for twenty years (until age 45) is zero for Medicare and available for medical gifts to children. After that, it is exclusively used for Medicare, as explained in later sections.

Health Savings Accounts are tax-exempt, and they can earn tax-free investment income. Except it isn't all it could be. Professor Ibbotson of Yale, the acknowledged expert in the long term results of investment classes, has regularly published data going back nearly a century. In spite of military and economic disasters of the worst sort, investment classes have remained remarkably steady throughout the past century, and presumably will maintain the same relationships for some time to come. John Bogle of Philadelphia has translated that into index funds of investment classes, with negligible administrative costs. (Caution: Many index funds are sold with very high trading costs, typically in hidden charges when money is withdrawn. Be careful of your counterparty, particularly if he specifies the index fund, because he may limit it to one who gives kickbacks to him.) With this warning, there is a reasonably good chance of getting gross returns approaching 10% for investments in index funds of well-known American stocks, even though the typical HSA at present is yielding less. This investment income can grow to the point where it constitutes a fairly large part of the health revenue.

PIECES OF THE LIFETIME PIE

Instead of starting at birth and ending at death, this book reverses the process for finance reasons. For social and political purposes however, that may not be where further expanding the program can make the most difference. Let me explain. During the first two years of life it seems likely excellent care would do the most enduring good. The same can be said of the last two years of life because they contain the highest proportion of mortal illness. But after the first two years, there are many decades before healthcare makes the same difference. The same is true of terminal care in reverse; it's preceded by decades of golf, bridge and television. If we must concentrate expenditures, these four, bookend, years of a lifetime are where to do it most effectively.

There is also a big transition problem in alternative proposals, since voters will be of different ages, and the system must work without gaps. It will take decades to prove any of them have much effect. Concentrate in these four years, however, and changes will be both prompt and wide-spread, a politician's dream. Everybody has already been born, and for a long time to come, everybody will have a piece of his life behind him that he does not want to pay for. The time has passed when Lyndon Johnson could solve the transition problem by simply giving a gift of many years free coverage to most of the new entrants to his system. So, although it will probably spook a number of old folks just to hear the discussion, let's begin with Last Year of Life Coverage, where the data is most accurate. Two years may be a little safer. Next, for political reasons, we would jumpt to First Two Years of Life coverage. If it is planned to have anything permanent, these are the two minimum goals you would start with. In our wildest dreams, after we have cured just about everything, these are the two features which would remain. Both of those apply to 100% of Americans, and in one sense would be basic coverage. Other end-games are possible, like universal heath insurance, or universal good health, or universally top-notch quality care for everybody. But only the year of birth and the year of death are universal, and finite. Only these two would be essential to any other scheme of healthcare reform, and therefore teach us the most. If we had to retrench, these two would be the last to disappear. If any health insurance should be universal, these four years have the strongest medical arguments. Unfortunately right now, they seem to have the least chance of political success. Therefore, it is likely that they will be voluntary and self-pay if they are adopted at all.

Footnote:That isn't quite the case however. Since third party (insurance) payers were placed in the middle of the transaction, and after electronic computers arrived, piles of individual payment data made analysis irresistible. That approach was repeatedly discredited when everyone with a computer found out that increasing the volume of useless data never improves its lack of relevance. The watchword of the 1960s became GIGO, garbage in, garbage out. Expanding the dataset with large volumes of medical data is nevertheless a dream lingering on, eventually running up against a new stone wall. It makes no economic sense to shift the clerical data-entry burden to a physician, the most expensive employee in the system. Although the Affordable Care Act mandates something close to that, it is safely predicted we will restrain the impulse when cost is fully appreciated. Meanwhile, the utility of just applying more reasoning to aggregate data, opened up the vista of a reversed health insurance system. In a sense, this book is a product of that line of thinking; more pieces of data contribute very little, but a new concept changes everything. Unfortunately, although a radical idea can be developed in six months, it may take decades to prove it had the predicted effect.

http://www.philadelphia-reflections.com/blog/2745.htm


Former Foreward to Saving for a Rainy

George Ross Fisher, MD

Philadelphia

January, 2015

three intended as part of a larger volume about the Affordable Care Act of 2010, commonly called Obamacare. However, that episode is vexed with unexpected developments, so I set the longer version aside lest it get longer. This slimmer one concentrates on what I would offer in place of the ACA, or at least parts of it. I fully expect any criticism of an American President's plan to be greeted with, "OK, wise guy, what would you suggest that's better? " So, here it is.

It's the Health Savings Account, in two forms, single-year and multi-year. The 1981 single-year version works pretty well, but the passage of time suggests a dozen or more tweaks, which are explained individually. The original version has often demonstrated a 30% cost reduction among several million early-adopters. So perhaps if we polish a few rough spots, the 30% savings will spread even further. Whether it spreads any faster will depend on national politics.

Meanwhile, in searching for more ways to cut cost, I discovered less expensive variations of Health Savings Accounts can be developed on a lifetime model. Lifetime insurance makes it possible to eliminate costs like covering gall bladder removal in people whose gall bladder has already been removed. That's the idea which started me down this path. Even more important however, it soon provided a framework for combining several advances like: whole-life insurance, passive investing, direct-pay insurance and eventually, even some Constitutional reconsiderations. Adding complexity worries me, because although some people will quit trying to understand complexity, and just adopt it because it works, other people will reject it, just because it sounds confusing. As it gets more complicated, it also must get more paternalistic; opinions differ on whether it is an advantage. There are enough Americans who won't accept anything unless they understand every word of it, so their carefulness will keep it slowed down. Even that has its advantage: a careful approach upsets fewer apple carts.

No doubt the two versions of Health Savings Accounts could be described in fewer pages. But greater density can hinder comprehension, seldom helps it for fast readers. Furthermore, presenting an alternative without a critique would leave the reader uncertain whether I believe the Affordable Care Reform presently goes too far, or not far enough. (In fact, both things are true, because it seems so likely both government and business employers will abandon the patient in pursuit of other agendas.) At the same time, the Affordable Care Act seems politically unsustainable. It costs too much. It needs more balance between benevolence and fiscal prudence, and it certainly needs more restraint to both sides protesting the other will ruin us. Of course we must do what we can for the poor. But we also need to stop promising more than we can deliver. In the very long run, it won't be politicians, it will be scientists who seriously reduce the cost of disease for everyone, by eliminating diseases. Until that happy day arrives, we need to maintain a lowered tension of aspirations. When government and business operate as partners, that's nice, but somehow it doesn't sound like a level playing field for the rest of us. But having business and government at odds with each other, would fit anybody's description of unsustainable.

The Affordable Care Act contains at least two innovative ideas which I certainly endorse. The idea of direct payment of insurance from client to insurance company (replacing employers as absentee brokers), is good, since it reduces the temptation for financial intermediaries to abuse the role of umpires. Rent-seeking is the technical term for this, I believe. Most office and outpatient claims could easily be paid by a bank credit card, streamlining the slow and expensive claims processing approach. Sadly, we may never know the full benefits of direct payment, because public dismay at the fumbling introduction of computerized insurance exchanges could poison direct-pay indefinitely. And secondly, to go on with my diplomatic message, the ACA use of a "cap" on out-of pocket payment seems like a simple, clever way to avoid adding another costly layer of re-insurance. The system already requires three levels of insurance (basic, supplementary, and major medical) to pay simple claims completely; it doesn't need more layers, it needs fewer. These two features, translated as -- more business efficiency, and less mission-creep -- could easily be allied with Health Savings Accounts, which in the past brought financial pragmatism to several million Americans, voluntarily. Remember, this country responds poorly to almost anything containing the word "mandatory".

However, two points of agreement are not enough innovation to balance the remaining unevenness. I regret how the Affordable Care Act continues to push the square peg of "service benefits" into the round hole of casualty insurance. That sort of incompatible mixture befuddled things for a century, and I look for little good to come of it. Except for helpless hospital inpatients with a tube in their nose, service benefits generate rent-seeking, because service benefits blur the boundaries and create loopholes. Later on, we describe the confusion and exploitation created by service benefits (renamed Diagnosis-Related Groups) as a method of reimbursement. If sharpened and refocused, they could ease the problem of negotiating prices with people too sick to cope with finances. But wide implementation of that inpatient approach without vigilant pilot testing, has resulted in chaos in outpatient pricing. Even dropping DRG and returning to the old system would now pose a daunting risk, for one main reason. The DRG system has made hospital outpatient prices -- totally meaningless, and bewildering to patients who encounter two widely different prices for the same thing in the same institution. As a goal, the techniques of service benefits should be revised for inpatients, but eliminated for outpatients, who are generally alert for bargains. Two systems of payments perhaps, but reaching roughly the same price. As it happens, this uproar is not the fault of Obamacare, nor is its remedy inherent in Health Savings Accounts. But neither system of reimbursement can function without understanding what hospitals are all about.

The Health Savings Account is a mixture of two approaches which more accurately reflect the natural expectations of consumers. It's a mixture of cash payments with insurance coverage. It can be viewed as cash with insurance standing behind it, or it can be viewed as insurance with cash to fill in its gaps. It's definitely a step away from One Size Fits All. That may make a problem for Congress to decide which committee has jurisdiction, but in practice it is more useful to address the larger issue, which is making the customer happy. The tendency should be resisted to specify by law that one system is to be used for inpatients, and the other for outpatients, for example. That's the way it mainly works out of course, but there are plenty of exceptions. My friends in administrative positions will have to forgive me for saying no one really likes uniformity -- except administrators. What has evolved is failing to appreciate the difference between a marginally better choice for everybody, and a clearly better choice for a majority. We have a democracy all right, but there are many cases where multiple choice is more suitable than majority rule. Admittedly, individually owned accounts create technical difficulty for cross-subsidy of expensive items, and I thoroughly understand the nation's attachment to pooled insurance as a way to subsidize the poor and helpless. But other patients have special problems, too. An unwarranted affection for simplification, leads to this kind of outcome.

Perhaps we do start to wander off the topic, which is saving money for healthcare. In a larger sense, it is only a small part of another larger problem, which is how to fix an engine, while the motor is still running. Neither one of the larger topics however, is the main mission of this book, so let's restate what it is.

Regardless of chapter markings, there are only two topics: regular Health Savings Accounts, as they exist today. And Lifetime Health Savings Accounts, as I hope they will evolve, tomorrow.

George Ross Fisher, MD

Philadelphia

January, 2015

http://www.philadelphia-reflections.com/blog/2775.htm


Lifetime HSA and Whole Life Insurance: A Basic Difference

Over the years, much experience and lore has accumulated about running a life insurance company. Because the managers ordinarily are responsible to others who have risked private capital, more latitude can be extended to them than to taxpayer-owned entities. Consequently, it may be wise to obtain experienced counsel to suggest some business limits and latitudes which need to be authorized by law. The following is meant to suggest some areas which may need attention. And a lifetime Health Savings Account has at least one unique difference with whole-life insurance. A moment's thought about Lifetime Health Savings Accounts immediately highlights it. Life insurance has only one benefit claim, the death benefit. Once the flow of premiums begins, only one liability by a life insurer has to be made, the length and risk of individual longevity. The relationship goes on autopilot and a rough match can be made between the pool of bonds and the pool of policies at any time, adjusting only for policy additions and subtractions, or for fluctuations in the bond market. A Health Savings Account, on the other hand, must anticipate a possibly constant stream of deposits and withdrawals.

It is probably true, more money will be deposited in whole-life insurance in response to a fixed annual premium billing, than if deposits are optional in date and amount, so it probably would be wise for the manager of a lifetime Health Savings Account to calculate annually what deposit is needed, for each client to meet his goal, judged by his age and past progress. He should send reminder notices for the "suggested" amount. The purpose of health insurance is to provide money for healthcare when absolutely needed, building up a fund for potentially even more urgent future emergencies. We have partially surrendered the right to mandate the amount, in favor of creating incentives to save it. Consequently, there will be a more constant drain on the investment reserves, matched by a somewhat greater inflow needed from outside sources. The Law of Large Numbers will smooth this out as it does with bank balances, but some volatility is unavoidable.

Since the general inclination is to limit the Catastrophic health coverage to hospitalizations, the attrition to their independent reserves in the account balance should be constrained (not limited) to paying at least one deductible, by adding one deductible to the escrow section, to reassure the hospital it is available. The non-escrowed balance would then more closely reflect the growing retirement savings earned by the arrangement. Since the Catastrophic Insurer is ordinarily an independent company, coordination is essential for long-term coverage. We can get more specific, but for now the risks to be managed are outpatient costs, less frequent but larger inpatient deductibles, and what for now we can call "all other". All three could usefully use reasonably independent escrows, which repeated display would encourage,.

Overdrawn Claims. Since any client might be hit by a truck within a week of establishing an account, new customers present the biggest problem with getting escrowed reserves established. A large front-end payment can be required, and eligibility for benefits can be delayed. Lines of credit may have a place. Otherwise, established customers must fund and be compensated for the risk of early claims. Most organizations will probably elect some combination of the several approaches, with some combination of selecting which phase of the combined insurance should or should not subsidize the others, and how it should be repaid, and at what age. Bond issues are a possibility.

Overestimated Reserves. In the long run, solvency will depend on deliberate over-reserving, gradually reduced as experience accumulates. The basic premise is young people are comparatively healthy, whereas most of the heavy sickness costs will appear as the client approaches and attains retirement, many years later. Compound investment income will grow over time. There may be periods of mismatch between accumulating and invading reserves, so there should also be a provision for intergenerational borrowing and repayment, the size of which will be established at the onset. Every effort should be made to reduce these shortfalls by overestimating the need for them, possibly based on archived statistics from the term-insurance era. Nevertheless, future shortfalls and future bubbles will both be steadily predicable, and unexpectedly volatile, so over-reserving must be seen as permanently advisable. The consequence of all this is a continuing need for some allowable non-medical use of surpluses, such as conversion to retirement accounts, in order to generate reluctance to invade the reserves. The importance of this easily overlooked necessity, is very great.

Proposal 8: Congress should state the principle that necessary Health Savings Account reserves should be somewhat overestimated at all times, linked to the incentive that individual non-medical uses of surpluses should be permitted at times when they are generally unneeded for health purposes.

Underestimated Reserves. And almost of equal importance is the need for early warning when reserves are threatening to become inadequate, in spite of every effort to overestimate them. Some sophisticated body must be created to oversee the growth of aggregated reserves, mandating increased contribution rates from subscribers. Since some subscribers could discover an increased contribution rate is a hardship, the oversight body must have the right to reduce benefits to uncooperative subscribers. That is, instead of reimbursing at 100% of cost, they may have to impose a seldom-used rate of less than that. In order to perform this unpopular task, the oversight body must have access to better information than the public does, to be in a position to impose small steps rather than big-steps. Under all these unpleasant circumstances, Congress could make the upper limit for contributions more flexible. At the moment, it is $3300 a year. However, while that amount now seems adequate enough, the figure is entirely arbitrary, probably set to prevent speculators from abusing the tax exemption. Therefore, if the upper limit is raised to address underestimated reserves, money might well be forthcoming to address the underestimate, which by then might have proved to be no underestimate at all.

Proposal 9: Congress should authorize the Executive Branch to raise the upper annual limit for deposits to Health Savings Accounts, whenever (and for such time as) average HSA reserves fall below an advisable level.

http://www.philadelphia-reflections.com/blog/2733.htm


Some Ruminations About the Far Future.

George Washington soon learned he couldn't defend the country without taxes, so in time the Constitutional Convention lodged firm control over taxes in Congress. If we must have taxes, the people must control them. Except for defense, Congress has ever since been cautious about imposing taxes. Reducing taxes is quite in accord with this attitude, except net reduction of taxes, after raising them first, may be a little tricky.

Net reduction of taxes is an important argument in favor of tax subsidies for Health Savings Accounts, using them as incentives to healthy people to "tax" themselves while they remain young and healthy. Investing the money internally, the subscribers can meanwhile protect it for their own use when they inevitably grow old and sickly. If interest greater than the rate of inflation is paid, the money returned should exceed the money invested. Investing the money tax-free, further helps the process. If people get back more than they contributed, they recognize it as frugal, saving for a rainy day, and so on. Lifetime Health Savings Accounts were designed as a way to enhance this thinking, and are described in Chapter Two. Over thirty years have elapsed since John McClaughry and I met in Ronald Reagan's Executive Office Building in Washington, but there has been a continuing search for ways to strengthen personal savings for health, while avoiding temptations to tax our grandchildren, or to mace money out of harmless neighbors. Many of the financial novelties naturally derive from models in the financial and insurance industries. This book in largely a result of such thinking.o

But the biggest advance of all has nevertheless come from medical scientists, who reduced the cost of diseases by eliminating one darned disease after another, and meanwhile increased the earning power of compound interest -- by lengthening the life span. We thus luckily encountered a "sweet spot", where conventional interest rates of 6% or better take a sharp turn upward, while 3% inflation still remains fairly constant. My friends warn me it must yet be shown we have lengthened life enough, or reduced the disease burden, enough to carry all of medical care. That may well be true, but we seem close enough to justify giving it a trial as a partial solution. Before the debt gets any bigger, that is, and class antagonisms get any worse.

While Health Savings Accounts continue to seem superior to the Affordable Care proposals, you can seldom be quite sure about details until both have been given a fair trial. The word "mandatory" is therefore better avoided at the beginning, and awarded only after it has been earned. As a different sort of example, the ERISA (Employee Retirement Income Security Act of 1974) had been years in the making, but eventually came out pretty well. In spite of initial misgivings, ERISA got along with the Constitution and its Tenth Amendment, and the McCarran Ferguson Act which depends on them. We had the Supreme Court's assurance the Constitution is not a suicide pact. So with this general line of thinking, and still grumbling about the way the Affordable Care Act was enacted, I had decided to hold off and watch. The 1974 strategy devised in ERISA, by the way, turned out to be fundamentally sound. The law was hundreds of pages long, but its premise was simple. It was to establish pensions and healthcare plans as freestanding companies, substantially independent of the employer who started and paid for them. Having got the central idea right, other issues eventually fell into place. Perhaps something like that could emerge from Obamacare.

Nevertheless, growing costs are ominous for a law proclaiming it intends to make healthcare Affordable. After several years of tinkering, this program stops looking like mere mission-creep, and starts to look like faulty reasoning, maybe even the wrong diagnosis. While waiting for the Obama Administration to demonstrate how the Act's present deficiencies could justify rising medical prices and greatly increased regulation, I brushed up seven or eight possible improvements to Health Savings Accounts, just in case. They had been germinating during the decades after Bill Archer, of the House Ways and Means Committee, got Health Savings Accounts enacted. However, my proposed new amendments wouldn't change the issues enough to cause me to write a hostile book. More recently, some newer variations grabbed me: Health Savings Accounts might become lifetime insurance, and thereby save considerably more money, without the fuss Obamacare was causing. Furthermore, in 2007 the nation immediately stumbled into an unrelated financial tangle, almost as bad as the Great Depression of the 1930s. A depression might lower prices, but if it provoked accelerating deflation, we could be cooked. And thirdly, the mistake of the Diagnosis Related Groups was such a simple one, failure to understand it might not be a complete description. Seen in their best light, unrecognized mistakes were about to disrupt a functioning system, while simple solutions were sometimes ignored. Maybe the problem was trying to spend our way out of extravagance, made worse by massive transfers from the private sector to the public one -- actually, just the opposite of what Keynes proposed. And finally, individually owned and thus portable polices, always held the potential for a small compound investment income. But the recent thirty-year extension of average life expectancy is what really changed the rules. The potential for much greater revenue from compound interest made an appearance, simply waiting for the recession to clear, and to be given a chance to prove itself with normal interest rates.

Cost is the main problem. The Affordable Care Act might be making the wrong diagnosis, even though it used the right name. Employer-based insurance did create pre-existing conditions, and job-lock; losing your job did mean losing your health insurance, and often it was a hard choice. If employer-basing caused the problem, why didn't the business community fix it? Is the only possible solution to pass laws against pre-existing conditions and job lock? Maybe, even probably, a better approach was to break, soften, or change the link between health insurance and the employer. Sever that linkage, and the other problems just go away; perhaps less drastic modification could even achieve the same result. ERISA had discovered such a new concept, forty years earlier. Employers might well bristle at the obvious ingratitude, but real causes were creeping up on them unawares. Generations of patronizing legislators had found it easier to raise taxes on the big, bad corporations, than on poor little you and me. Employers had always received a tax deduction for giving away health insurance to employees, but now, aggregate corporate double taxation made it approach fifty percent of corporate revenue. Nobody gives away fifty percent of his income graciously; for its part, the Government thought it couldn't afford to lose such a large source of tax revenue. Big business prefers to avoid the subject, while big government tends to mislabel things. It's mainly a difference in style.

Another issue: the approaching retirement of baby-boomers slowly revealed that Medicare, wonderful old Medicare with nothing whatever wrong with it, had been heavily subsidized by the U.S. Treasury, which was now paying its 50 percent subsidy out of borrowing from foreign countries, notably Communist China. Medicare's companion, Medicaid, subsidized by an elaborate scheme of hospital cost-shifting, transferred most of its losses back to Medicare. And, guess what, the Affordable Care Act transferred 15 million uninsured people into Medicaid. By this time, Medicaid had become hopelessly underfunded and poorly managed, and 15 million angry people were about to find out what they had been dumped into. Other maneuvers affecting the employees of big business are delayed a year or two, so we may not discover what they amount to, until after the next election, four or even five years after enactment. Meanwhile, the Federal Reserve "solved" the problem of mortgage-backed securities by buying three trillion dollars worth of them. That may not seem to have anything to do with Obamacare, except it pretty well crowds out any hope of buying our way loose of this new trouble. And it sure underlined our central problem. There was nothing all that bad about the quality of a fee-for-service healthcare system which gave everybody thirty extra years of life in one century. Two extra years of life expectancy even emerged in the past four calendar years, in fact. Our problem is lack of money. Lack of money, big-time, and Obamacare was going to cost even more. Health Savings Accounts, new style, emerged from all this confusion as a possible rescue for the cost problem. All this, helped me decide to write this book.

There are some who persuasively argue our even bigger problem is Constitutional. Perhaps because I'm a doctor rather than a lawyer, I don't consider the Constitution to be our problem, I consider it to be Mr. Obama's problem. Because the 1787 Constitutional Convention was convened to unite thirteen sovereign colonies into a single nation -- and splitting it into more pieces wasn't on anybody's mind at all -- they reached a compromise, brokered by two Pennsylvanians, John Dickinson and Benjamin Franklin. The small states wanted unity for defense, but they also wanted to retain control of their local commerce. They knew very well big states would control commerce in a unified national government, unless something fundamental was done to prevent it. Speaking in modern terms, a uniform new health insurance system risks being designed to please big cities who mostly want to hold prices down and wages up. Sparsely settled regions want -- or need -- to be able to raise prices, here and there, when shortages appear, of neurosurgeons or something like that. The full algorithm is: price controls always cause shortages, so shortages are only cured by paying a higher price. Eventually the Constitution was engineered to give power over all commerce to the several states; otherwise, the small states declared there would be no unified nation.

That's how we got a Federal government with only a few limited powers, reserving anything else to the states. Absolutely everything else was to be a power of the states, except to the degree the Civil War caused us to reconsider some details (which Franklin Roosevelt's Supreme Court-packing enlarged). So, that's why the 1787 Constitution effectively lodged health insurance regulation (among many other things) in the fifty states. Furthermore, The Constitution in the later form of the 1945 McCarran Ferguson Act thereby definitively insulates health insurance from federal regulation, reinforcing the point in a very explicit Tenth Amendment. This may regrettably create difficulties for interstate businesses, and for people who get new jobs in new states. Many states have too small a population to support the actuarial needs of more than one health insurance company, thus creating monopolies in many states, and consequent resentment of monopoly behavior. So, work it out. But don't give us a uniform national health system.

There, in a nutshell you have a brief restatement of the Constitution's commerce issue in language of the Original Intent point of view. The Constitution as a living document is all very well, but there must be some limits to stretching its plain language; otherwise, it becomes hard to understand what in the world people are talking about.

City dwellers have trouble imagining anyone in favor of either higher prices or lower wages, let alone negotiable prices as the central bulwark of a different way of life. The Civil War toned it down a little, but if it is nothing else, our system is tough-minded and realistic, doesn't surrender easily. The U.S. Supreme Court may soon make the Constitution and its central compromises into the central issue of the day, or they may wiggle and squirm out of it. But as long as they keep squirming, cost containment will remain the central commotion of the Affordable Care controversy. In certain parts of the country, price controls are seen as just one step before shortages appear. That's not entirely unsophisticated. As we will see when we come to it, lifetime Health Savings Accounts could materially reduce the sting of the cost issue, and thus made the final decision for me to write this book. The Constitutional issue, possibly, lurks for another day.

The case in point. On the particular Constitutional point, I would comment whole-life insurance companies in the past seem mainly to have addressed the Federal-State issue by obtaining multiple licenses to sell their products, state by state. Which might bring the Constitutional issue right back, because most insurance companies in practice attempt to be compatible with the largest states, just as John Dickinson predicted they would. In effect, the smaller states are forced to accept whatever regulations the big states have chosen first, or else they might have to do without some new product. Whole-life insurance seems rather less subject to the problem of conflicting regulations, because that industry inadvertently acquired another trump card. Life insurance mostly uses bonds in its portfolio, matching fixed income with fixed liability. That's a noble thought, but the additional practicality has surely occurred to insurers that state governments issue a lot of bonds, and insurance companies are major customers for bonds.

Lifetime HSAs could solve the problem of differing state regulations by allowing the individual subscriber to select a managing organization domiciled in "foreign" states, and thus indirectly if the individual chooses, select a different home state for its regulatory climate. After all, the nation has changed in two centuries from a culture of farming in the same local region most of your life, to one where it seems normal to change home states almost yearly. Businesses tied to local laws like insurance, do not move easily. The consequence for lifetime Health Savings Accounts might be a niche market for health insurance in small or sparsely settled states, or others which reject specific California or New York State regulations. Paradoxically, California presently has over a million HSA subscribers, so we must not underestimate the ingenuity of necessary work-arounds. Eventually, local pressure mounts to change local regulation, doubtless balanced by the attractiveness of acquiring disaffected customers from out-of-state. All of this could be accelerated by internet direct billing. Consequently, to avert this, we propose:

Proposal 6: Companies which manage health insurance products, particularly Health Savings Accounts, should be permitted to select the state in which they are domiciled, but must therefore accept the domicile-state's regulation of corporations. Such licensed corporations may sell direct billing products into any other state; but products sold in another state must mainly conform to the regulations of the state in which the particular insurance operates, even to the point of disregarding any conflicting regulations by the state of corporate domicile.

Comment: Fifty years ago, the main function of any State Insurance Commissioner was to assure the continued solvency of insurance companies, so insurance would be available when the customers needed it. In the past few decades, however, many insurance commissioners with populist leanings have viewed themselves as protectors of the public against price gouging. That is, they adopt the big-city, big-state, point of view. One Insurance Commissioner attitude might thus insist on high premiums, Commissioners with another attitude might reward low premiums. Insurance companies should therefore welcome laws which make it easier to switch the state of domicile, since the attitudes of insurance commissioners can change very quickly.

Comment: Lifetime insurance was pressed forward by discovering the investment world's computer-driven innovations might make lifetime coverage far easier, less chancy, and considerably more financially attractive, than coverage in self-contained annual slices. It is common knowledge in insurance circles that most term life insurance would be unprofitable, except so many people drop their policies. Therefore the attitudes of different states are not completely predictable. Some states are more aggressive than others in adopting new technology, for example.

Changes in Future Cost Volatility. At an advanced age, illnesses are more severe and more sudden. Right now, increasing longevity also mostly affects elderly people who live longer toward the end of life, by widening the interval between the last two major illnesses. You can never be entirely sure that will continue to be the case, because medical care and its science constantly evolve. Furthermore, the cost of care often has more to do with the patent status of a drug or device, than with its manufacturing cost, sometimes turning a cheap illness into an expensive one.

One thing you can be sure of, restructuring health insurance in the way to be suggested in Chapter Two, would result in a general reduction of health insurance markup, by exposing local insurance to more nationwide competition. Health costs themselves might skyrocket, or they might largely disappear, but in any event will probably end up cheaper than by using other payment methods. No doubt critics will find large numbers of nits to pick, since states retain the right to design idiosyncratic regulations; but new regulations would remain semi-optional for residents to the extent some neighboring state disagreed with them. No matter what else turns up, it will be pretty hard to match the cost variation from national marketing, demonstrated by ten minutes of internet cruising. In fact, the great obstacles to an effective system in the past, like "job lock" and "pre-existing conditions", present no obstacle at all to lifetime HSA within an HSA regulatory framework. Many problems would stand exposed as artificial creations of linking health insurance to employers, at least as long as health insurance remains modeled on term life insurance. Just change to a more natural system, tested for a century as whole-life insurance, and such technical problems might simply vanish. Even slow adoption, based on public wariness about a new idea, has its advantages.

Although prediction of future sea change is uncertain, a brief review suggests future healthcare financing could very well become highly volatile, in both frequency and costliness. Therefore, spreading the risk with insurance gets more attractive to age groups unable to recover from major financial setbacks. Planners would do well to consider such things as last-year-of life insurance, or some other layer of special reinsurance. Immediately, such ideas raise the question of multiple coverages, with multiple tax exemptions providing room for gaming the system. No doubt, this was the thinking behind imposing regulations prohibiting multiple coverages with HSA, and probably eventually ACA as well. There must be a better way to handle this dilemma than forbidding multiple coverages. Multiple coverages are very apt to be exactly what we will need to encourage. Since living too long and dying too soon are mutually exclusive, consideration should be given to placing tax-deductibility at the time of service, and permitting deductions for the one that actually happens to you. It is thus possible to envision having four or five different coverages, but only one tax deduction. Since the purpose is to spread the risk, we might even go to the extreme of limiting the number of policies that charge premiums, into the one that actually happens to you, but paid out of a common pool. Planners with more conventional background might well snort at such ideas. Until, of course, they themselves need a life-saving drug costing ten thousand dollars an injection for an extremely rare condition, under a patent which will expire in a year.

So, Let's Get Started with Pilot Experiments in Willing States. The original idea of modestly improving the original Health Savings Accounts, continues to stand on its own two feet. It's what I would point to right away, if you feel unsuited to the Affordable Care Act, or even to ERISA plans. Right now, anybody under 65 (who does not have, or whose spouse does not have) other government health insurance, including Veteran's benefits can enroll in an HSA, and any insurance company can offer a product containing minor variations of the idea, within the limits of the law. A number of Internet sites list sponsors for HSAs. For ease of understanding we present this idea as if we had two proposals, term and whole life.

Actually, the term-insurance version is the only one which is currently legal, whereas the whole-life variety remains only a proposal. It seems necessary to regard the whole HSA topic as: one proposal for immediate use, and a second proposal as a goal for future migration. In fact, almost 12 million people already are subscribers to the term variety, having deposited a total of nearly 23 billion dollars in them. The internet contains brief summaries of their policy variations. At this early stage of development, it is only possible to conjecture that small and sparsely populated states will probably develop more liberal regulations, while bigger and more densely populated states will probably develop bigger and more sophisticated sponsoring organizations. Any one of the fifty states, however, might some day change its regulations to make itself attractive as a "home state", and at present it is possible to transfer allegiance.

Unfortunately, current regulations exclude members or dependents of government health insurance programs including veterans' benefits, from depositing new funds in HSAs. It's easy to see why loopholes might allow an individual to get multiple tax exemptions in an unintended way. But loopholes are a two-way street. The early subscribers tend to be younger, averaging about 40 years of age, and probably of better than average health, because it would probably require a horizon of two or three years to build up the size of an account to the point where an individual feels adequately protected. That's a result of a $3300 annual contribution limit, and a scarcity of variants of affordable high-deductible catastrophic coverage. This is one instance where "the lower the deductible, the higher the premium" puts the subscriber at risk for the first few years. And that, rather than loophole-seeking, is the reason early adopters are younger, healthier and wealthier; the regulations give them an incentive to be. Let's stop saying, "My way or the highway." If there is reasonable fear of double tax exemption, the regulation ought to state its real purpose. Otherwise, "Let a hundred flowers bloom", regardless of oriental origins, is a better flag to fly. If a national goal is to get more people to have health insurance, we should be hesitant to impose impediments on it.

http://www.philadelphia-reflections.com/blog/2711.htm


Old Introduction June 28,2015

This book was originally based on a notion, or a dream if you will. A whole lifetime of healthcare might be purchased, for what now only covers a quarter of a half -- those scarcely-noticed payroll deductions for Medicare, listed on everybody's payroll stub ought to be enough. But then politics and Supreme Court decisions came along. Turning over each pebble on a new heap, it seems that amount might still stretch to cover all of the nation's average lifetime costs, although payroll deductions wouldn't resemble the way to do it. Reducing prices by 25% of $350,000 is a ton of money, particularly when multiplied by 300 million people. Let's lower expectations by saying the new narrower proposal might only reduce prices by 14%. That would be $39,000 times 300 million, or twice the combined fortunes of Bill Gates and Warren Buffett. $39,000 is a substantial amount for anybody, and $ 11.7 trillion is an astonishing aggregate for the nation. That's once in a lifetime, but it's still $140 billion a year. I decided to ignore the 42% of historical costs which Obamacare covers (age 21 to 66) until its facts are clearer. Just add the cost of the earning cohort (aged 21 to 66) later to include whole lifetime costs. That leaves a gap of one third in the middle of life, but it's not the third which will contain most of the healthcare costs in the future. If you don't know what the Affordable Care Act will eventually cost, you can't be confident what lifetime healthcare will cost. But I'm confident lifetime Health Savings Accounts would cost much less. The Affordable Care Act has not convincingly described any cost reductions, now or in the future. But to be fair, neither do Health Savings Accounts. They reduce net price by adding extra revenue. {top quote} The issue is how to transfer $238,000 from individuals in one group, to another group. {bottom quote} Quick calculation now follows. Average lifetime healthcare expenditure (in year 2001 dollars per person) is in the neighborhood of $350,000. That's the estimate of statisticians at Michigan Blue Cross, confirmed by Medicare. Medicare takes half of the annual cost, from birth to age 21 takes another 8%, and we don't know the cost of the unemployables of working age, but they are 10% of the population. So, the new segment we assigned ourselves, excluding age 21 to 66, involves at least 68% of national health costs, and probably somewhat more. That represents the basis for saying the working population 21-66 must pay its own costs and somehow transfer at least 68% more to what we will call the dependent sector. At a minimum, that's 68% of $350,000 per lifetime, or $238,000. Don't take it too seriously, but that's the ballpark. It's dangerous to foresee a day when all the people who aren't sick, are paying for all the people who are. Romeo's take on it was, "He jests at scars, who never felt a wound." Endowment funds traditionally aim for 8% annual return (3% for inflation, 5% net). The stock market has averaged 12% gain for a century, so 4% isn't exactly missing, but its disappearance requires convoluted explanation, later in the book. Starting with those bits of information and adding a few more, just re-arranging payments would get to the same final result-- by spending one-third as much money. The cost of separating employer-based insurance from all the rest of it, exceeds my abilities, so it will have to dangle. How we got to that conclusion isn't rocket science, but it isn't obvious, either. So let's make the conclusion easier: you can save a ton of money doing what is suggested. Don't complain it isn't two tons, or only half a ton, it is what it is. You can put this data through a bigdata computer, or use a slide rule, but you are still dealing with predictions about the future, which contain lots of uncertainty. Although it will not make healthcare free, it implies savings of about $38,000 per person, per lifetime. View that saving in two ways: it's only about $500 per person, per year. Or, viewed as a nation of 316 million inhabitants, it saves $150 billion per year. Skeptics could attack the math as exaggeration, and still get an answer in billions per year. Tons instead of billions would be as accurate, just sound imprecise. Next might come nit-pickers. You can't get 8% investment income returns a year, unless this, or unless that. Very well, just say this is the top limit of what is possible as an average, using average investment advice. The Federal Reserve confidently promised to keep inflation at 2%, but actually experienced 3% over the past century. Chairman Bernanke tried his best to "target" inflation up to 2% but inflation just resisted going up to more than 1.6%, and it's pretty hard to get any agreement about why it resisted. Accuracy just isn't possible when you are predicting the economic future. That's why the unit of measurement is in tons. Tons of money. Who will save it ,and who will steal it, is a little harder to predict. Some people are income targeters. They spend every cent they earn. But there are others, and to them this book is addressed.

http://www.philadelphia-reflections.com/blog/3267.htm


FOREWORD, written June 28,2015

This book was originally based on a notion, on a dream if you will. A whole lifetime of healthcare might be purchased, for what now only covers a quarter of a half -- those scarcely-noticed payroll deductions for Medicare, listed on everybody's payroll stub. But then politics and Supreme Court decisions came along. Turning over each pebble on a new heap, it nevertheless seems that amount might still stretch to cover all of the nation's average lifetime costs, although payroll deductions wouldn't resemble the way to do it. Reducing prices by 28% of $350,000 is a ton of money, particularly when multiplied by 300 million people. Let's lower expectations by saying the new narrower proposal might only reduce prices by 14%. That would be $39,000 times 300 million, or twice the combined fortunes of Bill Gates and Warren Buffett. The $39,000 is a substantial amount for anybody, and $ 11.7 trillion is an astonishing aggregate for the nation. That's once in a lifetime, but it's still $140 billion a year.

I decided to ignore the 42% of historical costs which Obamacare covers (age 21 to 66) until its facts emerge. Just add the cost of the earning segment (21 to 66) to estimate whole lifetime costs. That does leave a gap of one third in the middle of life. If you don't know what the Affordable Care Act will eventually cost, you can't be confident what lifetime healthcare will cost. I'm confident lifetime Health Savings Accounts would cost much less. The Affordable Care Act has not yet convincingly described any cost reductions. But to be fair, neither do Health Savings Accounts. They reduce price by adding revenue.

{top quote}
The issue is how to transfer $238,000 from individuals in one group, to another group. {bottom quote}

Quick calculation now follows. Average lifetime healthcare expenditure (in year 2001 dollars per person) is in the neighborhood of $350,000. That's the estimate of statisticians at Michigan Blue Cross, confirmed by Medicare. Medicare takes half of the annual cost, from birth to age 21 takes another 8%, and we don't know the cost of the unemployables of working age, but they are 10% of the population. So, the new segment we assigned ourselves, involves at least 68% of national health costs, and probably somewhat more. That represents the basis for saying the working population 21-66 must pay its own costs and somehow transfer at least 68% more to what we will call the dependent sector. At a minimum, that's 68% of $350,000 per lifetime, or $238,000. Don't take it too seriously, but that's the ballpark.

Endowment funds traditionally aim for 8% annual return (3% from inflation, 5% net). The stock market has averaged 12% gain for a century, so 4% isn't exactly missing, but its disappearance requires convoluted explanation, later in the book. Starting with those bits of information and adding a few more, just re-arranging payments would get to the same final result-- by spending one-third as much money. The cost of separating employer-based insurance from all the rest of it, exceeds my abilities, so it will have to dangle. How we got to that conclusion isn't rocket science, but it isn't obvious, either. So let's make the conclusion easier: you can make a ton of money doing what is suggested. Don't complain it isn't two tons, or only half a ton, it is what it is. You can put this data through a bigdata computer, or use a slide rule, but you are still dealing with predictions about the future, which will contain lots of uncertainty. Although it will not make healthcare free, it implies savings of about $38,000 per person, per lifetime. View that saving in two ways: it's only about $500 per person, per year. Or, viewed as a nation of 316 million inhabitants, it saves $150 billion per year. Skeptics could attack the math as exaggeration, and still get an answer in billions per year. Tons instead of billions would be even more accurate, just sound less precise.

Next might come nit-pickers. You can't get 8% investment income returns a year, unless this, or unless that. Very well, just say this is the top limit of what is possible as an average, using average investment advice. The Federal Reserve confidently promised to keep inflation at 2%, but actually experienced 3% over the past century. Chairman Bernanke tried his best to "target" inflation up to 2% but inflation just resisted going up that far, and it's pretty hard to get any agreement about why it resisted. Accuracy just isn't possible when you are predicting the economic future. That's why the unit of measurement is in tons. Tons of money. Who will save it and who will steal it, is much harder to predict.

Some doctors, deans, drug companies, financiers and politicians will always try to increase their spending to equal any available revenue. About forty percent of the public will line up at the same trough. All that is beyond my control. You won't find one word in the accompanying book to suggest I endorse such behavior. All I did was write a cook book. The cooking is up to you.

George Ross Fisher, MD

Philadelphia

June 28, 2015

http://www.philadelphia-reflections.com/blog/2710.htm


Supreme Court Rescues Obamacare, June 26, 2015

{Privateers}
Obamcare

The case of King v. Burwell was argued before the United States Supreme Court March 4, 2015, and the decision was reported June 26, 2015. In a clear victory for President Obama, the Court held that it was not the intent of Congress that a phrase in the statute, even though repeated six times, should be the final meaning of the law. Some day a participant in the writing of the law will come forward and tell the story of how the words got into the statute in the first place, but at the moment all we know is the words are there, and the law is unworkable if they remain. Just about everyone would agree these two statements are true. Furthermore, it is clear only Congress could change them, and Congress has changed parties since they were originally written; so they probably cannot be changed at all before new elections are held, unless the President agrees with Congress to do it. There is a third possibility: Congress and the President could make private agreements about what they would compromise on and present a friendly adjustment. Whether that was tried and failed, or whether it was not tried at all, is unclear. So, the Supreme Court did what it never wants to do, it changed the law.

Since millions of citizens had watched (on C-Span) the legislation, dropped on the desks of astounded Congressmen, with no opportunity permitted to debate or amend it. Indeed, even to read most of it before it was voted on, the public is inclined to take the Court's word for it, that...

"The Affordable Care Act contains more than a few examples of inartful drafting".
Whether the clause in question was accidental or not, is a matter of opinion. The clause in dispute reads, and is repeated six times, as
Tax credits "shall be allowed" for any "applicable taxpayer", but only if the taxpayer has been enrolled in an insurance plan through"an Exchange established by the State under [42 U/S.C., pp18031]" pp36B(b)-(c)
Some idea of the Court's historic position is given in a few quotes:

"In a democracy, the power to make the law rests with those chosen by the people. Our role is more confined--"to say what the law is."--Marbury v. Madison, 1 Cranch 137, 177 (1803)

"Oftentimes the meaning--or ambiguity--of certain words or phrases may only become evident when placed in context."--Brown and Williamson, 529 U.S. at 132.

"Reliance on context and structure in statutory interpretation is a 'subtle business, calling for great wariness lest what professes to be mere rendering becomes creation and attempted interpretation of legislation becomes legislation itself.'-- Palmer v. Massachusetts U.S. 79,83 (1939)

In the end, three conservative Justices, Scalia, Thomas and Alito found there was no reason to change the language of the statute as ambiguous, and four liberal Justices, Ginsburg, Breyer, Sotomayer, and Kagan found there was. The two swing Justices, Kennedy and Roberts, joined the liberals in finding the statute ambiguous, for a final vote of 6-3.

Judging from the global circumstances, it is probably fair to conclude that ambiguity was probably not the only issue involved, and it was probably inartful for the Court to establish a precedent that such a restructured role for the Court was either necessary or desirable. The history of Canada's use of this device to coerce provinces into joining the national health system was well known in Canada at the time. And the McCarran Ferguson Act has restricted insurance administration to a State level for seventy years. Both of these examples would seem to have provided a sounder basis for the Court to interfere in what really seems like pretty clear language in the law.

http://www.philadelphia-reflections.com/blog/3250.htm


Hamlet Speaks His Mind

Hamlet may have been speaking of his mother, or his significant other, Ophelia. And Justice Anton Scalia in his dissent may have been speaking of Health Secretaries Burwell and Sibelius, or the six Justices who took the other side of the Burwell case. But anyone who knows his Shakepeare recognizes the outrage in his voice when he repeatedly intoned "Frailty, thy name is..."several times, changing only the name of the person into the fault he is deploring. He goes on for 21 printed pages, but his summary suffices:

Today's opinion changes the usual rules of statutory interpretation for the sake of the Affordable Care Act. That, alas, is not a novelty. In National Federation of Independent Business v. Sibelius, 567 U.S., this Court revised major components of the statute in order to save them from unconstitutionality. The Act that Congress passed provides that every individual "shall" maintain insurance or pay a "penalty." 26 U.S.C. pp5000A. This Court, however, saw that the Commerce Clause does not authorize a federal mandate to buy health insurance. So it rewrote the mandate-cum-penalty as a tax. 567 U.S. at__(principal opinion) (slip op., at 15-45) The Act that Congress passed also requires every State to accept an expansion of its Medicaid program, or else risk losing all Medicaid funding. 42 U.S.C. (principal opinion) (slip op., at 45-58). Having transformed two major parts of the law, the Court today has turned its attention to a third. The Act that Congress passed makes tax credits available only on an "Exchange established by the State." This Court, however, concludes that this limitation would prevent the rest of the Act from working as well as hoped. So it rewrites the law to make tax credits available everywhere. We should start calling this law SCOTUS-Care.

Perhaps the Patient Protection and Affordable Care Act will attain the enduring status of the Social Security Act or the Taft-Hartley Act; perhaps not. But this Court's two decisions on the Act will surely be remembered through the years. The somersaults of statutory interpretation they have performed ("penalty" means tax, "further [Medicaid] payments to the State" means only incremental Medicaid payments to the State, "established by the State" means not established by the State) will be cited by litigants endlessly, to the confusion of honest jurisprudence. And the cases will publish forever the discouraging truth that the Supreme Court of the United States favors some laws over others, and is prepared to do whatever it takes to uphold and assist its favorites.

I dissent.

http://www.philadelphia-reflections.com/blog/3248.htm


Deeper Detail: Extending the Investor's Return, Simplifying His Role

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Start by looking at what happens if you increase the interest rate from 5% to 12%, or if you lengthen life expectancy from age 65 to age 93. Stretch the limits to see what stress will do. For example, increasing the interest rate to the edge of believable gets your balance to a couple million dollars amazingly quickly, while lengthening the time period (for that interest rate to work) even further enhances that gain. The combination of the two easily escalates the investment above twenty million. Because we are only trying to get to $350,000, reaching it suddenly seems believable.

The combination of extra time plus extra interest rate holds out a theoretical promise of paying for a lengthening lifetime of medical care, in spite of medical cost inflation. Present realities don't quite stretch that far, but finding some way to reach that level is not hard to imagine. In fact, it gets the calculation to giddy amounts so quickly it engenders suspicion, to which one answer is, we probably don't need anything like twenty million. The actuaries at Michigan Blue Cross, verified by the Medicare agency, estimate average lifetime health costs to be around $350,000 per lifetime. That's just a guess, of course, but increasing interest rates and life expectancy just a little could reach that minimum requirement. How do we go about it, and how far dare we go?

Some very credible theories sometimes disappoint us. Remember, our whole currency is based on the notion of the Federal Reserve "targeting" inflation at 2%, but in spite of spending trillions of dollars, they sometimes seem unable to achieve that target. We had better not count on schemes which require the Federal Reserve to target interest rates, because sometimes, they can't. On the other hand, if a vast army of smart people set about to nibble at various small increases in interest rates and longevity, perhaps they can make serious progress.

One person who does have practical control of the interest rate an investor receives, is his own broker. For a full century, Rogen Ibbotson has published the returns on various investments, and they don't vary a great deal. Common stock produces a return of between 10% and 12.7% in spite of wars and depressions; if you stand back a few feet, the graph is pretty close to a straight line. If you search carefully, a number of brokerages offer Health Savings Accounts which produce no interest at all -- to the investor -- for the first ten years. Try earning 2% during an inflation of 2%, and see what it gets you. In ten years, that approaches a haircut of nearly 100%, explained by the small size of the accounts, and by the fact that experienced customers who know better, just look for other vendors. Since the number of Health Savings Accounts has quickly grown to be more than ten million, it's time for some consumer protection. The prospective future size of these accounts should command much greater market power, quite soon. After all, passive investment should mainly involve the purchase of blocks of index funds, with annual fees of less than a tenth of a percent. Most of this haircutting is explained by the uncertainties of introducing the Affordable Care Act during a recession, and taking six years to get to the point of a Supreme Court Test to see if its regulations are legal and workable.

That's the Theory. If Necessary, Settle for Less. The rest of this section is devoted to rearranging healthcare payments in ways which could -- regardless of rough predictions -- outdistance guesses about future health costs. When the mind-boggling effects are verified, sceptics are invited to cut them in half, or three quarters, and yet achieve roughly the same result. The purpose is not to construct a formula, but to demonstrate the power of an idea. Like all such proposals, this one has the power to turn us into children, playing with matches. By the way, borrowing money to pay bills will conversely only make the burden worse, as we experience with the current "Pay as you go" method. By reversing the borrowing approach we double the improvement from investment, in the sense we stop doing it one way, and also start doing the other. In the days when health insurance started, there was no other way possible. The reversal of this system has only recently become plausible, because life expectancy has recently increased so much, and passive investing has put the innovation within most people's reach. The environment has indeed changed, but don't take matters further than the new situation warrants.

Average life expectancy is now 83 years, was 47 in the year 1900; it would not be surprising if life expectancy reached 93 in another 93 years. The main uncertainty lies in our individual future attainment of average life expectancy, which we will never know, but probably could guess with a 10% error. When the future is thus so uncertain, we can display several examples at different levels, in order to keep reminding the reader that precision is neither possible, nor necessary, in order to reach many safe conclusions about the average future. Except for one unusual thing: this particular trick is likely to get even better in the future because people will live longer. Even so, it is better to do a conservative thing with a radical idea.

Reduced to essentials for this purpose, today's average newborn is going to have 9.3 opportunities to double his money at seven percent return, and would have 13.3 doublings at ten percent. Notice the double-bump: as the interest rate increases, it doubles more often, as well as enjoying a higher rate. If you care, that's essentially why compound interest grows so unexpectedly fast. This double widening will account for some very surprising results, and it largely creeps up on us, unawares. Because we don't know the precise longevity ahead, and we don't know the interest rate achievable, there is a widening variance between any two estimates. So wide, in fact, it is pointless to achieve precision. Whatever it is, it's going to be a lot.

{William Bingham class=}
One Dollar: Lifetime Compound Interest, at Different Rates

Start with a newborn, and give him one dollar. At age 93, he should have between $200 (@7%) and $10,000 (@10%), entirely dependent on the interest rate. That's a big swing. What it suggests is we should work very hard to raise that interest rate, even just a little bit, no matter how we intend to use the money when we are 93, to pay off accumulated lifetime healthcare debts. Don't let anyone tell you it doesn't matter whether interest rates are 7% or 12.7%, because it matters a lot. And by the way, don't kid yourself that a credit card charge doesn't matter if it is 12% or 6%. Call it greed if that pleases you; these small differences are profoundly important.

------------------------------------------------------------------ If that lesson has been absorbed, here's another:

In the last fifty or so years, American life expectancy has increased by thirty years. That's enough extra time for three extra doublings at seven percent, right? So, 2,4,8. Whatever amount of money the average person would have had when he died in 1900, is now expected to be eight times as much when he now dies thirty years later in life. And even if he loses half of it in some stock market crash, he will still retain four times as much as he formerly would have had, at the earlier death date. The reason increased longevity might rescue us from our own improvidence, is the doubling rate starts soaring upward at about the time it gets extended by improved longevity. In particular, look at the family of curves. Its yield turns sharply upward for interest rates between 5% and 10%, and every extra tenth of a percent boosts it appreciably.

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Now, hear this. In the past century, inflation has averaged 3%, and small-capitalization common stock averaged 12.7%, give or take 3%, or one standard deviation (One standard deviation includes 2/3 of all the variation in a year.) Some people advocate continuing with 3% inflation, many do not. The bottom line: many things have changed, in health, in longevity, and in stock market transaction costs. Those things may have seemed to change very little, but with the simple multipliers we have pointed out, conclusions become appreciably magnified. Meanwhile, the Federal Reserve Chairman says she is targeting an annual inflation rate of 2% of the money in circulation; the actual increase in the past century was 3%. If you do nothing at 3%, your money will be all gone in thirty-three years. If you stay in cash at 2%, it will take fifty years to be all gone.

But if you work at things just a little, you can take advantage of the progressive widening of two curves: three percent for inflation stays pretty flat, but seven percent for investment income starts to soar. Up to 7%, there is a reasonable choice between stocks and bonds; but if you need more than 7% you must invest in stocks. Future inflation and future stock returns may remain at 3 and 7, forever, or they may get tinkered with. But the 3% and 7% curves are getting further apart with every year of increasing longevity. Some people will get lucky or take inordinate risks, and for them the 10% investment curve might widen from a 3% inflation curve, a whole lot faster. But every single tenth of a percent net improvement, will cast a long shadow.

But never, ever forget the reverse: a 7% investment rate will grow vastly faster than 4% will, but if people allow this windfall to be taxed or swindled, the proposal you are reading will fall far short of its promise. Our economy operates between a relatively flat 3% and a sharply rising 4-5%. In other words, it wouldn't have to rise much above 3% inflation rate to be starting to spiral out of control. Our Federal Reserve is well aware of this, but the public isn't. A sudden international economic tidal wave could easily push inflation out of control, in our country just as much as Greece or Portugal. As developing nations grow more prosperous, our Federal Reserve controls a progressively smaller proportion of international currency. Therefore, we could do less to stem a crisis than we have done in the past.

To summarize, on the revenue side of the ledger, we note the arithmetic that a single deposit of about $55 in a Health Savings Account in 1923 might have grown to about $350,000 by today, in year 2015, because the stock market did achieve more than 10% return. There is considerable attractiveness to the alternative of extending HSA limits down to the age of birth, and up to the date of death. It's really up to Congress to do it. If the past century's market had grown at merely 6.5% instead of 10%, the $55 would now only be $18,000, so we would already be past the tipping point on rates. In plain language, by using a 10% example, $55 could have reached the sum now presently thought by statisticians -- to be the total health expenditure for a lifetime. But by accepting 6.5% return, however, the same investment would have fallen short of enough money for the purpose. Like the municipalities that gambled on their pension fund returns, that sort of trap must be avoided. Things are not entirely hopeless, because 6.5% would remain adequate if our hypothetical newborn had started with $100, still within a conceivable range for subsidies. But the point to be made, provides only a razor-thin margin between buying a Rolls Royce, and buying a motorbike. If you get it right on interest rates and longevity, the cost of the purchase is relatively insignificant. That's the central point of the first two graphs. For some people, it would inevitably lead to investing nothing at all, for personal reasons. Some of the poor will have to be subsidized, some of the timid will have to be prodded. This is more of a research problem than you would guess: a round-about approach is to eliminate the diseases which cost so much, choosing between research to do it, or rationing to do it. Right now we have a choice; if we delay, the only remaining choice would be rationing.

Commentary.This discussion is, again, mainly to show the reader the enormous power and complexity of compound interest, which most people under-appreciate, as well as the additional power added by extending life expectancy by thirty years this century, and the surprising boost of passive investment income toward 10% by financial transaction technology. Many conclusions can be drawn, including possibly the conclusion that this proposal leaves too narrow a margin of safety to pay for everything. The conclusion I prefer to reach is that this structure is almost good enough, but requires some additional innovation to be safe enough. That line of reasoning will be pursued in Chapter Fxxx.

Revenue growing at 10% will relentlessly grow faster than expenses at 3%. As experience has shown, it is next to impossible to switch health care to the public sector and still expect investment returns at private sector levels. Repayment of overseas debt does not affect actual domestic health expenditures, but it indirectly affects the value of the dollar, greatly. Without all its recognized weaknesses, a fairly safe description of present data would be that enormous savings in the healthcare system are possible, but only to the degree we contain next century's medical cost inflation closer to 2% than to 10%. The simplest way to retain revenue at 10% growth is by anchoring the price leaders within the private sector. The hardest way to do it would be to try to achieve private sector profits, inside the public sector. This chapter describes a middle way. Better than alternatives, perhaps, but nothing miraculous. For the full whammy, you will have to read chapters Three and Four.

Cost, One of Two Basic Numbers. Blue Cross of Michigan and two federal agencies put their own data through a formula which created a hypothetical average subscriber's cost for a lifetime at today's prices. The agencies produced a lifetime cost estimate of around $300,000. That's not what we actually spent, because so much of medical care has changed, but at such a steady rate that it justifies the assumption it will continue into the next century. So, although the calculation comes closer to approximating the next century, than what was seen in the last century, it really provides no miraculous method to anticipate future changes in diseases or longevity, either. Inflation and investment returns are assumed to be level, and longevity is assumed to level off. So be warned. This proposal, particularly with merely an annual horizon, proposes a method to pay for a lot of otherwise unfunded medical care. The proposal to pay for all of it began to arise when its full revenue potential began to emerge, rather than the other way around. If the more ambitious second proposed project ever works in full, it must expect decades of transition. Perhaps that's just as well, considering the recent examples we have had of being in too big a hurry. Rather surprisingly, the remaining problem appears mainly a matter of 10-15% of revenue, but all such projection is fraught with uncertainty.

Revenue, The Other Problem. The foregoing describes where we got our number for future lifetime medical costs; someone else did it. Our other number is $132,000, which is our figure for average lifetime revenue devoted to healthcare. That's the current limit ($3300 per year of working life) which the Congress itself applied to deposits in Health Savings Accounts. No doubt, the number was envisioned as the absolute limit of what the average person could afford, and as such seems entirely plausible. You'd have to be rich to afford more than that, and if you weren't rich, you would struggle to afford so much. To summarize the process, the number was selected as the limit of what we can afford. If it turns out we can't afford it, this proposal must somehow be supplemented. The provision made for that predicament, is we will then have to jettison one or two major expenses, the repayment of our foreign debts for past deficits in healthcare entitlements, or the privatization of Medicare. That would leave us considerably short of paying for lifetime health costs, but it might actually be more politically palatable. It's far better than sacrificing medical care quality, at least, which to me is an unthinkable alternative, just when we were coming within sight of eliminating the diseases which require so much of it.

http://www.philadelphia-reflections.com/blog/3212.htm


Rollover of Unspent Flexible Spending Accounts

http://www.philadelphia-reflections.com/blog/2693.htm


Direct Premium Payments, Constitutional Issues

In earlier sections I said I like computerizing a health insurance exchange. But confessing does not suggest the difficulties are trivial. To enroll by computer implies access to a computer. Since millions of people are still frightened to touch a computer, it implies an army of instructors to guide newcomers through the process. And since the insurance choices confront applicants with a bewildering set of choices, some person they trust must explain the choices to them. Since no insurance system imaginable could satisfy every reluctant hesitater, a considerable complaint and re-assignment process would probably be necessary for years to come. Many people will choose the wrong policy, regret it, and ask to transfer. To continue, you wouldn't expect a person to trust his private data to a system, without a personal password. Fine, but what do you do with seven million passwords? People will forget them, leave them lying around in public, and disremember them. The crooks in the cyber underground will get seven million opportunities to break into the system and steal things. If insurers of older policies undertake passive resistance, things could get tangled for years. So why undertake all these headaches?

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Obama Administration

There may be other answers to this question, among which is likely to be a set of imperatives contingent on making it mandatory. We will let others make their own arguments, since once the vague mandatory feature is dropped, related conjectural problems diminish or disappear. The Affordable Care Act does not proclaim health insurance is mandatory; it only states a tax is required if you don't meet its requirements. The language really does suggest you have a choice between taking the insurance and paying the penalty tax. The Supreme Court mandates the tax must be small, to avoid being coercive to the states. The Constitution forbids the federal government to regulate the business of insurance, a provision heavily emphasized by the McCarran Ferguson Act. If the Health Savings Account with an attached high deductible is allowed to substitute for minimum requirements, any medical requirement is satisfied if someone has the money, and the HSA provides the money. True, it would allow someone with the money to reject the medical requirements, but what objection can there be to that?

There is a legitimate need to facilitate interstate health insurance. That means a minimal set of information exchange items is useful. The person must be confidently identified, and the terms and limitations of one state's policies must be matched with those of a second state. The credit status must be roughly described, and the current premium payments verified. If there is a current illness, its previously related history must be exchanged. Subsequent communication should be conducted between insurance companies, not between 300 million subscribers. Having established the basics, a communications channel(client to-and-from insurance company) must be provided for later use, particularly for expenses, even diagnoses, which might apply. And while this list may not be complete, it is close to adequate and can be expanded a little. It is nearly enough to get travellers, transferees and money exchanges to be organized. It will be sufficient for current needs, and can be supplemented between particular states at conferences. And it would satisfy the Constitutional issue without needlessly inflaming it. If the Obama Administration expresses a willingness to compromise, these are the lines it might follow. On the other hand, if the issue is forced to the Supreme Court, the Court might be persuaded to follow these lines. We present three other liberalizing proposals for Electronic Insurance Exchanges:

One. Let a Thousand Flowers Bloom. The Affordable Care Act provides for selling high-cost health insurance products, meeting certain specifications, on the Electronic Health Insurance Exchanges. It's not obvious why the government has a legitimate interest in promoting one kind of health insurance over another, but perhaps a case can be made. Uniform interstate protocols are legitimate between insurance companies, along with standardized codes. And a website is a legitimate means for citizens of one state to communicate with insurance for sale in another state. Beyond setting standardized definitions, the communication between customer and insurer can be left to the individual companies. The case for excluding many existing types of policies has not been made, and this has particularly infuriated the subscribers of such policies, particularly those cheaper than the preferred variety. So why not enable or even facilitate the construction of such exchanges in every state which wants them, privatize the electronic programming and operations, possibly even subsidize them. And then permit every one of them to set its own rules for the products to be sold across state lines, setting its own prices as long as the prices clearly relate to the same products for every state-licensed insurance client who wants to utilize a particular product. Nobody must use the system, but everyone may use it. If no one uses it, it needs improvement. There could be multiple exchanges in each state, but the state may set limits, and no state is required to have any. In return for federal assistance, the federal government is limited in its involvement to setting rules which guarantee access to every system for every insurance company, and every citizen.

Two. Specify That Health Savings Accounts are Acceptable Options. In fact, if Health Savings Accounts (linked to a matching high deductible), were available as an option among many other options in the Electronic Insurance Exchanges, only the worth of the option would be in dispute. The claim of HSAs to being listed, is they are cheaper than any other option. That's a feature which is certainly desirable for a Law which puts emphasis on helping the poor. It could potentially add tax-free investment funds to a pool which helps fund the program, or fund its deficit. Such windfall income could provide revenue for the costs of educating and coaxing people into making better choices, and is much less apt to provoke the irritation of mandating people to do unpleasant things for their own good.

{William Bingham class=}
Tenth Amendment

Three. Be brief(in requirements), and let who will be clever(in details). The threat of the Tenth Amendment hangs over all federalizing initiatives, not just the Affordable Care Act. If Electronic Health Insurance Exchanges would limit their scope to the flexible enlargement of interstate insurance sales, the insurance would clearly be part of interstate commerce, and thus safe from any revival of the Court-packing disputes of the 1930s. There is almost no justification for interposing the Federal Government into the middle of most communication between subscriber and insurance company. Permitting smaller states to enlarge their markets might by itself relieve many of the indirect pressures now limiting competition as a force to suppress healthcare prices; and could limit the damage to established insurance carriers, who will probably need time to recover from the changes it would force on their marketing.

Proposal 6: Congress should mandate the licensing to sell health insurance to be widely inclusive, including Health Savings Accounts and Catastrophic Coverage, and subject to regulation in the state of corporate domicile, subject to objection by the state of residence of the insured. When there is conflict, appeal may be federal.
Furthermore, the spread of computers has reached a point where people are sensitive about being commercially manipulated by computers. Fifty years ago, the department store had a computer and the customers didn't. Nowadays, even children have them, and just about everyone is touchy about the way early-adopters try to bamboozle the innocent, putting their own products on the first page, in big letters, and "all others" under a button that doesn't work. Considering all the compromises needed to satisfy a common denominator, it seems very likely some other products would be more suitable for some people. "Hogging the limelight" and forgetting to mention other alternatives have become such common practices, people are on the lookout for them. The term "user friendly" is now a part of the English language, people immediately bristle at signs of high-handedness, of which there is a great plenty in the computer world. It is no secret businesses will tolerate most taxes or indignities, just so all of their competitors are seen to endure the same. It was once a common experience to have one competitor offer to design a computer program for the industry, quietly slanting the terms of entry to favor its own products. Was this just another example of it?

Therefore, allowing privatized insurance exchanges to become available for all variants of health insurance might have allowed time for discovering other features which might require special adjustments. After all, health insurance would remain half-state and half-federal, and undiscovered problems may yet surface. Even if the President planned to run healthcare like an Egyptian Pharoh, a gradual switch to individually owned and selected lifetime insurance would have-- in time -- eliminated the need for pre-existing condition exclusions. It might even have provided an opportunity to reduce premiums for insurance which protects against the cost of appendices, indirect hernias, cataracts, uteri, prostates and gall bladders --that have already been removed. Not everyone would want such features, but that's a small price to pay for the freedom to want them. A long-term shift to lifetime health insurance might very well require other adjustments, but it would be best to wait to see what they are. Meanwhile, the public will get the idea, teach each other, and get where it wants to be in a few years. That's at least as quick as a mandatory system can respond to industry lobbying, and still get wherever it wants to go.

However, after all the uproar about the introduction of computerized direct-pay insurance has subsided, a great many opportunities are probably lost for decades, and any suggestions are probably futile. One thing remains, however, in view of the likelihood the issue of the Tenth Amendment will soon arise. How can we preserve the Constitution and still take advantage of our continent-wide marketplace?

The Argument Against National Uniformity of Prices.

It is abundantly clear the Founding Fathers were concerned with unifying a collection of thirteen sovereign states, and had to make concessions. Furthermore, it is also clear no other nation in two hundred years has been able to match the achievement, even with massive wars and millions of casualties. So the instinct is strong to leave our Constitution alone. If it was not originally clear, the Civil War made it so. Nevertheless, the nation is laced with successful interstate corporations, for the most part regulated by state, not national, law. It seems to have been accomplished by establishing stock exchanges in a few states, operating under a few states' regulation, and otherwise allowing each corporation to choose a state of domicile, where the corporation can be regulated by the laws and courts of that state. The arrangement lasted for two centuries, and only lately is starting to bend, under the pressures of electronic innovation. We seldom hear much uproar about the corporate arrangement under the state-federal problem. Why can't health insurance companies accomplish the same thing without federal oversight?

Well, for one thing, some states are still so sparsely settled, they cannot assemble the actuarial minimum numbers to have more than one viable health insurance company, or more than one HMO (Mrs. Clinton please note). Other states are densely populated enough to have several viable insurance companies, so the two state sizes resist changes made to accommodate each other. The two have a great many dealings with the major corporations in their states, allowing them to pressure state legislatures into favoring state "champions", or else resisting the power of large insurance companies to dominate one state marketplace.

However, this is all pretty small peanuts, and it would seem fairly simple to separate the buying and selling of insurance companies from the buying and selling of insurance. After a while, one or two state exchanges would come to dominate and cluster in one area; while a handful of companies would start to dominate national health insurance business, and therefore migrate their health insurance operations into some different legal climate. In particular, our history of the migrating frontier made local communities restless about the distribution of doctors and hospitals. They could, of course, pass a law if one cabin is built on Pike's Peak, there must be two neurosurgeons within a hundred feet of it. The futility of such laws was soon apparent, and almost all resorted to some sort of incentives to attract medical resources found to be in short supply. State licensing was sometimes a way to create a local monopoly as a reward for a hospital to locate, or some specialist to open an office. But the development of health insurance provided an ideal way to attract specialists in short supply, by the simple expedient of overpaying them. Naturally, such communities resist the proposal to have national uniform fees, as interfering with the laws of supply and demand. Large cities, on the other hand, see national uniform fees as a way to suppress high fees. Our Founding Fathers recognized what was going on, and responded by letting anything commercial be regulated by the local states, flying the flags of states rights or state sovereignty. Franklin Roosevelt, a big-state resident, thought he could accomplish the big-state goal by calling it "court packing", but the nation soon told him his landslide electoral victory had some limits, if it had that kind of result. Although Roosevelt largely accomplished his goal by other means, repeated attempts to make medical care nationally uniform have resulted in some kind of Presidential disaster. Things like medical care should become nationally uniform when the country becomes nationally uniform, but not sooner. Actuarial facts change pretty rapidly, as the discovery of gas shale in the Dakotas recently demonstrated. Any fixed but ideal arrangement will eventually fall victim to an agile and geographically flexible competitor.

Two personal examples have emphasized the point to me. In 1947, the Society for the Study of Internal Secretions (later known as the Endocrine Society) held its international meeting in a single lounge in a Chicago hotel. Nowadays, seven thousand national members meet in three concurrent ballrooms, and the shortage of Endocrinologists is over. To my surprise, a gentleman who looked like a Roman Senator approached me after a speech, and invited me, first to dinner, and then to become a paid consultant in his state which had no Endocrinologist. The other example was being approached by a lady in a pink hospital volunteer's uniform, asking me if I would like to become the sole doctor on a resort island of very rich folk, an hour from New York City. I accepted the first offer and declined the second, but the point is, people protect their own personal needs when national health insurance is under discussion. And they often do not mean to be thwarted by supposed needs for national uniformity.

Congress and the Supreme Court are urged to view the Tenth Amendment as a compromise between big and small states which still enjoys wide support. Big states desire uniformity in order to suppress prices, while sparsely populated states reject uniformity in order to maintain control of local interests.

Proposal 5: Congress is urged to permit the domicile of health insurance corporations to be in one state chosen by the corporation. But all health insurance should be freely sold interstate, subject to regulation by the state of domicile.(2611)

http://www.philadelphia-reflections.com/blog/2611.htm


Which Obamacare Plan Fits Best With Health Savings Accounts?

Health Savings Plans were designed over thirty years ago, well before the Affordable Care Act. The ACA does include pure catastrophic coverage. But it inexplicably limits such coverage to persons under the age of 30, and over that age, only in hardship cases. The paradox exists: Obamacare in fact imposes high-deductible features to every one of its products, but includes too much baggage. The catastrophic options are far overpriced for such limited use. The new regulations should be dropped to remedy that awkwardness. Later in the book, it is of central interest to see how lifetime coverage compares in cost, against a "naked" catastrophic policy costing about $1000 a year. (see below)

Proposal (K): Congress should permit the sale of excess ("Catastrophic") indemnity health insurance, without any specified service benefit provisions or age limitations, with a deductible approximated to exclude most outpatient costs while including most inpatient ones. If future medical science should evolve to exclude an unmanageable proportion of outpatient procedures, the line may be adjusted. If inpatient and outpatient costs fail to segregate roughly around the deductible, a numerical deductible should be abandoned, and wording should be substituted which has that general effect. The designation of payment for emergency care should depend on whether the patient is admitted afterward. Reasonable limits may be negotiated on ambulance costs and other outriders such as expensive drugs and equipment use.
Furthermore, the ACA introduces the interesting concept of an upper limit to cash out-of-pocket costs, which creates a quasi re-insurance effect. That seems like a useful innovation, which mitigates the need to design a special re-insurance program for Health Savings Accounts. The unknown person who devised this idea is to be congratulated for simplifying the problem. Commercial catastrophic insurers are urged to take a look at imitating it, and the Secretary is urged to write regulations which permit the use of it, at the option of the insurer in consideration of the required flexibility of Catastrophic insurance regulation. This is an area where the use of dollar limits (indemnity) is clearly preferable to enumerated service benefits. When bills are large enough to exceed the deductible threshhold, they are likely to be paid to institutions, where subsequent non-medical use is comparatively easy to identify.

{top quote}
None of the Obamacare "metal" options is entirely suitable for a Health Savings Account. {bottom quote}
A high deductible is itself a desirable feature, while co-pay or coinsurance, is undesirable. The typical 20% co-pay feature has proven too small to have restraining effect on usage, and would have been dropped as useless, except for one thing. A 20% co-pay will reduce the premium by 20%, a 34% co-pay would reduce premiums by 34%. Therefore, in the heat of a salesman making a pitch, it is useful to be able to adjust the premium to just about anything requested, so the marketing departments usually press for inclusion of a "flexible" co-pay feature. But that is really just a smoke-screen. The effect of a deductible on premiums, on the other hand, is rather tedious to calculate, but its effect on outpatient shopping behavior is striking, because a host of small claims are swept away when their price becomes too low to justify expensive individual claims processing. Just think for a moment of the effect: the higher you raise the deductible, the lower you make the premium. I seem to remember a time when the AMA offered a $25,000 deductible for $100 yearly premium. If we had stayed with that approach during the following fifty years, we might be in less of a pickle about rising health care costs.

{top quote}
But, the bronze plan currently has the highest deductible and the lowest premium. {bottom quote}
So the bottom line is this: even the Obamacare "metal" plans demonstrate that the higher the deductible, the lower the premium. With the highest deductible and the lowest premium, bronze plan is currently the one to choose for linking to a Health Savings Account. It's nowhere close to a $100-dollar-a-month premium, however, and is not at all what I would have designed for the purpose. But if you must have an ACA high-deductible, take this one. And indeed, you probably must. The U.S. Supreme Court decision that it isn't a penalty, it is a tax, has been worked around by saying you have to pay a penalty of 1% of your income, unless the small tax penalty is larger, which it probably seldom will be. A young person might be able to pay the small tax penalty with his first job, but one hopes it will soon creep up on him that he actually has to pay 1% of his income, when the happy day arrives he is so unlucky as to get a raise in salary. It's hard to interpret the rumor circulating around that the premium for Bronze plan will double in 2015. Since by definition, a Bronze plan only covers 60% of the cost, it must be presumed all other plans will similarly double in price. That hardly seems credible, since it would push all Obamacare premiums into the unaffordable range, causing the system to collapse. If you are a gambler, try gambling this rumor is just a hustle, intended to get more people to sign up before it happens, thus allowing enough money to arrive, so it won't happen.

{top quote}
The higher the deductible, the lower the premium. {bottom quote}
The Iron Law of Insurance.
So the way we would advise using the HSA has three components: 1. Choose the cheapest plan with the highest deductible. 2. Try to build up the HSA to $10,000 as quickly as you can, by contributing the full $3300 annual limit ( or $6000 family unit) even when you otherwise don't need to. 3. Try not to spend the funds in this best tax-sheltered account, unless you don't have any other funds at your disposal when you get sick. Bear in mind it is more favorably taxed than even an IRA.

If your Health Savings Account contains a $10,000 special-purpose fund for unexpected medical costs, compound investment income will make it grow considerably faster when you are young. That's a time when mathematics will make it grow fastest in the long run. Remember, you aren't required to do this, but take my word for it; it will make for much easier lifetime health financing, if you can spare the funds.

And by the way, if you can think of any legitimate reason why we should forbid the sale of this type of insurance for any age group whatever, I wish you would come forward and explain it.

http://www.philadelphia-reflections.com/blog/2684.htm


Passive Investing by Unsophisticated Investors

Burton G. Malkiel published A Random Walk Down Wall Street in 1973, and John Bogle founded Vanguard Group in 1974. Without getting into quarrels over originality, the timing makes it hard for an outsider to judge who thought of what, first. It could diplomatically be said there are two concepts mixed together to make a more general concept called passive investing. Professor Malkiel is associated with the idea that the stock market contains all the information publicly known about corporations, so therefore random selection of stocks will result in the same yield as stock analysis will, and involves less trouble and expense.

Jack Bogle is in the stock brokerage business, and offers a closer, more critical, view of his colleagues in the business. In his view, whatever extra profit there might be in stock-picking by experts, is eaten up by the experts themselves in the form of fees and salary. So, why bother with any small differences, when the vast multitude of ordinary investors would be better off with passive investing. There is little practical difference between the messages of the two essayists, although John Bogle's Vanguard has already achieved deposits in the range of trillions of dollars, growing so fast they have largely closed their retail outlets. Both men advocate the advantages of wide buy-and-hold diversification, with low brokerage fees. And because of low turnover, fewer taxes. John Bogle is perhaps a little more censorious about retail brokerage practices.

Ultimate Goals of Passive Investing. These two offered somewhat different reasonings, but they come to the same conclusion: The average investor will do better for himself, using random stock selection, than by picking individual stocks, even with the help of experts. John Bogle offered a simple packaged randomization in the capital-weighted Index Fund, allowing the manager of the fund to maintain the randomization if it wandered, and he had his reasons for thinking one particular method(capital-weighted) of indexing was best. You might add some other factors, like the cost saving through computers for the "back room" shuffling of orders and payments, and the narrowing of buy-sell margins with greatly increased speed and volume of transactions by computer trading. Who cares, it's cheaper.

In any event, it was stockbroker John Bogle's insight into how to take practical advantage of these ideas, which produced index funds mirroring the whole stock market, and their close relative, ETF, or stock-traded units of index funds. Taken all together, these features make up the concept of "passive investing", which includes the advantages of buy-and-hold over more frequent trading; the considerable reduction of advisory fees; broad diversification; and taking advantage of the payments float. Substituting randomization for stock research, obviously introduces economies of scale. Unfortunately, many other methods of random selection have been offered which give the investor different returns, and they too call themselves Index funds. Some day, someone may well devise a formula for constructing an index which produces results which are superior to those weighted for company capitalization; keep an eye out, but be careful of fly-by-nights. Furthermore, index funds ordinarily start small, using a sampling technique; in time, they can get big enough to contain a proportionate share of all stocks listed in the index. But what index? If you buy a small-stock index, some of the stocks will grow right out of the category and need to be replaced. A few of the components of a large-stock index will fail and be dropped. In a mid-cap index, there can be migration both up and down. The best simplified method is to restrict the list to index funds which are 15 or more years old, and pick the one which has performed best. Switching around among index funds defeats the transaction-cost saving, achieved by just buying one index and forgetting it. That is, some day the system may improve still further, but at the moment an innovation seems just as likely to harm results, as improve on them. Nevertheless, the quest continues, because a variation of a trillion-dollar fund by a tenth of a percent, produces enormous overall savings for the fund manager. The manager is looking at totals, the individual investor looks at averages.

In what follows, we are suggesting trillion-dollar Index Funds, so big they might contain some of every listed stock in America, or in the whole world. As any tiny stock rises, it gets included; and as any listed stock fails, it is dropped. Even the largest stocks individually affect the average to only a slight degree. Right now, John Bogle's books and speeches emphasize the brokers' fees and commission as what the investor captures, while Burton Malkiel tends to emphasize the essential randomness of the entire stock market. Both men are surely correct to some degree, and the investor need not care why the system works. It's called "passive investing", with the central advantages of avoiding the selection of individual companies or industries, and at the extreme, emphasizing the economies of the whole world. In the case of American investors, there is the great good luck that American stocks are both the biggest and the best performing. If you think this will change in a lifetime, an argument can be made for the superiority of world-wide indexes. In the long run, all sovereign nations can change their rules and their taxes. While the average investor is encouraged to buy the biggest and cheapest, it is possible to go too far. Every passive investor is urged to compare the results of his choice with a broad range of 15-year competitors, once a year, just in case.

It makes some difference which factor most explains the improved performance of passive investing, because they reach limits of penetration at different times. Index investing is increasing by trillions of dollars a year, but must flatten out eventually when the market finally segments into those who wish to vote their shares, and those who are content not to meddle. John Bogle irritates his colleagues by repeating, the financial industry takes 85% of the total return for themselves, but even if that is accurate, it must come to an end when the financial industry threatens suicide if it isn't better paid.

Further Growth of Returns. It does appear that Bogle has so far won his argument, but eventually one-off things like this always flatten out. It would be my opinion that Roger Ibbotson's book of the century-long returns on various asset classes sets final limits to the running average to be achieved by this approach. To whatever degree the index funds fall short of Ibbotson's figure, the manager of an index fund has further work to do. To be blunt: The difference between the long-term results of index funds, and the price index for the asset class, probably results from the degree to which the index fund manager or his company is himself eating up the total returns. But some of it is the difference between doing it with pencil and paper, and actually doing it. For example, small-cap index funds should closely approach 12.7 % long-term total returns. (i.e. dividends plus realized and unrealized capital gains.) Strangely, big business corporations you have likely heard of, average only 10.4%, so the executives of firms of over a billion dollars in capitalization are extracting a 2.3% premium from stockholders for something unidentified, which needs to be clarified. Long-term U.S. Treasury bonds average 5.4%, and U.S. Treasury bills average even less at 3.7%. All of these various premiums for "safety" would seem to be the market's estimation of their true value, and that premium must surely disappear if they cannot justify it. Inflation averaged 3%. The far superior results by Warren Buffett and David Swensen, the endowment manager at Yale, represent the somewhat different advantages of being a large, immortal, tax-exempt investor buying things like Canadian lumber forests, totally beyond the reach of the average small investor. When someone devises a way to capture these advantages for the small investor, their new price advantages might possibly be considered achievable by average investors, but if so that advantage should be reflected in the index, to some extent.

Buy-and-hold Index Fund Investing. Index funds will vary in their returns, and the difference between 0.25% commission and 0.06% will only become noticeable in larger accounts. But the difference between $7 retail trades (passive) and $300 trades (active) is simply absurd. If an index fund is composed of the stocks of American companies in the same proportion as the stock market, investing in an American index fund becomes the same as investing in the American economy. Investing in a total world index is comprehensive in a different sense, but there is merit to the idea we owe this success to the American economic style, so Americans ought to climb aboard the American lifeboat. If they do, there is reason to argue they should eventually reach a limit of an effort-free 12.7% return on their money; any higher return probably entails unrecognized risk. But remember, high corporate taxes have driven many American corporations to Ireland, Cayman Islands and other tax havens. If this trend gets out of hand, it may be necessary to turn to world index funds. But when the broker gets fancy and makes up an index of his own recommended stocks, the maneuver gets too fancy to be called passive. That's a variant of active investing, and it's not what we are talking about, or recommending.

Short and Long-term Volatility. Every business has cash overhead, endowment funds have volatility; put those two ideas together and you find periods of time when there isn't enough cash to run the business or pay the dividends. According to Ibottson, the yearly volatility of the stock market is 11%, meaning 70% of the time the market is within 11% (one standard deviation) of the mean. It would thus seem prudent for a fund manager to hold 10-15% of the portfolio in cash, recognizing that when a fund is growing there will be considerable cash inflows from new deposits. For this reason, an index fund should probably be only 90% in stocks, 10% in cash. There are also long-term cycles of 28-40 years (remember 1929 and 2008), with volatility of 50% followed by a recession of 10 or so years. For a fund to continue to pay out 8% during those cycles requires long-term reserves of about 20% in long-term fixed income securities averaging 5.5%. This is what underlies the old adage of 60/40 portfolios, although most observers see the cycles are lengthening, suggesting smaller portions of fixed income are safe enough. In all likelihood, the appropriate asset mixture is a gamble on which stage of the long term cycle you are in. If you start at the very depths of a new cycle, it is probably appropriate to have no long term reserves at all, but scarcely anyone has that degree of self-confidence. In the long run, the amount of needed reserves will depend on the attitudes and ages of the investors.

The Past is (usually) Prologue. All those historic events, plus several severe recessions and the invention of the computer, seemed like earth-movers at the time, but in retrospect scarcely affected the long-run relative values of various asset classes. Unfortunately, many of John Bogle's insights were not available during long stretches of this experience, so data is not available for precisely the mixtures we wish had been collected. It is also useful to keep in mind the man who drowned while crossing a river which averaged six inches deep. Nevertheless, it seems safe to conclude U.S. Treasury bills will closely follow U.S. inflation, and stocks will do better than bonds.

Traditional Endowment Lore. The endowment community contains a great many serious investors whose livelihood and reputation depend on arriving at the right combination of safety and income return on their endowments. Among such persons it is the wide-spread belief that a long-term return of 8% is about the limit of safe return of an endowment. The reasoning focuses on the perpetual need to return a safe maximum, in spite of unpredictable hills and valleys of investment return. In those circles, the most devastating mistake they can make is to be forced to sell good stocks at the bottom of a decline in the market. Seeking to avoid that squeeze at all costs, the 8% maximum return is the conventional answer of these professionals. Their stocks return 10%, but they are diluted by holding enough bonds or cash to reduce the effective overall return down to 8%. The exact proportion of bonds will depend on how much cash flow they can expect from new contributions during a recession, and that is variable between endowments. For this reason, we tend to use 7% in our illustrations, because the formula of -- 7% doubles the principal every ten years -- makes it rather easy to do long calculations mentally. So that's the working goal: invest your Index stock portfolio so it returns between 10% and 12.7% annually, and dilute the stocks with cash or bonds until the total portfolio reaches 8% as return on investment. If that overall running average is not maintained, questions need to be asked. Individual accounts may vary from these benchmarks because people do get sick unexpectedly, but the aggregate account of all subscribers needs to achieve this goal to be considered healthy, and its index fund to be considered well-run.

What if We Start Investing Just as a Long Depression Begins? John Bogle was recently on a television program, asserting long-term passive investing will probably average 5% total return for the next decade. Since the stock market is up 20% in the past year alone, one interpretation is this is a way of saying he expects a major decline in stocks of 25% fairly soon, from which there would be a recovery of 30%, leaving a 5% gain for the whole cycle. (He might well squirm at this interpretation of his remarks, which definitely were not that specific.) At his age, with his heart problem, he probably regards 10 years as long-term, while this book is looking at an 80-year horizon of 10%. In that sense, all of us could mean the same thing. I am urging the belief that if the market closely followed 10% for the past century, it will probably return to 10% for the next century. Of course, it might turn out that it follows 5% for half a century, then follows 15% for the last half of a century; that would have mathematical truth, but would be essentially worthless information for everyone who dies in the next fifty years. Those people would be like the inhabitants of Asian Angkor Wat, or the Mexican Yucatan, dreaming of past glory for a while, but eventually just forgetting it all during a parade of ancient relics. But since I am willing to concede 5% for the next century is a possibility, it is necessary to wish for some enduring wisdom to emerge from the wars of civilizations, not just within national economies, or the transient achievements of a single stock market.

Rising Above Mere Investing. Running one of these funds is not child's play, even though individual stock-picking is superseded. The only reason for investing amateurs to play with such numbers is to get a feel for what size of total return should be expected, in the light of what others are doing. The reader is invited to study Ibbotson's yearbook, and see for himself whether he agrees that a 10% total return on stocks seems safe to bank on; or whether the whole permanent staff devoted to management of some favorite fund needs to be replaced. Best of all might be to invest in several private funds, and reward the ones that do best. To go just a little further, Congress might even consider whether a management which consistently produces less than the long-run return of a related index is eligible to be replaced. But that's not reasonable. To be reliant on such approaches alone, is unlikely to be successful. One only needs to watch how quickly an investment committee clusters around the consultant they have hired, glowingly eager to ask him for investment tips, while ignoring the business at hand.

But that's not what this book is about, nor what is ordinarily expected of bean counters in a bureaucracy. Someone must devote himself to such issues, but there's investing and there is finance. About the best we can hope for is to include in our planning some national agency to monitor the economic environment. That agency should feel obliged to warn Congress and the nation that we must apparently reduce our goals for the program. We might need to develop some other plan for paying off foreign debt for Medicare, for example. Or the Health Savings Accounts might only be able to pay 50% of our bills, saving the rest for unexpected contingencies. Or we might need to require a 50% larger annual deposit in the HSA accounts. Or we might need to float some bonds for the duration of some sudden national emergency. All because it becomes apparent in the future that some national or international upheaval has changed the basic terms of trade. It's important to be a good investor, but when a program gets as large as this one ought to become, its finances are pretty much the same as the national economy, and each will influence the other.

The take-away points are that the better funds can and should produce total returns which are superior to what an ordinary citizen can produce for himself, and some way to measure it is mandatory. And also, that there is no point to getting into this, unless Congress establishes -- and monitors -- policies which deliver on the promise. If you think Fannie Mae and Freddy Mac affected the economy, just consider what this one could do.

This program will fail unless we maintain a narrow margin between what the stock market is earning, and what its owners are earning.

{top quote}
Your money earns 11%, but that isn't necessarily what you will earn. {bottom quote}
Expecting it and getting it, can be two different things. Because, for one thing, most expenses for a management company also come in its first few years, on their first few dollars of revenue. Wide experience with a cagey public therefore teaches experienced managers to get their costs back as soon as they can. Until most managers get to know their customers, in this trade, charging investment managing fees amounting to 0.4% annually is considered normal for funds of $10 million, so charging 1-2% for accounts under a thousand dollars is common practice. These things make it understandable that brokers are slow to lower their fees, or 12(1)bs, or $250 transaction fees to distribute proceeds. But our goal as customers, is to negotiate fees reasonably approaching those of Vanguard or Fidelity, which have fees of about 0.07% on funds amounting to trillions of dollars. Such magic can only be worked by purchasing index funds from a broker who aggregates them to deal in large quantities, and also develops a service with minimal marketing costs to cover the debit card, help desk, hospital negotiating, and banking costs. And who, by the way, derive serious side income from managing corporate pension funds for higher fees. Corporations get a tax deduction for such fringe benefit fees, so even the US Treasury may be said to have a conflict of interest. Remember, stock brokers are not fiduciaries; they are not required to put the customer's interest ahead of their own. One of the better-known brokerage houses advertises charges of $18 a year for HSA accounts over $10,000, but only after it reaches that size will it permit the customer to choose the index fund. If kickbacks are suspected, the incentive it creates is obviously for the client to get the account to be over $10,000, as fast as he possibly can. Under present contribution limits, even with a family account, this cannot be accomplished in less than two years.

Proposal 14: Congress should remove all upper (and lower) age limits to opening Health Savings Accounts.(2584)

Proposal 15: Congress should impose transparency rules on fees and net returns for Health Savings Accounts, including mention of the fees available from the least expensive local competitor.(2584)

There needs to be an added layer of investment in government securities, to provide liquidity to all HSAs, in the general range of 10% of the total investment. There must be some available cash in any business; there are bills to be paid. For example, in the case of Obamacare insurance, the first purchase in the deductible fund might well be $1250 in indexed Treasury Bills, reverting to total stock market index purchases, thereafter. Other liquidity needs are an individual matter, remembering cash reserves will lower the overall return of the fund and slow its growth. At the moment, interest rates are artificially low; leaving the reserve in cash is nearly as good. At this writing, we have experienced several years of essentially zero short-term interest rates, so long-term bonds are not for an amateur to buy.

The investment alternative of purchasing in-house stock-picking funds, or funds with a concealed kick-back to your broker, is probably the riskiest of all alternatives available, and to be avoided. The goal here is to get 10% long-term return as cheaply as possible, or else as soon as possible. With an index, 50% of customers do better than the average, and 50% do worse. For health costs, just be sure to avoid the bottom 50%, and the rest becomes fairly easy. There is one other common hazard: the tendency of all investors, small and large, to buy high and sell low. Dollar-cost averaging is the simplest way to avoid it.

In recent years, health insurance has tended to avoid co-pay and therefore to raise deductibles. For people living from paycheck to paycheck, any hospitalization encounters a cash shortage, soon translated into a hospital bad debt. It is not entirely clear what plans have been made to meet this shortfall. There needs at least to be an added layer of investment in government securities, to provide liquidity to all HSAs, in the general range of 10% of the total investment. On the other hand, it is possible to be too cautious, maintaining a duplicate cash balance for a investment fund which is itself maintaining a 10% fixed-income portfolio. In the case of Obamacare insurance, the first purchase in some deductible fund might well be $1250 in indexed Treasury Bills, reverting to total stock market index purchases, thereafter. Indeed, because of the universality of high deductibles, it looks as though an HSA ought to be the first step in any health insurance with a high deductible. Always remembering not to duplicate the safeguards put in place by the fund manager. Specific investor cash needs should also be kept in mind: regardless of fund composition, just how available is your fund's cash to the customer? Excessive cash reserves will lower the overall return of the fund and slow its growth. At the moment, interest rates are so artificially low, leaving the reserve in cash is nearly as good. At this writing, we have experienced seven years of essentially zero interest rates on Treasury bills, so long-term bonds are not a for an amateur to buy.

The investment alternative of purchasing volatile stock-picking funds, or low-return funds with a concealed kick-back to your broker, is probably the riskiest of all alternatives available, and to be avoided. The goal here for HSA owners, is to approach a 10% long-term return as cheaply as possible, or else as soon as possible. With an index, 50% of the customers do better than average, and 50% do worse. For health costs, just be sure you aren't in the bottom 50%, and the rest becomes fairly easy; passive investing assures it. There is one other common hazard: the tendency of all investors, small and large, to buy high and sell low. Just avoid selling stock; if you plan not to keep it there for long, just put some cash in the bank.

http://www.philadelphia-reflections.com/blog/2712.htm


Diagnosis Related Groups (DRG), in Relation to Medical Electronic Records.

The American Medical Association

For a concept supposedly working moderately well, the Diagnosis Related Groups (DRG) system for inpatient reimbursement has a bizarre history. It has led to some unconfessed, and widely unrecognized, disastrous results, and should be thoroughly reworked as soon as possible. In a scholarly sense, the story begins eighty years ago. The American Medical Association decided all of disease, ultimately all of medical care, would be better understood if reduced to a systematized code. Originally, the code was visualized as a six digit complex, with the first three digits defining anatomical location, followed by a second set of three digits specifying the cause of the disease affecting that location.

SNODO That 6-digit structure limited a code to a thousand diseases in a thousand locations, or a million "disorders" just for a beginning. Roughly half those theoretical combinations have no biologic existence, although even fanciful codes had some value for detecting coding errors. Other regions of the code exceeded the number of conditions actually found to exist, but originating in a digital structure then allowed virtually unlimited expansion, but sacrificed the significance of a particular position within the code. IBM was enlisted as a consultant, who advised the AMA to stop worrying about it; just provide a numerical code for everything, in the finest detail possible. Mathematicians could later easily make it usable for calculating machines, the forerunners of computers; and non-existent conditions created no harm. Some of those consultants had worked with a system which produced great success for the U.S. Census, and perceived no advantage to limiting the code numbers, while planning for them to be manipulated by machines. A third group of three digits was soon added, making a nine-digit Standard Nomenclature of Diseases and Operations , familiarly known as SNODO, which could identify a million different operations, whether actually performed or not. Actually, groups of three or more digits separated into groups of three digits by hyphens, transferred the significance of code-position to the cluster level, which proved adequate.

SNOMED The pathology profession subsequently added still a fourth set of digits, for microscopic features, so the potential was soon up to a hundred million microscopic conditions. The team of physicians who worked on coding the medical universe contains many names now famous, notably including Robert F. Loeb and Dana Atchley of The College of Physicians and Surgeons of Columbia University. For at least thirty years, the Joint Commission on the Accreditation of Hospitals (an AMA and AHA joint affiliate) enforced a rule: every discharge summary from every accredited hospital in America must code and index every discharge diagnosis in SNODO code. It was tedious work, kept alive by the glittering future prospect of developing an Electronic Medical Record by 1940.

Robert F. Loeb

ICDA After twenty years or so of this enormous task, the Medical Records Librarians rebelled. The labor effort was burdensome, and the librarians were in an occupational position to observe how little use was being made of it. On their demand, an alternative simpler coding system was adopted, called the International Classification of Diseases (ICDA). At first it was limited to the one thousand commonest discharge diagnoses , therefore limited to the charts which the librarians could confidently observe would be used. In time, it was expanded to ten thousand commonest diagnoses. Limiting medical codes also limited the cost and effort of coding, and was considered an important retreat from over-enthusiasm. Meanwhile, expansion of the SNODO code by a handful of true believers continued to fill up the coding gaps, soon using and exceeding the capacity of the 80-column IBM punch card (originally, ten digits plus metadata),one card per diagnosis.

Unfortunately, the code was in danger of collapsing from this unanticipated expansion, since computers had not yet advanced to the point where they could rescue SNODO from the limitations apparent to its users. It was a classic case of a hypothetical system appearing to be better than the one in actual use, but not living up to its promise when both systems encountered actual use. The ICDA coding scheme did suffice for immediate purposes, and the "calculator" system was at least a decade away from evolving into the more flexible "computer" which could skip around the limitations of a punched card input system.

The professional difference was this: the doctors roughly understood the coding logic, and could devise an understandable code for most charts through the logic of a structured language. The record librarians had not been trained to encipher (or even dither, as photographers say) the code by logic; a thousand codes was about the limit of what anyone could memorize. The burden of manual coding eventually overran the code design, before practical results could defend its utility in other areas of the hospital or the profession.

All the medical record world promptly abandoned SNODO; except for the pathologists who intuitively recognized ICDA could never approach their own greatly expanded needs. Eventually pathologists took SDODO over, expanded and redesigned the basic framework, and produced what they are rightly proud of, an elegant code book called SNOmed which obeyed meaningful internal coding rules. It still came however, as a large and expensive book, which most practitioners were reluctant either to buy, or to use.

Dana Atchley

DRG Meanwhile, a group at the School of Hospital Administration at Yale under the leadership of John Thompson lurched in the opposite direction of drastically reducing the ICDA code (initially expanded to 10,000 entries, which proved too large for some purposes, while still lacking specificity in many others), back down to only 468 of the commonest "diagnosis clusters". The purpose was to find clusters of diagnoses with common characteristics, which could be used by unskilled employees to identify diagnosis submissions which normally fell within certain bounds, but who in a particular case were sufficiently deviant to warrant investigation as "outriders". This gross sorting by machine was then examined by the PSRO (Professional Standards Review Organizations), especially in the central feature of length of stay. They termed their product Diagnosis-Related Groups (DRG) , which made no pretense of being complete, but was complete enough to encompass the majority of outrider events. The computer version of their concept was called Autogrp, which had some attraction to hospital administrations as a way to predict outriders.To summarize what happened next when Medicare adopted DRG for payment purposes: both DRG and ICDA started to expand, and SNOMED was relegated to the role of code book for Neanderthal pathologists.

{top quote}
Two million diagnoses are compressed into two hundred payment groups. {bottom quote}
Diagnosis "Related" Groups

Using the standard diagnosis codes, one- size-fits-all did not help the hospital and insurance accountants a bit, since by habit they tend to believe all businesses are about the same, no matter what the business produces. Their complaint was codes with thousands of codes were too big and complicated. Simultaneously the medical professionals were finding them much too small for the job. Meanwhile, ICDA was fast losing its reputation for being compact and inexpensive, while the opposite feeling immediately developed: the DRG was far too small for what physicians could now realize was going to play a very large and important role in everybody's finances. Two vital areas of the hospital had difficulty communicating from the beginning; now, there was no longer even a common language to use. There was no quick fix, either, because both DRG and the underlying ICDA designs were based on frequency of occurance, rather than precision and logic. Furthermore, the copyright was owned by professional societies who had little interest in finances, and considerable interest in reducing their burdensome coding workload. In the background, however, computers had made the task of code translation a trivial one. A third profession, the computer department, scarcely knew what the other two were talking about, but they came closer to affinity with the accountants.

Like the three bears of Goldilocks, some codes were too large and some were too small, but at least there were three of them, each crippled in a different way. Comparatively few doctors understood what was going on, and in spite of their vital interest at stake, had trouble getting over their hatred of the boring coding task. Since this whole issue of data coding and summarization has taken on major importance to the success of the Affordable Care Act, in some circles the uproar has become a political war dance. Let Obama do it, if he likes coding so much. Basically, the librarians were saying they resented being criticized for making important mistakes in a task they didn't understand very well. In summary, everybody hates coding.

Overview of the Future.One faction of the small field of those who are interested in such matters, has decided to expand both the specificity and the reach of ICDA, which is now up to its tenth edition of revision. Unfortunately, it does not seem to some of the pathologists to be a sensible approach. We have an elegant code in SNOMED, they protested, which is arguably too big to use; expanding ICDA seems destined to reach the same destination, on the rebound from being too small. We now have ample data on what is common. The most efficient approach would at first seem to be condensing the highly specific SNOMED to a useful size, based on frequency of use. The approach would stand in contrast to making a list of diseases by frequency, and then subdividing their specificities. While such a condensed volume could be printed as a book, we are now at a point where every record room within the hospitals of the nation is equipped with several computers, so elasticity of the code should no longer be anyone's problem. Let the machines do the drudgery.

This whole process could now rather easily be automated for much more than its original purpose of classifying disease populations, and in a pinch it could even substitute 26-digit letters for 10-digit numerals, imparting some clues in the process. A further condensation of an already condensed version began to be used for payment purposes, adding still greater amounts of practical nuance. You might suppose everyone could see paying the same amount of money for treating the same disease (tuberculosis, let's say) of two different organs (let's say of bone, and of kidney) was either going to bankrupt someone, or enrich someone else. And that's only money. Any scientific or diagnostic decision based on a code of "All other" will make computerized medical records sprint faster toward worthlessness. At the rate it's going, lumps of "all other" will have no relation to each other, except to justify the same reimbursement for treatments of vastly different value. Or difficulty. Or cost. Or contagiousness.

SNOMED

In automated form, SNOMED is quite ready to be revised still further in other directions for other purposes. It could, for once, integrate the accounting and demographic functions with the rest of medical care. But a great many other useful functions can be imagined, once computers have a stable platform on which to build, and the task of coding can be safely undertaken without much physician input burden. Safe, that is, from the danger the whole coding framework will get changed, again and again. In a certain sense, this is similar to the brilliant choice by Apple of the Unix skeleton, when Microsoft Windows seized on quicker expedients. A great many sub-professions seem to wish to have their own codes for their own purposes, and resist the idea a physician code should be imposed on them. When you encounter such obstructionism, it is easy to suspect motives. But the general rule is: when it comes to a choice between scheming and incompetence, it's incompetence, nine times out of ten.

However, medical care and hospital care are medical functions, and their accounting and demographics will always eventually return to their medical professional core. Meanwhile, notice what happened to DRG, a code so crude it relegates most refinements to the category of "All Other". The fact of the matter is, it is a crude approximation, some cases paying on the high side, some on the low side of true costs. If the hospital loses money on inpatients, well, just build another wing to the outpatient department. Underlying this response was the enduring misconception that outpatient care is inherently cheaper than inpatient. If it's the case, well, we'll just have to fix it.

The surprising lack of chaos from such expedience has almost nothing to do with medical content, and almost everything to do with having insufficient case volume to remain in balance. That is, the big hospitals smudge it out, and the small hospitals don't understand it. The highly prized profit margin of 2% or 3% can easily be achieved by admitting slightly more cases of a profitable kind (ie hire a surgeon expert in certain profitable operations), or by the government adjusting just a few DRGs to profitable status (like reducing tariffs on behalf of favored industries in Congress). Meanwhile, the rest of the enterprise becomes progressively more expensive, because there is no fixed relationship between service benefit prices and audited costs, and now an even less regular relation, to cost-to-charge ratios.

It is a precarious thing for institutional solvency, to depend on financial balancing of a particular case load within one set of four walls, and then complain hospitals are too small to survive. Between their accountants and their record librarians, this outcome drives the smaller institution into a futile chase after higher patient volume. Of course we need to change with the times. But some basic truths never change, and one of them is every ship should be able to sail on its own bottom. You don't approach that by giving every ship a new hull.

Let's get specific. In the first place, allowing only a 2% profit margin during a 3% national inflation is to walk on the edge of a dangerous cliff. If some fair profit margin could be agreed to, it is only an average among hospitals. You might as well reduce the DRG to four payment levels, and reimburse hospitals on the basis of which of the four walls the patient faces. With enough tinkering, you might arrive at the desired total hospital reimbursement to match any profit margin you establish, totally disregarding the diagnoses of all patients. Quite obviously, you must code the diagnosis to whatever number of digits it requires to identify the unique condition. You could match up all of the hundred dollar cases and all of the fifty thousand dollar cases, call the two codes, and pay only two prices.

But such an effort is just a delusion. Somebody-- or some machine-- has to go to the trouble of coding every single diagnosis down to the point where the code is no longer meaningful to costs, and assign relative values among them. Only at that point would it be legitimate to assign a dollar amount to each relative value. You have to maintain the code as treatments change, which will be quite frequently. You can do it, and you can computerize it. A computerized version of this process would scarcely be any different from copying the English description and, like a Google search, getting back a number to copy; it might even be done by voice transcription. But there is still no guarantee charging itemized bills wouldn't turn out to be cheaper, and at least have a different meaning. DRG in its present form is nothing but a crude rationing system; get rid of it, or spend the money to make it work. I can't guarantee if you put a doctor in charge, it would work. But I can guarantee that if you don't put a doctor in charge, it won't.

Proposal 5: Congress should be asked to commission a computer program to translate English language diagnoses into SNOMED code, preferably by voice translation. Suggested format: a search engine where English variants of discharge diagnoses are entered, and a SNOMED code number returned, along the general lines of entering common phrases into Google and receiving file location numbers in return, except it returns the SNOMED code. If the code is not found, the computer accepts a manual entry by a trained person. verified by an expert over the Internet to become officially entered into a master list which is periodically circulated as an update. The search program and its supplements should be produced on DVD disks to be used on hospital record room computers by other professional users. It should provide "hooks" so the Snomed codes and patient identification can be transferred electronically to related programs, such as payment codes and billing.

So that's how DRG got to be be what it is. It's perfectly astounding such a crudity, devised for other purposes, could be so "successfully" employed to pay for billions of dollars of Medicare inpatient care, such that payment by diagnosis-lumps threatens to spread to all medical care. There is even another way to describe it: inpatient hospital care has been lumped into a rationing system which constrains national inpatient care to a 2% overall average profit margin. That's just as surely true as if someone deliberately tried to make it that way.

Payment by diagnosis ignores both cost and content, based on the mistaken assumption those features have already been carefully accounted for. It does not matter in the slightest how long the patient stays or how many tests he gets, or how many expensive big hospitals swallow up inexpensive little ones. Meanwhile, emergency rooms and satellite clinics also do not affect the cost inherent in a supposed linkage between the diagnosis and the cost. The failure to link drug prices into this modified market system, is particularly noticeable.

The exciting potential has been lost to have the patients who can shop frugally as outpatients, set the price for inpatients who are helpless to act frugally. Their much more generous profit margins support what is essentially a hospital conglomerate. Any corporate conglomerate executive could tell you what happens when one department is subsidized, while another is treated as a cash cow. And the fun part is this: squeezing physician income against an unsustainable "Sustainable" Growth Rate creates the "doc fix", which annually blackmails physicians into acquiescence past the next November elections.

SGR: Sustainable growth rate, earmarks by a different name. SGR is a term borrowed from financial economics, signifying the rate at which a company is able to grow without borrowing more money. It is easily calculated by subtracting dividends from return on investment. Any variation from this definition, will produce different results. A sustainable growth rate in Medicare is calculated by a formula, modified every year in special ways which closely resemble "earmarks", but contain special adjustments for changing work hour components, malpractice cost components, etc. It is a large task for the Physician Payment Commission to determine yearly changes in thousands of services, and it must be frustrating for them to see their painstaking calculations tossed aside every year by Congress, in response to howls from the various professions. Whenever this occurs it is a fair guess the calculation has been misused. The discussion has long since transformed from a simple calculation to a simple threat: physician reimbursement will be cut. Each year it is cut, and each year Congress relents on the cut at the last moment. But ultimately its design will prevail: on the pie-chart of healthcare expense, physician reimbursement will shrink, and hospital reimbursement will expand, as physicians migrate to salaried hospital employment, and enjoy an instant 40-hour week amidst a physician shortage. This keeps the AMA in a constant state of agitation, and physicians in a constant posture of supplication. At the end of 2013, the proposed cut in reimbursement had grown to 26%. When almost every physician has an overhead of 50%, a cut of 26% is beyond meaningful. And every year the financial attractiveness of joining a hospital clinic for a dependable salary grows, with consequent improvement in overall power of the hospital conglomerate, and steadily decreasing relation to market-set pricing readjustments.

Insurance Reimbursement, The Missing Item on the Itemized Bill. The DRG system threatens patients, too. After discharge from a hospital, the patient is sent a multi-page itemized bill, which purports to be what the patient would owe without insurance. Such bills traditionally omit any mention of the insurance reimbursement, which is the only payment the hospital receives if it has contracted to accept "service benefits" as payment in full. Since that is almost always the case, the "total of service benefits" is exactly equal to the "total patient responsibility". Since the patient will pay nothing if patient responsibility is limited to service benefits, and service benefits are exactly equal to whatever the patient received, the explanation goes round and round without ever revealing what has been paid. The illusion that you have been told something worth hearing, is maintained by providing an almost endless list of itemized charges.

Most hospital employees do not have the foggiest idea why the list is even produced, and its accuracy is therefore questionable. A variety of specious explanations therefore emerge, usually with a focus on billing a handful of uninsured people, or insured people whose service benefits have expired as "outriders". There may be a particle of truth to this, easily refuted by showing the supposed items on the bill were often fabricated by employees who know very well they are seldom used for anything. Most likely, the purpose is to conceal the true insurance reimbursement from competitive insurances who might undercut them. As profit margins shrink, it becomes increasingly dangerous to let competitors know what they are. As margins widen, it is even easier for competitors to undercut them. As a matter of common observation, most retailers in any business are less than forthright about their profit margins, so perhaps this concealment can be forgiven as normal commercial behavior. It becomes more questionable when seen as an industry-wide practice, intended to defend a system of double-pricing. In this case, it defends the employer tax discount as the lowest price around, when compared with those rascals, the uninsured or the insured but fully taxed.

The DRG payment to the hospital is not zero, but it is far less than the total on the itemized bill, and is seldom revealed. One central message it sends is however pretty clear: "This is how much you would be charged, if you didn't have Insurance X." The shortfall in revenue is made up by overcharging the emergency room and the outpatients, who are unsuitable for anything resembling the present DRG. If the hospital does not have enough outpatient work to sustain the inpatient losses, its only recourse at present is to call the architects and build a bigger outpatient department. To fill it, just buy up a neighboring group practice or two of neighborhood doctors. Fix the DRG, and it would be hard to say what would eventuate.

Bottom Line: Who is Injured? For a long time, service benefit insurance was the only thing supporting the hospital industry, and commercial behavior by the hospitals was justified as the only way to support their charitable mission. Now that Health Savings Accounts have reached 12 million clients, with assets reaching $22.8 billion, a viable way to provide indemnity insurance has definitely arrived. Not only are HSAs cheaper for the customer, they very likely provide higher payments to hospitals. This last point will only be clarified when we learn what discounts the catastrophic high-deductible insurance have been able to extract, but hardly anything else will affect the answer. To the extent one competitive method receives major discounts and the others generally do not, this service benefit discount is probably only of benefit to the insurance companies who enjoy it. A personal episode in my family illustrates.

My son went to a well-known Boston hospital for an outpatient colonoscopy, and received a bill for $8000.00. When told that was outrageous, he protested and promptly received a bill reducing the charge to $1000. He was delighted to send a check for that reduced amount, even though I told him a fair price was probably around $300. He reminded me of a comment from a famous surgeon now deceased, whose name is emblazoned on a tall pavillion in another city. The old surgeon growled, "The only reason to carry health insurance is to keep the hospital from fleecing you." In a sense, that growl applied directly to the colonoscopy, which that hospital had converted from a markup into a holdup.

Discounts for Health Savings Accounts? HSAs scarcely have to penetrate the market much further before they have the market power to command an equal discount. That may still take a little time, because some states have hardly any penetration, while California has a million subscribers. In the meantime, the patient needs to be careful to ask for prices in advance. Almost every health insurance has started to impose high deductibles, so their proper stance is to insist on equal treatment. The old system of "First-dollar coverage" was responsible for making outpatient care a target for this sort of thing. The next advance, after making all outpatient care match market prices, is to insist a hospital charge the same thing for the same service for inpatients as it does with outpatients. To make that possible, it has to return to fee-for-service billing, and managements of Health Savings Accounts should settle for no less. That's the main reason DRG billing offends me, although there are lots of other reasons, and lots of other people are injured in different ways.

http://www.philadelphia-reflections.com/blog/2634.htm


A Change in Direction

For whatever reasons, much of the Affordable Care Act is still shrouded in mystery. After three years, an employer-based system is still predominant, and it remains unclear where big business wants it to go, or perhaps what makes business reluctant to go ahead. It is even conceivable big business just wants a vacation from healthcare costs, hoping to go back to the old system of supporting the healthcare system by recirculating tax deductions. Once an economic recovery restores profits enough to generate corporate taxes, it will once again be worth saving them by giving away health insurance and taking a tax deduction. Otherwise it is hard to see what value there is, in a year's respite. Under the circumstances, it begins to seem time to look at some new proposal, neither sponsored by an opposition party, nor motivated by antagonism to the Administration initiative. Let's reverse its emphasis, testing how much it is true the financing system now drives the health system, not the other way around.

Both big business and big insurance have been remarkably silent about their goals and wishes for the medical system, while quite obviously agitating for some sort of change by way of government, and quite obviously leaving their own agendas off the visible negotiating table. Let's illuminate the situation, with the medical system speaking out about how employers, insurance and investment should change, while leaving the medical system alone until we better understand the finances which are driving it. The proposed way to go about all this is to harness Health Savings Accounts, with its two different ways of paying for healthcare (cash and insurance), with two time frames for the public to explore (annual and lifetime), and passive investment of unused premiums versus concealed borrowing. So yes, it's technical, and necessarily it's been simplified. Two important features, multi-year insurance and passive investing, are outlined in this book. But one theme runs throughout: the customers, individually, should have choices. Nothing should be mandatory, everything possible should be left for individual customers to select.

Don't take on too much at once. Health Savings Accounts have grown to over 12 million clients, so it isn't feasible to do more than repair a few loopholes, and let it grow. The next logical step is to get rid of "first-dollar coverage". Not by eliminating insurance, but by making high-deductible the normal standard for health insurance. If we must make something mandatory, it ought to be insuring big risks before insuring small ones. Catastrophic indemnity insurance is a well-established, known quantity; it's not likely to need pilot studies to avoid crashes. It doesn't need government nurturing; it needs big insurance companies to see the writing on the wall. So let's get along with it, without any mandatory coverage rules. If the old system of employer-based and tax-warped coverage can get its act together, that's fine. Because as I see it, the main danger in Catastrophic coverage is it will penetrate the market too quickly; let people have a level playing field to watch the game unfold. When we have two viable competitive systems, the customers can decide between them, and both will emerge healthier.

An observation seems justified. In a system as large as American healthcare, changes should be piecemeal and flexible; win-win is strongly preferred to zero-sum. Sticking to finance for the moment, we slowly learn to avoid zero-sum approaches, while strongly applauding aggressive competitors. Napoleon conquered Europe, and Gengis Khan conquered Asia by smashing opposition, but it isn't an American taste. Since everyone would prefer saving for when he needs that money for himself, (compared with being taxed to support someone else's healthcare), let's see how far and how fast we can arrange that. The recent extension of life expectancy creates a long period between healthy youth and decrepit old age. About 20% of those born in the lowest quintile of income, will eventually die in the highest quintile. That's a good start, but the process can't go much faster just because someone beats on the table with his shoe.

Nevertheless, a larger proportion of people could save a small amount of money when they are young, and by advantageous investing in a tax-sheltered account, accumulate enough money to support their healthcare costs while old. Some people will never be self-supporting, of course, but the idea is to shrink the size of the dependent population as much as we can. We can at least try it out, on paper so to speak. And if it produces good numbers, perhaps we are ready for pilot projects. That ought to be the next step in our long-term plan to reform the health system without attacking it -- switching from one-year term insurance, to multi-year whole-life insurance. The underlying insurance principle is called "guaranteed re-issue". We aren't ready for that yet, but we are ready to call in the experts in whole-life life insurance and ask for their guidance, while setting up information gathering systems to navigate the reefs and shoals. The exercise does seem feasible, and is partially explored in the rest of this book. Meanwhile, medical science is steadily reducing the pool of acute illness and lengthening the average longevity. Actuaries are my best friends in the whole world, but I think they are wrong about one prediction. Like retirement planners, both professions assume future taxes and future health costs are going to go up. But I am willing to predict, net of inflation, they will go down as longevity increases. Just wait until you see an enthusiastic medical profession attack the problem of chronic care costs. The nature of retirement living must change. Both things will change because of changes in the nature of investing and finance, the lowering of transaction costs, and the effect it has on the economy. Because: investing is based on perceptions, and a general disappearance of acute disease will certainly re-direct perceptions of what is important.

Over thirty years have elapsed since John McClaughry and I met in the Executive Office Building in Washington, but a search for ways to strengthen personal savings for health marches on, trying to avoid temptations to shift taxes to our grandchildren, or mace money out of innocent neighbors. Most of the financial novelties to achieve better income return originated with financial innovators and the insurance industry. But the central engine of advance has come from medical scientists, who reduced the cost of diseases by eliminating some darned disease or another, greatly increasing the earning power of compound interest -- by lengthening the life span. My friends warn me it must yet be shown we have lengthened life enough, or reduced the disease burden, enough. That's surely true, but I feel we are close enough to justify giving it a shot. Before debt gets any bigger, that is, and class antagonisms get any worse.

While Health Savings Accounts continue to seem superior to the Obama proposals, there is room for other ideas. For example, the ERISA (Employee Retirement Income Security Act of 1974) had been years in the making, but eventually came out pretty well. In spite of misgivings, ERISA got along with the Constitution. And we had the Supreme Court's assurance the Constitution is not a suicide pact. So, still grumbling about the way the Affordable Care Act was enacted, I eventually stopped waiting to describe an alternative. The long-ago strategy devised in ERISA, by the way, turned out to be fundamentally sound. The law was hundreds of pages long, but its premise was simple and strong. It was to establish pensions and healthcare plans as freestanding corporations, more or less independent of the employer who started and paid for them. Having got the central idea right, almost everything else fell into place. Perhaps something like that can emerge from Obamacare, but its clock is running out.

http://www.philadelphia-reflections.com/blog/2740.htm


Some Underlying Principles

Casualty insurance formerly contained a clause making it noncancellable and guaranteed renewable. Except for disability insurance, most insurance no longer has those contractual promises, but the better ones will still "stand by their product". Prices were too unstable to permit a continuation at the same price as a legally enforceable right. In 1945, the Henry Kaiser caper changed the whole nature of the relationship, at the end of which the employees walked away with no individual renewal right at all, but got really great benefits while they had them. That was not a good bargain. Without a right of renewal, there is no good way to make internal transfers from young healthy employees to aging sick ones. Apparently, labor and management felt it was more important to get something out of the situation than to come away empty-handed. Most of these negotiations were private, and there may have been unrevealed considerations.

{top quote}
No individual renewal right, but really great benefits while they lasted. {bottom quote}
Bad Bargain.

But the one sure outcome of this turmoil was a young employee had no assurance of health insurance if he changed jobs, and no sure way of transferring surplus benefits to his later years, even after remaining within the same employer group for decades. Older employees were plainly getting more value for their health benefit, but young ones could not be sure they would stay around long enough to enjoy it. In retrospect, this may have been a driving force in the enactment of Medicare in 1965. Employees experienced "job lock", which definitely meant they could not take stored-up benefits to a new employer, or into retirement. Furthermore, casualty health insurance was gradually changed by employers donating the policy to the purchaser, so ownership of the policy migrated into the employer's hands. The employer had to change insurance companies for the whole employee group, or not at all, so slavery begat more slavery. The negotiated group rates naturally reflected this change. The business plan of health insurance does not differ greatly from automobile insurance: Premiums are paid to an insurer at the beginning of the year; and at some time during that or subsequent years, the insurer uses the pooled money to pay the claims. In practice, there does exist one important difference between the two types of casualty insurance. Many auto insurance companies imply they hope to renew a policy if the premiums remain paid, but hardly any health insurance is "guaranteed renewable" in any sense. You can pay individual health insurance premiums for many years to the same insurer, but the insurer still reserves the right to drop you.

This largely unanticipated disadvantage grows out of the sponsorship of health insurance by employers, since applicant employees are in no position to put strings on a gift. Its hidden unpleasantness was emphasized when millions of people were recently dropped from long-standing policies which did not conform to the Affordable Care Act's regulations. Original motives and understandings became unprovable after the passage of time. One could, however, easily imagine employers felt they might acquire new duties by law, and were reluctant to stand behind unmeasurable ones. One could imagine the insurers were uncomfortable with the risk an employee might move to a new state, and because of the Tenth Amendment to the Constitution, be facing insurers with no duty to continue coverage. This ACA dilemma came about in an environment with so little competition, neither the employers nor the health insurer felt compelled to wander into unforeseeable conjectures.

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In this single subsequent event during the Obamacare confusion, a serious disadvantage of employer-based insurance discarded its tradition as harmless boiler-plate, revealing the enforceable facts of the matter. A health insurance company can unexpectedly walk away from an employer-based contract, even when it is needed most. The patient gets it as a gift and doesn't own it. This dispute over fairness and original intent was surely involved in the government's decision to delay implementation of Obamacare for large employer groups.

By contrast, we must point out the Health Savings Account leaves unspent money with the individual as permanently as he can restrain himself from spending it. For this he loses the ability to pool with others, and must buy high-deductible insurance to provide the pooling feature for large costs. Interest gathered on his idle money remains his alone. By retaining ownership in the hands of the employee, HSA gains protections against much broader health-finance risks, than the Affordable Care Act's pre-existing condition-exclusion does, for its population segment.

In fact, this sweeping violation of a gentleman's agreement may make such arrangements unacceptable in the future. If the employer community finds it impossible to live with guaranteed renewability, they may feel forced to drop the fringe benefit. Not everyone wants to exchange freedom of choice for freedom from the expense of it, but some do. Consequently, opening this can of worms could lead to dissolution of the present system, which depends heavily on the tax-deductibility of the gift for employers. There is essentially no difference between an individual income tax, and a corporate income tax, except the corporate tax is higher. The world's highest corporate tax necessarily creates the world's highest tax deductions for employers. Reduce their wage costs, and you will reduce their income tax. But reduce your own tax, and you reduce what it has been paying for. That's the bargain, and no stalling will change it.

We must, however, introduce an observation which applies to all defined-contribution plans. The advantage has switched from the older "new hire" rather markedly toward the younger "new hire", because of the addition of investment income for the younger one. This is an advantage for one, not a disadvantage for the other, but negotiators seldom recognize such arguments. The terms of the agreement should probably be adjusted for this new development, which is illustrated in the first section of this book. But since the change is due to the mathematics rather than the judgment of the donor, experts will have to see what they can do about it, before it becomes a punching bag, desired by no one, but forced on everyone.

{top quote}
Some rude things it would not hurt to know. {bottom quote}
Employer-based health insurance was once a well-intentioned gift, with a regrettable lack of guaranteed renewability. Until the First World War, most corporations were controlled by founding families, and more employees enjoyed lifetime job security. The switch to stockholder control led to fewer benign gifts to lower-level employees. After a century of modification, the employee still is forced to bear the risk of losing his paid-for health insurance when he loses his job. The implicit good-faith guarantee of guaranteed renewability is however likely to vanish. Its implicit risk was transferred to the employee, but money to pay for it was not, until the Health Savings Account came along. With that, surprising discoveries emerged. Thirty years had been added to longevity, now making compounded interest money a truly substantial issue. Furthermore, many diseases had disappeared, generating overall a protracted interval of smaller expenses during working life.

As long as the (term insurance) risk of losing the premium flow remained, it was not prudent to invest the money in higher-paying assets, so the insurance intermediary was in no position to maximize float. Curiously, the famous Warren Buffett became one of the richest men on earth by buying entire auto insurance companies to transform the one-year "premium float" into a virtually permanent source of cash flow. Substituting health insurance for auto policies, essentially the same strategy is proposed by this book, for employees to consider. Except for Jimmy Hoffa, few unions have considered such a role, and in view of colorful union history, perhaps employers resist it.

Is there enough money in this approach? Some of the limitations to be encountered in paying for healthcare are specific and final; longevity would be one of them. At present, the average longevity at birth is 83. It would take some dramatic research discovery to extend it much beyond 93, but it is reasonably safe to project it will slowly rise from 83 to 93 during the next century. The medical costs of achieving such a goal are almost impossible to know in advance, but attempts are regularly made, and the best available estimate is $350,000 on average per lifetime, using year 2000 dollars. Women cost about 10% more than men, partly because of increased longevity, partly because of the statistical convention of attributing all obstetrical costs to the mother. There is reason to believe all late-developing diseases originate in the dozen genes residual in the mitochondria of the mother's cells, so the conquest of diabetes, cancer, Alzheimer's disease, Parkinson's disease, and arteriosclerosis -- during the next century -- is a reasonable prediction. Furthermore, new cures while generally expensive at first, eventually become cheap. Mix it all together, and while the costs of the next century may at times be towering, it seems entirely conceivable healthcare costs will become comfortably sustainable, a century from now. If we can generate the means to get to that point, give some of the credit to Warren Buffett, and John Bogle.

John Bogle may not have invented the idea you can't beat the index, but he certainly evangelized the news that 80% of mutual funds managed by experts, somehow don't beat the index. Let's explain. When you finally get over the idea of getting rich by out-performing the stock market, the idea reverses itself. The whole stock market is a proxy for the economy, and so although some people do get rich faster than the stock market grows, hardly anybody gets richer in the stock market without using some form of leverage, a genuinely risky approach. Professor Roger Ibbotson of Yale has compiled extensive data for the previous century, and convincingly demonstrated how relentlessly the American equity stock market has grown quite linearly, depending on asset class, but largely disregarding stock market crashes, and numerous wars, large or small. While small stocks have grown at a rate of 12.7%, blue chip stocks have consistently grown at about 11%. With big cheap computers we can see investors in stocks have received a return of 8%, paying a penalty for the small investor's inability to ride out really long-term volatility in any way but buy and hold. Perhaps, over time, we can find ways to narrow the overhead and return more than 8%. But for the time being one must be satisfied with 8% net, although 11% might become some ultimate goal. To go on, the 8% we get is made up of 3% inflation, so we better not count on more than 5% actual return. What will that achieve toward paying an average lifetime cost of $350,000?

The table plots how $400 will grow, starting at birth and ending at 83 and 93 years, with 5% compound interest. We've already described why 83, 93, and 5% were chosen, but why $400? It's a personal guess. It represents the amount I think would be achievable as a subsidy to "prime the pump". It might some day be a government subsidy for handicapped people who could never support themselves. And since it would be at birth, it would have to seem bearable to young parents. Many readers would react that $400 is too stingy, but politics is politics, and what people can afford is not the same as what they will vote to afford. In any event, we here are testing the math as a preliminary to announcing we can save a bundle of money by changing the system we are used to. Choose your own number, remembering we are attempting to reduce what is now reliably estimated as 18% of the Gross Domestic Product, and competing with a presidential proposal to give it to everyone. Further, the only thing you need to know about dynamic scoring is that making it free, will assuredly escalate its eventual true cost.

Compound interest always surprises people with its power, and in this example 5% just about makes the goal. There's not much room for error or contingencies. All of the known factors are conservatively estimated, and it passes the test. What isn't covered is the unknown factor, atom wars, a stock market collapse, an invasion from Mars. To be on the safe side, we had better not count on this approach to pay for all of health care. Just a big chunk, like 25%, seems entirely feasible. In the immediately following section, we examine the first "technical" problem. The first year of life is effectively as unaffordable as the last year of life, and newborns generally can't dip into savings.

http://www.philadelphia-reflections.com/blog/2816.htm


Lifetime Healthcare, Using Health Savings Accounts (1)

Can it be done? What would it cost? Since no one can predict future healthcare costs, no one knows how to pay for them. Conclusions like that over-state the difficulty. It's fairly easy to predict minimum available revenue, and fairly good cost extrapolations already exist. Payment feasibility can amount to comparing "no more than" with "no less than". With luck, we can judge the relative probability of success among payment proposals. Since that still sounds like a scam, what follows is step-by-step. We apologize to actuaries and mathematicians, who may find simplified explanations tiresome.

Medical Costs. We use someone else's estimate of present costs, and the foreseeable rate of growth. Blue Cross of Michigan, confirmed by federal agencies, estimates the average lifetime cost in America today roughly approximates $350,000 for a male, and about 10% more for females, using year 2000 dollars. An 83 year overall lifespan necessarily includes history, and prediction. The gender difference rests mainly on women's somewhat longer life expectancy, as well as the statistical convention of attributing all obstetrical costs to the mother; it's likely to be a stable ratio. A million dollars for a family of three is pretty daunting. Because there have been so many changes in medical care in the past century, likely to be repeated in the next century as well, $350,000 must be considered a soft number. Most extrapolation errors will arise from it, so an analysis reduces to this question: How close could we come to covering a $350,000 cost, without distorting medical care? To simplify explanation, the cost goal is reckoned in year 2000 dollars, so inflation and other adjustments are taken from revenue, to make them match. Inflation has remained steady at 3% in the past century, so 3% per year is accepted for the future in this analysis. Medical inflation is somewhat different; greater than 3% in the past, recently diminished. Only revenue projections are discussed, with costs taken as a given. It isn't perfect, but it can serve as a base for mid-course corrections, providing a margin for error is adequate.

Revenue, per average person. It is easier to estimate future bulk numbers for the whole nation, than to predict any individual's future cost. Therefore, our approach is to take national costs, divide them by the population, and concentrate final analysis into a hypothetical "average" person. Since the goal is to compare average costs with average revenue, it is important to avoid using revenue as a basis for costs. The temptation is great, however, because of the well-known tendency of costs to rise to the level of available funding. To the extent possible, such behavioral adjustments are reserved for "dynamic scoring."

Other Data Points. Longevity has risen by 30 years in the past century, but is now relatively stable at age 83. Where practical, we have extended calculations to 93, which seems a reasonable guess for where longevity might go in the coming century. How much an average person could or would be likely to accept as a personal expenditure is hard to say, just as it is hard to say how much cost the country would be willing to pay for subsidies to the poor. There is a temptation to use present costs as a surrogate because there is so much uproar about them, but that approach has too much circularity to its logic. After all, the public is complaining. So, whenever practical, we have presented a family of curves which permit the reader to choose between alternatives. The final data point is the maximum achievable interest rate, a matter of enough complexity to require special discussion, which follows after voicing an opinion about the medical future underlying this subject.

The medical side of it. There is fair reason to believe most or all late-developing diseases might originate in the dozen or so complete genes in the mitochondria of cells. These genes are only inherited through the mother, and probably originated in the plant kingdom. So the conquest of our currently most expensive diseases -- diabetes, cancer, Alzheimer's disease, Parkinson's disease, and arteriosclerosis -- during the next century -- is not a totally unreasonable prediction. Furthermore new cure discoveries, while generally expensive at first, eventually become cheap. Mix it all together, and while the costs of the next century may at times be towering, it seems entirely conceivable healthcare payments could become self-sustaining without financial intervention, a century from now. If we generate the means to get to that point, curiously we should give some credit to financiers, like Warren Buffett and John Bogle. If that sounds confusing, read on.

What passive investment income for a Health Savings Account is generally achievable? Essentially, this proposal advocates saving in advance instead of paying after the fact (often called "Pay as you go.") That translates into being paid interest instead of being charged interest. For this, we steer the reader toward investing his savings as much as possible in an HSA (Health Savings Account), rather than an IRA (Individual Retirement Account), or a 401(k) plan, the employer-based equivalent to IRA. There's nothing the matter with these other tax shelters; they are just not as good as an HSA. The only qualified American savings plan to contain a tax shelter on both deposits and withdrawals is the HSA, and even its tax shelter on withdrawals is limited to approved medical expenditures. The Canadian savings plans do have this dual advantage, but in every other qualified American plan it is necessary to reduce either the deposit or the withdrawal by its estimated taxes at different ages. All graphical representations of IRAs and 401(k)s likewise require a mental adjustment for taxes. In amounts this large, taxes make a vital difference. After-tax savings vehicles are necessarily less generous, and are not discussed.

So far, so good. Probably the greatest reluctance this proposal will encounter will come from an almost absolute need to invest the HSA in common stocks, which many people sincerely feel is a form of gambling. But to reflect on history for a moment, it took over a century for Americans to overcome their resistance to banks, which are now found on practically every street corner. Pioneer families were obedient to Shakespeare's, "neither a lender nor a borrower be," which indeed remains pretty good advice in most circumstances. But banks were also the foundation of the Industrial Revolution, and their process could also be called a form of gambling. Modern index funds are a far cry from 19th Century mining and railroad stocks. Their risks, while not totally eliminated have been tamed, so the modern economy really has no savings vehicle quite as safe for those who must live in the real world. At this particular moment in time, almost no stock is as risky as bonds, and in Europe cash in the mattress can lose 50% of its value in a month, responding to central-bank changes in currency rates. True, approximately every thirty years stocks fall almost as much, but modern investment has ways of coping with the "black swan" risk, by somewhat sacrificing some of the investment return. Every company eventually comes to an end in about a century, and the only real safety comes from wide diversification of risks substituting for agility in jumping among them. The current total-market index fund model allows for investment in the whole economy at once, counting on remorseless market pressure to purge the index of failing companies, while constantly adding new ones who are succeeding. Holding several thousand successful stocks at once, is the new definition of safety. Meanwhile, the new definition of success is moderate but relentless growth, from low costs and low taxes.

John C. Bogle of Philadelphia probably did not invent the notion you can't beat the index (he means the stock market averages like Dow Jones, Standard and Poor, Russell, etc.), but he certainly evangelized the idea. Let's explain. When you finally overcome the idea of getting rich by out-performing the stock market, the idea reverses itself. The entire stock market is a proxy for the whole economy, and although some people do get rich faster than the stock market grows, hardly anybody gets appreciably richer than the index in the stock market without using leverage , and leverage is only for gamblers who can disguise the nature of their leverage.

Professor Roger Ibbotson of Yale has compiled extensive data for the previous century, and demonstrates how relentlessly the American equity stock market has grown quite linearly, varying by asset class but largely disregarding stock market crashes, or numerous wars large and small. While small stocks have grown at a rate of 12.7% per year over the past century, safer Blue chip stocks have consistently grown at about 11%. With big computers we can see investors in stocks have only received a return of 8%, which sometimes implies the financial industry is absorbing 3% for its expenses and profits. That may not be a fair comment, since a considerable portion of the 11% must be invested in lower-yielding bonds to protect against periodic black swan disasters like 1929 and 2008; this point is expanded later. Vanguard, Bogle's fund, reduces overhead cost by matching his portfolio to the index and letting it run indefinitely, a process known as passive investing, which at least minimizes taxes and expenses. Perhaps, over time, ways can be found to widen the investor's lifetime return to more than 8%, but for the time being one must be satisfied with 8%, and 11% remains the ultimate goal for the far future. Warren Buffett does better than that by buying whole insurance companies and leveraging with their cash float; that's not exactly possible for other people. To rephrase the whole business, a total-market index fund offers the 8% current safe limit to passive investing, within a bumpy unsafe 11% world. Furthermore, the 8% contains steady 3% inflation, so investors better not count on more than 5% spendable return. A disappointingly low five percent, relatively safe, after-tax and after-inflation, return. What will that achieve toward paying an average lifetime cost of $350,000? Remember, this is compounded , which has a magic of its own.

Table xxx plots how $400 will grow in response to compounding, starting at birth and ending at 83 to 93 years, at 5% to 12% compound investment return. We've already described why 83, 93, and 5% were chosen, but why $400? It's a personal guess, shown at the bottom of a family of curves which go up to 12%, the current maximum. It represents the amount I guess would be privately regarded as within almost everyone's reach, and if lost wouldn't financially cripple them forever. It would admittedly have to come as a government subsidy for handicapped people who could never support themselves. And since it would be at birth, it would have to seem bearable to young parents. Also included in this family of curves, are 12% (the limit of growth in the stock market over the past century) and other 1% levels down to 5%, so the effect of taxes, overhead, inflation, and bond protection against stock crashes, can be judged. Note in particular how the curves widen around age 60, exposing the new opportunity created by the 30-year increase in longevity during the past century. The consequence of every improvement in the investment return is multiplied appreciably, after you reach that bend in the curve. In my personal opinion, this growth is both staggeringly large, but disappointingly inadequate to pay for all future health care with enough margin to justify committing the whole country to risking it. It will pay for a big chunk of it, however.

Another central point of the graph however is that a lifetime of investing a relatively small amount -- at reasonably achievable interest rate -- has apparently come within our grasp. In my view, however, we have to do better than this. We have to tweak this basic idea enough to generate more than $400 at birth. Although prosperous people could use it to make a large reduction in their lifetime medical costs, there is not enough room for error, to permit the nation to risk so much for millions of people with only a marginal income. In the following sections we apply a variety of other variations to convert an attractive idea into a widely useful one.

************* Compound interest always surprises people with its power, and in this example 5% just about makes the goal. There's not much room for error or contingencies. All of the known factors are conservatively estimated, and it passes the test. What isn't covered is the unknown factor, the atom wars, a stock market collapse, an invasion from Argentina. To be on the safe side, we had better not count on this approach to pay for all of health care. Just a big chunk, like 25%, does seem feasible. In the immediately following section, we examine the first "technical" problem. The first year of life is just as expensive as the last year of life, and you can't dip into savings.

http://www.philadelphia-reflections.com/blog/2858.htm


Basic Coverage: Three Big Problems, No Little Ones

{Privateers}
Columbus and the Egg

Let's summarize. We started with the classical Health Saving Account (C-HSA), which may need a little updating, but appeals to millions of frugal people as a simple way to avoid the tangles of present-day healthcare financing. The law hasn't changed much, but use by millions of subscribers has turned up many surprising features, all good ones. Deliberately overfunding them has unexpectedly useful results, for example, in providing retirement income if you have been lucky with your health.

On that foundation then was devised New Health Savings Accounts (N-HSA), combining six more innovations, each of which is easy to explain, but in combination utterly transform the basic design. The extended longevity of the 21st Century makes compound interest on passive investing into a powerful investment tool, and is used to reduce healthcare costs to the consumer, markedly. Secondly, improved healthcare for the working years has unbalanced the employer-based model, so sickness costs are getting crowded into retirement years. For this, the accounts permit extraction of the first year and last years of life, transferring their heavy costs to the working generation where employment-basing still makes sense. And so on. With very little new legislation, most of this package is ready to go.

Lifetime Health Savings Accounts (L-HSA), patterned on a whole-life model. L-HSA won't work without some new legislation to edge around recent regulations and some outmoded premises. Multi-year coverage is cheaper, but requires a longer commitment, so it needs to be precisely designed. Starting fresh, it directly addresses a host of problems hiding behind a century of habit. Its flexibility accepts a range of designs, stretching from self-insurance out of a bank's safe deposit box, stretching all the way to letting life insurance companies run everything.

We conclude insurance of every sort "shares the risk" for expensive problems, but generates extra expense when little problems get insured that don't need to be. Little medical problems swamp the fixed overhead of insurance unnecessarily. When you only insure essentials -- as true catastrophic insurance does -- it costs far less than insuring everything. So, here's an outline of a major variation, adding features, one by one. It's a Health Savings Account, on steroids.

Proposal 25A: Let's combine the high cost of the first year of life with the really high-cost last year of life, as a basic foundation of minimum health insurance.
The dual combination could surely include everyone. What I am technically trying to achieve, I admit it, is to combine one life situation, which sometimes generates a surplus it can't use, with another situation, where every baby creates a difficult debt for someone else to pay. And whereas 100% of the population experiences birth and life at the two ends of life, there is ancient uneasiness about sharing liabilities outside of families, and even, how far the boundaries of families will stretch. Ancient fear of violating obsolete family boundaries sometimes hinders useful proposals. Because of increased longevity, grandparents are now real people, not just a picture on the wall. And by no means are they all senile.

A sly feature of all this is, people still alive are willing enough to overfund the costs of the terminal care lying ahead of them, but few still alive have their own birth costs on their minds, even if they were never paid. That lopsided initial generation might generate sizeable reserves for a circular program, if we imaginatively link accounting between generations, carrying those birth costs forward. Another unrecognized feature is the costs of these first and last years of every life are in fact both paid in retrospect, and often not by the patient.

Furthermore, most of the heavy expenses of both ends of life are created within a hospital, which often delays final billing until the issue of responsibility is settled, creating blind spots in which final responsibility is unclear. Nevertheless, the hospital aggregates many services in a total hospital bill, so bulk payments by diagnosis or even by age, are tempting but as yet crudely perfected. When all these matters finally get standardized, reimbursement from one insurance entity to another should become commonplace. The final transaction in both end-of-life insurance as well as beginning of- life insurance easily and more naturally evolves into who reimburses some other entity who (temporarily) paid the bills.That's about all there is to say about the funds flow, which should become very simple, but come in larger lumps. At such esoteric levels, no one cares whose money it is, so long as it gets paid. At the local patient level, family transfer issues can be troublesome. It can be recalled we have gone into detail about grandparent/grandchild transfers in the section on New Health Savings Accounts, and indeed it emerges as the main innovation of that effort. Still earlier, we described the compound interest hidden in the background, paying for a great deal of it. As an aside, most people will eventually find it is desirable to use overfunded accounts as a basis for tax-sheltered retirement costs, and will therefore often die with a small surplus, which is the basis for closing the loop between generations. That may take time to evolve.

Proposal 25B: And then, add catastrophic coverage regardless of age, less the cost of overlaps. Title: Tri-Challenge Basic Coverage.

Here's the universal catastrophic coverage we promised in the first chapter, minus the first and last years of life overlaps.

Overlaps. One passing word about overlaps. Reducing overlaps is one of the main mechanisms for reducing costs, but the insurance entities will fight fiercely over who gets the reductions. For example, what about a six months old child who dies with an expensive hospital bill? My suggestion is that the beginning of life insurance pays first, the end of life insurer pays second, and then the catastrophic insurer pays for the balance. This gives the savings to the catastrophic carrier, but most of the cost is given to grandpa, who is dead, and anyway most of it is investment income, leading to less complaints.

We thus design the basic coverage to include two universally-unavoidable costs, plus the universally-inescapable risk of unpayable health costs at all ages in-between. It is clearly superior to less universal, and more unaffordable, coverages.

Proposal 25C: Require the unused birth coverage to be transferred, either at the time of death or optionally at other times, to either a designated grandchild by inheritance or to a designated pool of unassigned third-generation recipients. The grandchild's Health Savings Account would begin at birth, capturing 21 extra years of compound interest, compared with employer-based insurance.

The purpose of beginning a HSA at birth is to add 21 years to the compounding, while staying within the laws of perpetuities.

A 1:1 ratio of national grandparents to national grandchildren does exist, but so do multi-children families, no-children families, unmarried families, divorces, etc. There is definitely a need for a pool within which, mis-matched funds are administered.

The childhood transfer feature adds about $28,000 to the coverage, but it would only require $42 a year (added to the last-year of life premiums, at 6.5% interest compounded from one year of age). Because catch-up transition at age 40 would require $200 annual contribution to catch up with newborns, rising to $28,000 for someone aged 65, it might be better to add $25, or so, at birth to reduce the even greater cost of late joiners (over age 40) to the plan. They must be enticed, however, because they are the ones closest to activating the transfers, and hence are the most important support to enlist to an innovation.

Proposal 25D: This is voluntary Tri-Challenge Basic Coverage. Whether to make it mandatory, whether to subsidize it for the poor, and whether to replace Obamacare with it -- are political decisions, not questions of insurance design.

This coverage probably approaches half of the entire health costs of the nation, depending on how you treat the cost of prison inmates, the unemployables and illegal immigrants. If science should ever succeed in eliminating every major disease and therefore every other cost of healthcare, 18% of present costs would very likely persist. And in fact the cost of prisoners, mentally retarded and illegals show no signs of changing much, either.

They are costs most likely to be permanent, but what we spend on the rest will depend on where we place the limits on "Catastrophic" care insurance. That cost depends on the size of the deductible, and the upper limit of coverage. You can readily predict the debate: the higher the deductible, the lower the premium, so the out of pocket cost depends on the deductible, too. But while controversy would remain, the great beauty of this design is the lessened political resistance from every voter who would likely benefit, which is 100%.

There is no escaping these realities, and in the meantime the rest of health costs will dwindle down to the cost of birth and death, which change their nature very slowly. Therefore, although it is not traditional in the health insurance field, I propose it has long seemed an entirely natural thing, for the costs of childbirth to be an obligation of some other generation, usually but not always of the same family.

The problem is indeed complicated by the unusual concentration of malpractice claims in obstetrics, as well as the marginal finances of parents at this stage of their careers. But the hidden effect is to create more, or less, valuable babies, depending on how you judge the impact of emotions versus supply and demand. It was almost an unknown issue a century ago.

Any resistance to this proposal is thus likely to be more instinctive than rational, since we have had so many generations of channeling such issues within the family unit. The relatively trivial cost of funding children's health care through 104 years of compound interest does generate a temptation to overfund the program, which if necessary can be frustrated by requiring one or more zero balances per lifetime. That is particularly true in this particular instance, when compound interest could generate almost any amount of leveraged money at the death of a grandparent, simply by increasing the modest amount impounded at the grandparent's birth, and waiting long enough for it to grow. People in charge of managing the currency are then drawn into the discussion. Indeed, the relatively confiscatory level of estate taxes (60-70%) is a sign our society is not comfortable with perpetuities, although available remedies are fairly simple. Indeed some states also levy inheritance taxes on the recipients as well as the donor's estate taxes.

Whatever the traditional resistance, it's permanently true that costs of the first year of life will always greatly exceed what a newborn is able to pay. And therefore it surely follows that this obstacle has hindered health financing for a very long time.There must be some mechanism for inter-generational transfer of funds, or life cannot continue. At present, it's called a family, and families are under strain. Conditions of modern life have evolved to the point where interference with some generational transfers will cause more suffering than relaxation of such attitudes. There will be resistance, but it must be persuaded to re-consider its position and bilateral compromise must result.

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Warning: Start Saving While You are Young. Health Costs for the first year of life are reportedly 3% of the total, and while the last year of life (15%) is worse, those costs laid on young families are particularly disruptive because of still higher costs later if neglected. At best they compete with college, housing and automobile costs, and probably reduce the birth rate of the middle class. The enclosed graph shows a family of curves based on subsequent investment income from different invested external-contribution levels at birth, to help readers judge how much surplus might likely be generated at the end of a lifetime of average costs. Our goal is to estimate the cost of overfunding grandpa's health costs at birth, so there would remain an incentive for him to spend wisely, but still generate enough surplus to fund a grandchild's juvenile health costs. That is, to estimate the cost of transferring the obligation of grandchild costs from parents to grandparents. But it must ultimately be recognized that the full consequences of such a basic change, are unpredictable.

First, however, we must determine the size of grandchildren's costs. 3% of all costs ($10,500) for the first year of the child's life sounds plausible. But 5% of costs from the first birthday cake to the 21st birthday ($17,200) sounds surprisingly high and needs to be challenged, if only to defend it properly from rapidly escalating educational costs. That's one of the great advantages of starting with a demonstration project; you can see where the bills are coming from. But that's mostly a quibble, because even $17,000 is manageable, and the legal boundary of age 21 is strongly defended.

Let's take just a moment to examine the laws of perpetuities, which mostly focus on intergenerational inheritance. Established about three hundred years ago as common law, they permit transfers for 21 years after the birth of the last person to be alive at the time of the bequest. I'm not a lawyer, but those do not seem like a handicap for what is proposed.

The pool would also pay for multiple children in a family or those newborns who do not have a willing grandparent. I never met any of my four grandparents, so I don't know if they would have been willing or not. As the father of fourteen living children, one of my two grandfathers would surely have wanted some adjustments. If it becomes an issue, the government could easily afford to donate the $7 yearly required to avoid the issue. During the early transition phase it might possibly be necessary to have government backup if temporary mismatches appear, eventually repaid by adjusting the initial cash deposits. It happens the birthrate is 2.1 per mother, which easily matches one-half per grandparent, greatly relieving but not eliminating the occasional mismatches. It would seem a fairly simple task to charge 1:1 (grandparent to child) for the first three or four years, and gradually re-adjust if more precise data becomes available. It could even be possible to to pay for the child-generation completely, but this is not entirely desirable. It should not require dynamic scoring to understand that making healthcare free would increase its cost.

{top quote}
Not everything which is desirable to do, is desirable to do in a big hurry. {bottom quote}
The political advantages are wide-spread. Much tax resistance to paying for healthcare would be deflated by knowing that almost all cost was absolutely essential, and for the most part universal. The parent generation would be relieved of the cost of the healthcare of children. During transitions, there probably will be problems with overlapping coverage. Not only is Medicare reducible for overlapping costs, but the U.S. government is relieved of some of the embarrassment of borrowing 50% of Medicare from foreign countries in order to pay for it. But, sorry, we're getting down into the weeds.

If desired, the 1.6% salary withholding for Medicare can be reduced, relieving working people and their employers of about one quarter of Medicare costs. The tax inequity between employees and self-employed should be eliminated anyway, but this somewhat reduces the disparity. The doughnut hole was a good idea, but it is part of copayments which are a bad idea. It should be self-evident that making hospital insurance free but doctor payment subject to Part B premium, creates unmanageable distortions. Many healthcare financing problems are like the fable of Columbus and the egg -- once explained, anybody can do it. Nevertheless, it would seem much better to proceed slowly according to a defined plan, using demonstration projects and experimental trials, mid-course adjustments and careful monitoring. Because not everything which is desirable to do, is desirable to do in a big hurry.

Finally, someone does need to calculate the cost of adding catastrophic stop-loss insurance to birth-and-death insurance. It isn't possible for an insurance outsider to calculate the overlaps between the two types of insurance, which are probably considerable. But, particularly if there is a lot of overlap making it relatively cheap, that combination would constitute the kind of basic insurance which covers what everyone needs, and very few would be able to fabricate. If you linked it to a more sensible diagnosis related code, as a basis for DRG for inpatients, and firm association with market-based outpatient costs, you might get a firm basic package. It then only requires a relative value index for items which do not overlap, and a firm rule that the same items be charged the same amount, for helpless inpatients and not-so-helpless outpatients.

What are vital but uncovered by this basic package are new scientific discoveries, so self-evidently essential they create temptations to exact extortionate prices. I'd say it would be shooting yourself in the foot to go hard on such discoveries for their first few years. Overall, that which is left uncovered by this hybrid tri-insurance may be hated for its commercial motives, but nevertheless remains something we clearly want to encourage. Managing costs of that sort ought to be left to the Food and Drug Administration, the Patent Office and competition. And silently endured by insurance.

http://www.philadelphia-reflections.com/blog/2882.htm


Lifetime Healthcare, Using Health Savings Accounts (3)

Let's return for the moment to the difference between what a total market index earns (11%) and what just about every foundation and endowment earns (8%). That 3% difference is so large it has a major effect on what an HSA can provide. If the 3% represented what the financial industry imposed as a middle-man cost, it would be an outrage we should work to change. However, it likely has a more benign explanation with standard available protections. Remember, there are two cycles recognized in the stock market, one of which is the daily or weekly volatility which can be ignored by long-term investors. For a century it has had a standard deviation of about three percent, conventionally referred to as if "risk" can be represented as one standard deviation in amount.

However that is not the risk most long-term investors fear. Roughly following a 30 year cycle, although don't count on that, it has recently been termed a "black swan" risk, of 30-50% volatility. Such disturbances usually last a couple of years, and can be utterly disruptive to foundations and nonprofits who meet a payroll to keep their doors open. The market has always recovered in a few months or years, but meanwhile how can you function?

Available solutions vary, but generally come down to a choice between a contingency reserve, and a "balanced" portfolio of stocks and bonds, usually in 60/40 ratio. Since bonds generally return about 5% instead of the blue chip stock average of 10%, the nominal return on a balanced portfolio is reduced from 10% to 8%; the real return after inflation is further reduced from 8% to 5%. However, in the case of a lifetime HSA the lifetime at risk of a black swan crash stretches from birth to age 66, much longer than 30 years. We suggest the after-inflation bond content of the portfolio should grow 2% a year from age 43 to 66, when the eventual bond content of the portfolio should roughly equal the required lump-sum payment to Medicare. Once the disbursement is made, the remaining portfolio can return to 100% stocks.

It could still fund a Medicare buy-out without disturbing the rest of the investment program if by bad luck the time for a buy-out coincides with a bear market. If there is no bear market, the cost of this safety measure can be shrugged off as just the price of safety, because it also permits the extra risk of 43 years of a 100% stock portfolio. The overall effect -- 43 years of 100% stocks ignoring the risk in the background of a black swan -- is to increase the portfolio's overall total return from 5% to 6%, as well as mostly guaranteeing the fund will be undisturbed by black swans at just the wrong time. This safety assumes no withdrawals from the fund except this one, so no amount of volatility needs to be considered except volatility at the one moment of liquefying a portion to buy out of Medicare. That's individual black swan risk; the black swan risk for the entire population is otherwise practically certain to afflict someone at some time within a 66 year interval. The tiny proportion of people wealthy enough to weather the storm with outside funds can elect not to do it at any time up to the 43rd birthday. However, they should probably be required to fund their own contingency arrangement, because for a poor person to neglect safety is a risk of unraveling the scheme they should not run. Remember for a moment the scheme promises to cost $xxxx for the avoidance of lifetime costs of $350,000, and thus is entitled to insist on reasonable protective rules if someone wants to share the benefits.

http://www.philadelphia-reflections.com/blog/2899.htm


Lifetime Healthcare, Using Health Savings Accounts (4)

At the time this book is written, newspapers report 12 million people have Health Savings Accounts. Unfortunately, newspapers also report the Affordable Care Act ("Obamacare") is awaiting Supreme Court decision as to its Constitutionality. Like the rest of the healthcare world, we must wait to see how the decision affects the financing. At the hearing, Justice Alito hinted the effective date of the decision might be delayed longer than the decision itself. Therefore I decided to proceed with a discussion of really radical health insurance reform, necessarily treating working-age people as a later add-on. The whole matter of paying for healthcare amounts to shifting resources from people who are able to work, to paying for people who are too sick to work. Insurance is one way to accomplish it, but is the ideal way for only some of it. For one thing, insurance has proved to be remarkably expensive. It involves a major shift of funds from those who can work, to those who can't, but administrative income from the transfers somehow gets dissipated. We can do better than that, by hundreds of millions of dollars.

Furthermore, the financial strain has overwhelmed the political obstacles. To speak of Medicare as a political "third rail" is no longer tolerable. It is the job of politicians to persuade the elderly that no one wants to ruin their entitlement, shorten their lives, or ration their care. Protection from all that would be strengthened, not weakened, by making the system sustainable. And the time is long past for believing the government will protect the funds better than having the money within one's own possession. At the other age extreme, the parents of children will do a better job of protecting the kids, than treating the whole age group as if it were in a child-care center. Mind you, there must exist a fail-safe or catastrophic, health insurance against legitimately huge medical expenses, plus a system of oversight for overcharging. But the first level of price resistance must rest with the patient's family, who have an avenue of appeal if they are bullied. We need an appeal mechanism, not a system of regulators. We need catastrophic insurance, not first-dollar coverage. With these two basics in place, the next level of decision must be restored to the patient's family. While of course frugal shopping is useful, the main decision a family must make is whether to spend their funds now, or save them for a later rainy day. A public education program might well prove useful, reinforcing but not supplanting the advice of a family physician. By improving the investment choices of the administrators of Health Savings Accounts, the investment experience of the whole country would be enhanced by educating the public in personal investment. That would be an invisible advantage of an enlightened HSA investment service; the visible part would be to set realistic goals, and then achieve them. Assuming legal or legislative clearance, the total lifetime cost would be one single payment at birth of $2200 (invested @ 6% compounded), in addition to whatever it turns out Obamacare charges for coverage from age 22 to 66.

In return for that, Medicare could stop borrowing 50% of its costs from foreigners, and each individual would cover the cost of one child per subscriber, up to age 21. (Remember, the present birthrate is 2.1 children per mother.) That is, individuals with children would get coverage for one designated child from birth up to age 21, for $220, which would be a bargain price for what is now 8% of lifetime medical costs, or $25,000. The government would get a far larger benefit of 50% of Medicare costs for one person. That would be a far more attractive part of the bargain, paying for coverage worth $82,500, for $2000. Although this would be a bargain package for many subscribers, it would only be of tangible value to those who had children. Very likely, it would be a futile selling opportunity, whose only virtue from presentation is to illustrate how we already start with solvency instead of subsidy. Subsidy -- and advantage to working people -- comes later, when compound interest makes the other, more customer-attractive, features vastly cheaper to provide. For that, we must await the Supreme Court's decision, followed by bipartisan debate and eventually, election results.

So, that's sort of a disappointment until we begin to envision what some regulatory changes could make, in addition. Remember, unless there is a change in the law, one quarter of Medicare's cost is supplied by payroll deductions from working people, and one quarter from the premiums paid by Medicare subscribers. Therefore, this proposal would only pay for half of the cost of Medicare, the rest being an elimination of the present deficit spending. If a system of voluntary Medicare buy-outs could be established, these costs would disappear, and both working people as well as present Medicare subscribers would be appreciably better off financially. At first, only the adventurous first-adopters would take the bargain, but even that slow beginning would allow a new program to get started, picking up more timid subscribers gradually. The whole population would now be offered a voluntary bargain. The next legislative step with significance would be to provide for an overfunded Medicare buy-out, which with a lump sum payment gives the customer a Medicare buy-out plus the surplus, which goes to cover the first 21 years of medical cost for a designated grandchild. Where does this extra money come from?

Taxing the Working Generation We won't know the realities of financing Obamacare for quite some time to come, but we can estimate how painful the revenue effect would be for working people, in addition to their Obamacare costs. For an extra $5 a month, from age 22 to 66, a small tax on working people would generate (with 6% compound interest) an extra pool of $xxxxx by age 66. That would seem easily adequate to supplant the $2220 pump priming at birth we postulated at the beginning of this section. Since it is paying for subsidies to the poor as well as the well-off, it probably should be discounted by a third or even a half. So, if that seems insufficient margin, it could be raised in incremental amounts of $5 per month, depending on how much saving could be effected in Obamacare costs, which at present we do not know. Nevertheless, the numbers inspire reasonable confidence that this general approach is at least worth a demonstration project. At present, the main uncertainty revolves around the consistent ability to generate a 6% return through index funds, including adequate provision for the "black swan" sort of recession every few decades.

Technicalities of Transition Once transfers from the "grandparent" HSA to the "grandchild" one are working smoothly, the working-generation contribution can be eased by up to 8% (the cost of children). Furthermore, if the option of buying-out Medicare is made legal and feasible, it should no longer be necessary to deduct Medicare withholdings from paychecks; prior payments might be open to negotiated rebate. That should eventually reduce the price of lifetime coverage, but unfortunately might make any remaining gaps less appealing for poor people until the entire life cycle gets into operation. Looking ahead, considerable premium costs would be less necessary, and are therefore up for consideration in the new scheme.

Repealing Obamacare's present prohibition of Catastrophic Health Insurance after age 30, is certain to be very popular, and should be an early priority, leaving extra room for compromise after the removal of childhood costs. All Obamacare policies are high-deductible, but their premiums have been raised to cover the uninsured. Once this funding concept has proven itself, that should be less necessary. Since the HSA covers everyone who wants it, and anticipates subsidies for those who cannot afford it, a compromise phase-in should be possible. How much real re-insurance would then cost is probably fairly well known to its recent insurers, although recent uproars will probably make new bidders rather protective. In this sense, public opinion is important to the price which would be demanded. As far as subsidy to the poor is concerned, Obamacare originally anticipated hospitals would be able to lower their prices if everyone became insured and internal cost-shifting would stop; this would provide a test of that hope. Really serious planning may have to be deferred until a concerted effort is made to clarify the extent of internal hospital cost-shifting; one hopes this is already under way. If the approaching Judicial outcome produces a mixture of priorities which cannot be balanced, there will just have to be a later Congressional action to balance it. Since it can be anticipated that piecemeal introduction of lifetime coverage will seem attractive to many, perhaps there will be several opportunities to get things more optimal. Transition into a new system must coincide with transition out of the old one. Unfortunately just the fear of deadlock, could slow smooth advancement.

Since John McClaughry and I were the two originators of Health Savings Accounts in 1981, we obviously are pleased with the notion that so many fellow citizens see our idea as the main alternative to comprehensive government involvement. The previous few chapters outline how I think the HSA can be stretched to finance and reduce the cost of all medical care, how its segmentation would assist a stepwise transition to it, and how it would essentially leave the scientific details to scientists while leaving more decision-making to the patient. Having once been in charge of the Professional Standards Review Organization in my area, I am completely satisfied that professional self-governance can quickly control abuses, if there must be an iron fist hidden somewhere inside this velvet glove. Doctors are generally no more interested in administration than Senators are, or than executives of unrelated businesses once were; but doctors are disciplined and bright, which is the main qualification. I share Senator Wallace Bennett's view that a small but adequate minority can be found to do the work, although overstaffing will seldom prove a problem.

Health Savings Accounts were originally designed to replace employer-based health insurance, but millions of subscribers would be relatively satisfied with either one. Like any one-size fits-all solution, each will seem uncongenial to some people, who should be left free to make a choice. By leaving enrollment voluntary, institutions can gradually expand or contract to adjust to demand. I have an enduring but blurred memory of the chaos which ensued in 1966 when Lyndon Johnson on television invited old folks to start sending the government their medical bills, when it was soon discovered Medicare did not even have a listed telephone number. A vacant supermarket was found in Camp Hill, Pennsylvania, to store the unopened mailbags of Medicare claims, floor to ceiling.

All the HSA needs, to integrate almost any reasonable working-person health insurance into lifetime coverage, is a reliable stream of enough money to function. Starting at age 21, this money would link the roll-over money from the "grandparent's" surplus Medicare funds after death to the newborn's new HSA. Judging from this untried analysis, the likely limiting step would appear in organization of the proposed Medicare "buy-out" program, since infirm old folks in the last years of life would have little incentive to switch. In fact, demographic mis-matches might appear between any two segments of a lifetime program. Therefore, a contingency fund to cover these anticipated short-falls, especially for the first year of life, would probably have to be regarded as a main hindrance to smooth start-up. From my talks at public meetings I detect that elderly people have accepted Medicare as a fact of their lives, and are surprisingly indifferent to the Obamacare commotion. They even express the unlikelihood that anyone could ever change the present entitlement, in time to make a personal difference to them. This attitude must be gradually persuaded to yield, and then secondarily reflected by their elected representatives. A surplus is welcome at any juncture; it is the shortages which will hurt. The key to smooth transition is to devise the right incentives, well in advance of the uproar.

http://www.philadelphia-reflections.com/blog/2929.htm


Healthcare Financing, Up to Medicare Age

We have just estimated the lifetime healthcare cost of people up to age 65 as $128,000. That estimate was largely derived from guessing the limit of what people could afford for a lifetime of healthcare ($325,000), and observing you can't spend more than you have, indefinitely. From the total was subtracted the present known cost of Medicare, leaving the younger people with a healthcare budget of $128,000 from birth to 65.We then calculate how much compound income could be derived from $128,000 at 8%, recognizing it would arrive in yearly limits of the Health Savings Account Law of $3300 per year, from age 26 to 65. We calculate under two assumptions, with and without privatizing Medicare, and in two other assumptions, average life expectancy of 83 (the present figure) and life expectancy of 93 (the projected life expectancy). Curiously, the longer life expectancy has a lower projected cost, probably because it does not include the treatment costs of whatever lengthens life expectancy by ten years. But it does include the extra revenue from the lengthened period of compound interest on reserves.

It is most unfortunately true that present law prohibits paying for high-deductible insurance which is mandated to accompany a Health Savings Account. By striking a single sentence of the law, the injustice of unequal tax deductability for employer-paid insurance would disappear, but for the moment this feature must simply be accepted. First, let's define it. A high deductible could be as little as $1250 per year, or as high as $6000 for family plans. Its top limit, however, is simpler. It need not be higher than $10,900, the average cost of Medicare, since average young people will almost always cost less than the elderly. Furthermore, let's state the great virtue of high-deductibles: the higher the deductible, the lower the premium. As a consequence, the sellers of high-deductible Catastrophic healthcare insurance are very reluctant to advertise or even quote over the telephone, what their typical annual premium would cost, particularly when pre-existing condition riders are forbidden. This last feature creates an incentive to search for group memberships, higher premiums, younger clients, higher deductibles and lower ceilings. A longer waiting period for insurance to take effect might be a partial solution. As would rebates for longer subscriptions without claims. Obamacare has withdrawn its pure Catastrophic coverage in favor of paying subsidies for higher premiums to fairly high income groups. Increasingly, it is difficult to obtain this type of coverage without either being in a group or having a personal interview. With a change of party control in Congess, this would be a very good time to hold hearings on the problem. In the meantime, for discussion purposes, we use the hypothetical limits of $5000 deductible with an $11,000 maximum limit, for a premium of $1000 annual premium. Probably no policy exactly matches this example, but the difficulties could be ironed out by agreed rebates, or guaranteed issue, after 5 years of policy-holding. All of this does increase the administrative costs of what started out to be an ultra-lowcost product.

This approximation would consume $39,000 of a $128,000 budget, allowing $3300 annually to be deposited in the account. With compound income at 8%, this would purchase $xxxx worth of deductibles and outpatient costs over the 39 years of coverage, and including childhood costs. Except for unusual medical circumstances in the first few years, this should suffice. Indeed, after the first five or ten years, the fund would grow to the point where additional savings could be derived from less expensive fail-safe insurance policies, or even smaller deposits into the fund.

http://www.philadelphia-reflections.com/blog/2766.htm


That Dratted Third Rail

During the Obamacare uproar, I was giving some speeches, and I can tell you that old folks didn't care a hoot, one way or the other. Obamacare wasn't going to affect their medical care at all, so they had only one passing concern. They were afraid Obamacare would cost so much, it would be necessary to raid Medicare to support the promises. As long as no one brought up that issue, retirees didn't care. But as soon as I tested them on the point, they uncoiled like a spring. Plenty of politicians saw the same phenomenon, and nick-named Medicare insurance reform "the Third Rail of Politics". Just touch it, and you're dead. The mathematics are already so strong, no mathematical argument is going to influence any opinion. Essentially, there's a way to make Medicare almost free, but it doesn't matter. What matters is if politics get ugly, political candidates will say almost anything. Right now, and for some time to come, nobody wants to listen to mathematical arguments. They want to know if a red-mouthed opponent can upset them at the polls, by using reckless attacks. They can, and will, and there isn't much that can be done about it. The consequence is, the easiest argument for using compound interest to pay for health insurance is to privatize Medicare, but it has the most political obstacles to overcome.

Whereas, using the same approach for younger people has difficult math because of the shorter time periods. But it has a much easier time of it politically, because young people often don't have insurance, or need insurance, and so they have very little to lose. Furthermore, the regulations issued for Obamacare were often selected for the purpose of hindering Heath Savings Accounts. Much of the coming battle in Congress will be fought over trenches and fences, seemingly erected for the purpose of making progress difficult. That will be true for more than Health Savings Accounts, but that fact is just another irrelevance.

Here's another unexpected twist which will influence future trends. When Medicare emerged from the sausage factory of legislative construction, the hospital part (Part A) was entirely funded by government subsidy, and therefore is an obvious target for adding revenue, based on the fairness argument. That tends to crowd this heavy expense into the category funded by something else, and makes the pressure stronger. By another quirk of legislation, Medicare is a subchapter of the Social Security Act, which is now starting to need revenue. So the mechanism already exists to merge retirement income with Medicare surplus, if we ever get a Medicare surplus. The doctor reimbursement part of the Act (Part B) is what people nominally pay for when they pay their Medicare premiums. Now, add the DRG squeeze into the mixture.

Seeing hospital revenue for inpatients squeezed by the DRG, the hospitals have responded by enlarging their outpatient areas and hiring practicing doctors to join their staff on (somewhat above-market level) salary. Although hospitals pay the higher salaries, there can be little doubt they would squeeze those inflated salaries if revenue got squeezed. Meanwhile, Medicare is confronted with a mass movement of doctors from Part B to Part A, and so it raises the premiums in extraordinary jumps, which that only affects the premium still more. Unless things are changed, that means there will be less money for Social Security, and the hope of merging the two programs will be greatly injured. Meanwhile, if the hospitals squeeze the salaries, there will be a surge of physician returnees to private practice, ultimately raising Part B premiums, or else lowering physician incomes, leading to a doctor shortage unless reimbursement is raised, and new medical schools founded. Patchwork will be applied. The long-run consequence of single-payer would be to slow the merger of Medicare with Social Security. The latter merger would have some mutual advantages, whereas merging Medicare with private insurance would be an acrimonious take-over of one way of life by the other. What a tangled web we weave.

http://www.philadelphia-reflections.com/blog/2767.htm


Lifetime Health Savings Accounts:How Much is Enough?

The Duchess of Windsor was reported to say, a woman can never be too rich or too thin. Perhaps, but with insurance you state -- in advance -- how much insurance you can buy, best not expect more. In healthcare, it's my hunch something drastic would have to change before the American public voted an assessment for more than $3300 per person, for every working year from age 26 to age 65. In fact, if it went much higher, many people would probably look for a way to escape the burden. Perhaps we could supplement 3% per year, the historical rate of inflation for the past century. That's fair, because although it would reach $10,000 at age 65 instead of $3300, everything else would have readjusted to give it the same financial impact. Similarly, asking people 26-65 to pay for all ages is more palatable if it's arranged as your own childhood and retirement to be supported.

Excluded: Past debts, and Custodial Care. In any event, any payments for past debts, for health or otherwise are not envisioned in the following plan. The term "fixed income" reminds us debt and equity obey different rules, and the premise is the income supplement of this calculation will be based on equity, common stock. Furthermore, we know the National Debt, but how much of it once paid for health services, is fuzzy. When I started this analysis, I really never dreamed all of current healthcare costs might be covered by investment income from common stocks, and it's going to take some experience to be sure even that is reasonable. It allows us to take a stance: if it won't pay current costs, at least it will pay for some of them. If it more than pays for them, annual deposits should be reduced, never confiscated. To avoid circumvention by changing definitions, it might be well to state custodial care costs are not included, either, because they are treated as retirement income.

Medicare. Making it easier to explain, let's begin at the far end of the process, the day after death, looking backward. This proposal didn't initially include a Medicare proposal, but the accumulation of its unpaid debt has become so alarming, considering Medicare within Health Savings Accounts could fast become a national priority having no other solution. In addition, most factual health data come from Medicare, so the reader gets accustomed to hearing about it. So, while the Medicare situation is fraught with political obstacles, we might have to risk them. While debt overhang from earlier years continues to grow, Health Savings Accounts cannot be confidently promised to rescue Medicare by itself. But perhaps at least the Savings Account discussion could put a stop to going deeper into debt. Even a stopgap would have to get started pretty soon, but there is also a chance an improving economy might partially reduce the indebtedness.

Medicare-HSA Overlaps. At present, Catastrophic coverage is required for Health Savings Accounts, but its premiums are not tax-exempt. To extend HSA for the life expectancy therefore, requires an additional average of 18 years of after-tax premiums. We have split lifetime HSA into two parts at age 65 and assume a single-premium ($80,000) exchange for Medicare, possibly traded for partial forgiveness of premiums and rebate of payroll taxes. It is important not to count the $80,000 twice, if it assumed to be self financed. One quarter from payroll taxes, one quarter from premiums, and half from the $80,000 which used to be from the taxpayers. If pre-payment begins at an early age, Medicare costs might be quite modest after growth from income. Even when we show all the costs, including double payments, using an HSA at conservative rates like 4% will reduce the Medicare cost by 75%. Better performance depends heavily on approaching 12.7% by passive but hard-boiled investing. To pay down the existing debt back to 1965, is not contemplated by this proposal. At present, it grows by 50% of annual costs by addition; and an unknown amount by compounding. The amount of debt service is probably going to depend on the national ability to pay it down, regardless of its written terms. The same is likely to be true of subsidies for the poor. Ultimately, both of these decisions are political, limited by ability to pay. Because of the long time periods, comparatively modest interest rates could convert this impending disaster into a manageable cost, but it should not be contemplated until net investment returns approach 12.7 %. The outcome of these intersections is that the terms and benefits become largely a matter of political choice. That has been true for a long time, yet no effective corrections have been made. It is perhaps unbecoming of a citizen to say so, but the political system needs some steps taken to increase its sense of urgency.

Disintermediation of Investment Returns. By this reasoning, the rescue of Medicare depends on the political choice to do it, and the avoidance of a collision with the financial industry. Without a solution to the Medicare problem, a solution to paying for healthcare at younger ages becomes quite feasible, but it would be useless. Conversely, solving Medicare would be possible if the problems of younger people were ignored, but that is equally unlikely. To solve healthcare financing for all ages depends on introducing some new feature, and the easiest solution to imagine is to raise effective net interest rates. Interest rates are unusually low at present, and the Federal Reserve probably feels it would be dangerous to raise them. However, that's the easy part, because interest rates are certain to rise, eventually. What's much harder to envision is to flow the improved rates and the transaction-cost efficiencies through the financial system without wrecking it. What's hard to imagine is not hard to seem feasible, however. It is to take investments averaging 12.7%, flowing 10% past the intermediaries to the investor; and keeping it up for a century. Disintermediation, so to speak.

Rationalizing Fragmented Payments The transition to a solvent system could be greatly eased by the present premiums and payroll deductions, which are largely age-distributed, and can therefore be forgiven in a graduated manner for late-comers to the program. Most redistribution of high-cost cases should be handled through the catastrophic insurance, which is well suited for invisible and tax-free redistribution. Because of hospital internal cost-shifting, inpatients are overpriced, rapidly heading toward underpricing. This distortion of prices is achieved by squeezing inpatient prices with the DRG to shift costs and overpricing to hospital outpatients. In the long run, distorting prices has the effect of raising them. This will more immediately affect the relative costs of Catastrophic and Health Savings Accounts, and should be more carefully monitored, with an eye toward re-achieving equilibrium.

Dual Reimbursement Systems are Better Than One At present costs, statisticians estimate average lifetime healthcare costs at about $325,000 in year 2000 dollars; we could discuss the weaknesses of that estimate, but it's the best that can be produced. Women experience about 10% higher lifetime health costs than men. Roughly speaking, how much the average individual somehow has to accumulate, eventually has to equal how much he spends by the time of death. At this point, we must work around one of the advantages of having separate individual accounts. On the one hand, individual accounts create an incentive to spend wisely, but it is also true that pooled insurance accounts make cost-sharing easier, almost invisible, and (for some) tax-free. Therefore, linking Health Savings Accounts with Catastrophic insurance provides a way to pool heavy outlier expenses, while the incentive for careful money management resides in the outpatient costs most commonly employed (together with a special bank debit card) to pay outpatient costs. Such expenses are much more suitable for bargain-hunting anyway, because dreadfully sick people in a hospital are in no position to bargain or resist.

Internal Borrowing. Furthermore, there is significant difference between mismatches of aggregate revenue-to-expenses of an entire age group, and outliers within the same age cohort, the latter much likelier to be due to chance. To put it another way, somebody has to pay these debts, and the plan has been designed to break even as an entirety. Surely we must have a plan about who should pay them when enough revenue is not yet present in a new account. Surely some groups are always in surplus, other groups are always in arrears; the two should be matched, at low or zero interest rates. Borrowing between sick outliers and lucky well people within the same age cohort should pay modest interest rates, and borrowing between different cohorts for things characteristic of the age (pregnancy, for example) should pay none. Unfortunately, some people may abuse such opportunities, and interest must then be charged. Until the frequency of such things can be established, this function of loan banking should be part of the function of the oversight body. When it's limits become clearer, it might be delegated to a bank, or even privatized. While it is unnecessary to predict the last dime to be spent on the last day of life, incentives should be identified by the managing organization, separating structural cash shortages from abusive ones. Much of this sort of thing is eliminated by encouraging people to over-deposit in their accounts, possibly paying some medical bills with after-tax money in order to build them up. Such incentives must be contrived, if they do not appear spontaneously. User groups can be very helpful in such situations. People over 65 (that is, those on Medicare) spend at least half of that $325,000 lifetime cash turnover, but just what should be counted as their own debt, can be a matter of argument (see below.)

Proposal 10: Current law permits an individual to deposit $3300 per year in a Health Savings Account, starting at age 25, and ending when Medicare coverage appears. Probably that amount is more than most young people can afford, so it would help if the rules were relaxed to roll-over that entitlement to later years, spreading the entire $132,000 over the forty-year time period at the discretion of the subscriber.

Bifurcated Health Savings Accounts. When Health Savings Accounts were first devised, it never seemed likely that Medicare might be supplanted. However, Medicare has grown both highly popular and severely under-funded, probably running at a large loss. The rules should be modified to permit someone who has health insurance through an employer to develop a Health Savings Account which he funds but does not spend while he is of working age. The funds would then build up, enabling him to buy out Medicare on his 65th birthday or thereabout, with a single-premium exchange at present prices, (exchanging about $100,000 funded by forgiveness of Medicare premiums and some portion of payroll deductions from the past). He would have to purchase Catastrophic coverage at special rates. If this approach proved popular, it might supply extra funds for loaning to HSA subscribers in the outlier category. While there is no thought of phasing out Medicare against the subscribers' will, Congress would certainly be relieved to have subscribers drop out of a program which must be 50% subsidized.

Proposal 11: The present closing age for HSA enrollments at the onset of Medicare should be extended a few years older. And single-premium buy-outs of Medicare coverage, including the possible return of payroll deductions where indicated, should be permitted as an option.

Proposal 12: Congress should create and fund a permanent Health Savings Account Agency. It should have members representing subscribers and providers of these instruments, with power to hold hearings and make recommendations about technical changes. It should meet jointly with the Senate Finance Committee and the Health Subcomittee of Ways and Means periodically. It should be involved with the appropriate Executive Branch department, to review current activity, detect changing trends, and recommend changes in regulations and laws related to the subject. On a temporary basis, it should oversee inter-cohort and outlier loans, leading to recommendations concerning the size and scope of this activity.

Single-Premium Medicare, age 65 Hypothetically, if anyone could live to his 65th birthday without spending any of the account, a prudent investor would have accumulated $132,000 in pure deposits on his 65th birthday. He only needs $80,000 to fund Medicare as a single-payment at age 65, however, so he can even afford to get sick a little. If he starts later than age 25, he has already paid for Medicare somewhat, with payroll taxes. That could be considered payment toward reduction of the Medicare debt.

If someone makes a single deposit of $80,000 on his/her 65th birthday, there will accumulate $190,000 in the account over the next 18 years, the present life expectancy if he spends nothing for health and invests at 5%; and $190,000 is what the average person costs Medicare in a lifetime. Since the average person spends $190,000 during 18 years on Medicare, enough money will accumulate in Medicare to pay its expenses, and after some shifting-around, this should make Medicare solvent, in the sense that at least the debt isn't getting bigger because of him. Furthermore, index funds should be returning 10-12% over the long haul, so there should be some firm discussions with the intermediaries about some degree of dis-intermediation. Please don't do the arithmetic and discover that only $40,000 is needed. That seems plausible, but that's wrong, because the costs remain the same , and previously the government has been borrowing half the money from foreigners. In effect, the subscribers have been paying the government in fifty-cent dollars, while claiming the program is entirely self-funded. There has been an exchange of one form of revenue for another, so the required revenue actually does demand $80,000 for a single deposit stripped of payroll deductions and perhaps premiums. An end would be put to further borrowing, but the previous debt remains to be paid. I have no way of knowing how much that amounts to, but it is lots. All government bonds are general obligations, mixed together, while access to Medicare reports back to 1965 is not easily available. What we can more confidently predict is the limit young working people can afford for the sole purpose of paying off the Medicare debts of earlier generation. If there are other proposals for paying off this foreign debt, they have not been widely voiced. And the debt is still rapidly growing.

Escrow the Single Premium A young subscriber would have to set aside an average of $850 per year (from age 25 to 64) to achieve $247,000 on his 65th birthday, assuming a 5% compound investment income and relatively little sickness. This might seem like an adequate average, but occasional individuals with chronic illnesses would easily exceed it in health expenditures. Assuming a 10% return, he would have to contribute $550 yearly. It is not easy to estimate the size and frequency of expensive occurrences in the future, so someone must be designated to watch this balance and institute mid-course adjustments. As an example, simple heart transplants costing $200,000 are already being discussed. To some unknown extent, the cap on out-of-pocket expenses would have to be adjusted to pass these cost over-runs indirectly through the Catastrophic insurance. Insurance does greatly facilitate sharing of outlier expenses, but usually requires a time lag whenever new ones appear.

It does not require much political experience to know taxpayers greatly resent paying debts that benefitted earlier generations. They complain, but complaining does not pay off the debts of the past. To double required deposits in order to pay off past debts, as well as using forgiveness of payroll deductions and premiums, would require an additional $120,000 per year escrow, for each year's debt accumulation. At present, roughly $ 5300 per beneficiary, per year, is being borrowed, and there are roughly twice as many current beneficiaries as people in the tax-paying group, but for only 18 years, as compared with 40 years as a prospective beneficiary. So that comes to liquidating roughly $1300 a year of debt to balance the two populations, or $2600 a year to gain a year. That's for whatever the debt happens to be, which surely someone can calculate. To accomplish it, one would have to project an average of ??% income return. That's definitely the outer limit of what is possible, and it probably over-reaches a little. Therefore, to be safe, one would have to assume some other sources of income, a change in the demographic patterns, or an adjustment with the creditor. Assuming inflation will increase expenses equally with inflation seems a possibility. And it also seems about as likely that medical expenses will go down, as that they go up. You would have to be pretty lucky for all these factors to fall in line over an 80-year lifetime.

Medicare: Optional, Mandatory, or Third Rail? It is this calculation, however rough, which has made me change my mind. It was my original supposition that multi-year premium investment would only apply up to age 65, and that would be followed by Medicare. In other words, it should only be implemented as a less expensive substitute for the Affordable Care Act. It seemed to me the average politician would be very reluctant to agitate retirees by proposing a plan to eliminate Medicare. They would feel threatened, the opposing party would fan the flames of their fears, and the result would be a high likelihood of undermining the whole idea for any age group, for many years. Better to take the safer route of avoiding Medicare, and confining the proposal to working people, where its economics are overwhelmingly favorable.

But when the calculations show how close this proposal under optimistic projections would come to failure, and when nothing remotely close to it has been proposed by anyone, the opportunity runs the risk of passing us by. So, I changed my mind. The moment of opportunity is too fleeting, and the consequences of missing it entirely are too close, to worry about the political disadvantages of doing the right thing. The transition to a pre-funded lifetime system will take a long time to get mature, and the political obstacle course preceding it is a daunting one. However, there is another way of saying all this, which is perhaps more persuasive that Medicare must be changed. It begins to look as though the unfunded and accumulated debts of Medicare are such a drag on our system of government, that very little can be accomplished by anyone, until this central problem is addressed. In that sense, our problem is not the uninsured or the illegal immigrants, or an expensive insurance system. Our problem has become Medicare underfunding, and our second problem is that everyone loves Medicare.

The "simplified" goal is therefore for everyone to accumulate $80,000 in savings by the 65th birthday, remembering that savings get a lot harder when earned income stops, and definitely remembering that people approaching retirement are not likely to part readily with $80,000. With current law, you would have to start maximum annual depositing in an HSA of $3300 by your 52nd birthday, to reach $80,000 by age 65, and you would still need 10% internal compounding to make it. With 5% return, you would have to start at age 48. But notice how easily $200 a year would also get you there, starting at age 25 (see below) but it immediately gets questionable to assume $700 a year deposit for a 25 yr-old receiving 5% returns. We are definitely reaching a point where the ideas proposed in this book will no longer bail us out of our Medicare debt. Because -- the most optimistic of these projections are achieved by assuming there will be no contributions at all from people aged 25-65, for their own healthcare, babies, contraceptives and whatever. Many frugal people might skin by with looser rules; But the universal goals of the past are just that, the goals of the past. If we are going to cover lifetime health costs instead of just Medicare, many more will need $80,000 to do it, and have something left to share with the less fortunate. But to repeat, that still compares very favorably with the $325,000 which is often cited as a lifetime cost. Unfortunately, that just isn't enough, the Chinese will have to wait for repayment. This book was not written to propose a change in Medicare, but in writing it I do not see how we get out of our healthcare mess without addressing Medicare. If politicians can be persuaded of that, at least we will no longer need to invent reasons for urgency.

Starting with the Medicare example. Notice that forty years of maximum contributions, would amount to far more than the necessary $40-80,000 by age 65. We haven't forgotten that the individual is at risk for other illnesses in the meantime, so in effect what we need is an individual escrow fund for lifetime funding intended (at first) only to replace Medicare coverage. (We are examining lifetime coverage, piece by piece, trying to accommodate an extended transition period.) Depending on a lot of factors, that goal could cost as little as $100 a year deposited for forty years at high interest rates, or as much as the full $1000 per year with low rates. It all depends on what income you receive on the deposits in the interval. In a moment, we will show that 10% return is not impossible, but it is also true that a contribution of $1000 per year would not seem tragic, compared with the present cost of health insurance (now averaging over $6000 a year). I have unrelated doubts about the current $325,000 estimate of average lifetime health costs, but that is what is commonly stated. For the moment, consider these numbers as providing a ballpark worksheet for multi-year funding, using an example familiar to everyone, but not necessarily easy to understand after one quick reading.

The Cost of Pre-funding Medicare. Rates of 10% compound income return would reduce the required contribution to $100 per year from age 25 to 65, but if the income were only 2% would require $700 contributed per year, and at 5% would require $300 per year. Remember, we are here only talking of funding Medicare, as a tangible national example, Obviously, a higher return would provide affordability to many more people than lesser returns. Let's take the issues separately, but don't take these preliminary numbers too literally. They are mainly intended to alert the reader to the enormous power of compound interest. Let's go forward with some equally amazing investment discoveries which are more recent, and vindicated less by logic than empirical results.

http://www.philadelphia-reflections.com/blog/2742.htm


Pit Stop: Some Features Regular HSA and Lifetime HSA Have in Common

This book was primarily written to explain the difference between regular Health Savings Accounts and Lifetime Health Savings Accounts. The first is available right now although in somewhat crippled form, and the second requires enabling legislation to become available in a year or two. Naturally, the emphasis is on differences between them. They have several features in common however, based on obscure quirks in law which are vital for the reader to understand. So at the risk of a little repetition, let's review the DRG, the Flexible Spending Account, and the income tax deduction.

The Income Tax Deduction, for Employees Only. Seventy or more years ago, wartime wage freezes interfered with moving steel workers to the West Coast, so as a temporary war measure, fringe benefits were not considered taxable income. Big business and big labor never allowed this situation to be rectified, so in time it became the principle basis for employer-based health insurance. Employees got a tax deduction but self-employed and unemployed people did not. Much was made of this unfairness, but it never was changed.

Meanwhile, no one called attention to the fact that big business was getting an income tax deduction, too, which amounted to fifty percent in state and federal corporate income tax. Added to the fifteen to thirty percent deduction for the employee, this indefensible inequity became the main financing method for the American health system. And it was the main pressure behind the Clinton Health Plan, as well as the Affordable Care Act, or Obamacare. Like a smiling Cheshire cat, big business hardly said a word about it.

The DRG Diagnosis-Related Groups were a group of two hundred payment groups, used to pay for Medicare's hospital in-patient costs, and widely imitated because Medicare payments are half of hospital revenue. They replaced nearly a million specific diagnoses, so they were extremely crude approximations. More important, they replaced fee-for-service billing. It no longer mattered how long you remained in the hospital or what services you received, hospitals were paid by the DRG. Being essentially meaningless lumps of diagnoses, their translation into money was easily manipulated, eventually resulting in a 2% profit margin, spread around rather unevenly. Many hospitals lost money, which was easy to do in a 2% inflation. Consequently, hospitals shifted their costs internally to exaggerate the effect that the Emergency room generated a 15% profit, and the out-patient area, formerly the domain of physician offices, became an extension of the hospital and had a 30% profit. The distorting effect, and the consequent uproar, is easily imagined.

The Flexible Spending Account. Essentially the same as a HSA or Health Savings Account, the FSA had one major difference. At the end of the year, any unspent money was returned, in what was soon called "Use it or Lose it." A large number of health related luxuries, like prescription sunglasses, were consequently purchased in order to get some value out of the system; many people dropped the policy. However, they were heavily sponsored by Employers and Health Insurers, so were widely adopted. If the law could be changed to permit unused surplus to be "rolled over" to future years, essentially millions of employees would find themselves with what amounted to Health Savings Accounts. This would appear to be a gift by employers to employees, but gradually the terms of agreements changed. Much of the money sacrificed at the end of the year is effectively now the employees' own money, as a result of employee participation in the premiums, and in co-payments for the benefits.

There are many other quirks and unfairnesses in the existing employer-based system, particularly as they disadvantage non-employees. But in a very simple paragraph of reforms to these three, the Health Savings Account would emerge as a major reform, whether one-year term, or lifetime. A cleanup of the diagnostic code underlying DRG is badly needed, income taxes should be leveled for everyone regardless of type of employer, and rolling over the year-end surplus of Flexible Spending Accounts would give a big boost to HSA enrollment.

That's all, the rest is in this book. Making healthcare cheaper is a bigger project, so let's return to where we were. We were about to talk about passive investment.

http://www.philadelphia-reflections.com/blog/2736.htm


Disadvantages of Lifetime Health Care

So, right off, what are the disadvantages of lifetime coverage? They would seem to be:

1. At the moment, persons receiving Medicare are excluded from starting Health Savings Accounts. During the debate about Obamacare, seniors were therefore remarkably uninterested in two topics which didn't affect them: Obamacare and Health Savings Accounts. Very few seem to realize that Medicare is 50% subsidized by the federal taxpayer, and therefore few realize they are quite right to be uneasy Medicare might be "robbed" to pay for Obamacare. No politician is comfortable discussing this issue, for fear his party will be blamed for injuring a perfectly blissful status quo. Naturally, everybody likes buying a dollar for fifty cents, and everybody likes to imagine payroll deductions and premiums create an impregnable entitlement. The sad truth is the 50% subsidy, paid for by borrowing from foreigners, practically guarantees Medicare will be eyed as a victim, using the "fairness" argument. Seniors on Medicare, of which I am one, should be immediately in favor of a proposal which forestalls such pressure. Unfortunately, right now every one of them is looking toward the sunset, gambling on outliving a threat they hope will go away.

2. The computer revolution, which makes lifetime health insurance even imaginable, has severely impacted the investment community. It is still difficult to foresee which branch of the existing financial community would be natural allies, or natural enemies, of Health Savings Accounts. A remarkably large segment of the investment community already has HSAs for their personal affairs, and the banking community sees a chance that Bank Debit Cards could displace the huge industry of insurance claims processing. Meanwhile, insurers remain uncertain whether HSAs are a new revenue source, or a threat to existing lines of business. The Dodd Frank legislation is so large and complex it confuses everyone about net winners and losers. Investment advisors have been hit hard by the recession, and are forced to charge $250 per trade when their competitors charge $7.50 for the same service. Just about everybody in the HSA business is uncertain whether HSAs are insurance policies with an attached savings account, or whether they are are investment vehicles with stop-loss insurance attached. Things are tough when lobbyists don't even know which committee to lobby. It takes time for HSAs to achieve profitable size, so industry leadership hangs back to see what they look like when bigger.

3. There are lots of small advantages, but one big disadvantage. The transition from one system to another takes a long time, perhaps a lifetime for some.

How can we navigate a transition that might take a century to complete?

Transition Strategy. The general answer to the long transition period lies in providing more than one method to close the transition gaps. Start from both ends, and then find one or more methods to break into the middle. If lifetime insurance saves money, use some of it to overfund parts of the system as an incentive. When you find people are gaming the system, drop the feature which permits it. If some goal is accepted to speed up the transition, calculate what it is worth to accomplish it, and limit the feature as the transition speeds up. The method proposed in the ****previous**** chapter will certainly work out, but a newborn baby will be a Medicare recipient before children's insurance is complete for everyone. The rest of us have already lost some years for compounding, while some of us are already on Medicare and are, as they say, entitled. Therefore, we propose two additional ways of getting to the goal. Reducing the cost of healthcare is one, to be taken up in Chapter ****. That one works for everyone's finances at any age.

The other method, which suits people of working age, is the present topic. It has two possible solutions, the issuance of special revenue bonds, and offering inducements for dropping Medicare. In the present environment, just using Medicare as a transfer vehicle is unthinkably unwise, politically. Reducing Medicare can only be brought up as a voluntary exchange, long into the future when the financial attractiveness of the HSA approach is so well established it has no political downside. It can be used to pay for non-medical retirement costs after HSAs demonstrate they can comfortably cover medical ones. At that point, it would no longer have the stigma of "robbing" Medicare, but might be politically acceptable as making some use of unspendable double coverage.

Special Bond Sales. The safer approach is therefore to issue bonds to smooth out bumps in what is in some respects an equity investment. To match present cultural patterns, it should be recognized that working parents now fully assume the medical costs for their children, but have only a moral liability for the medical costs of their retired parents. Therefore, our culture might accept bond indentures with similar structure, but in one of the cases resist an identical bond issuance which differs significantly from accepted local patterns. In fact, it is difficult to imagine enacting any proposal which does not generally respect societal patterns. An important feature would be to start HSAs at an early age, adding as much as 26 years to the duration available for compounding. At 10%, that would be almost four doublings of the investment, and a fairly good start toward the initial goal of $80,000 in the account by age 65, while still starting with relatively small investments in childhood. True, a bond issue would have interest to pay, but since the interest payment stays within a family it might be designed to seem less burdensome than taxes. It is a curiosity that U.S. Treasury bonds are entirely general obligations, unlike state bonds. There may be a good reason why federal bonds for specific projects are agency bonds, but someone else will have to explain it. The two purposes for which special bond issues might be considered are: respect for society's wishes with regard to parent/child discipline, divorce and illegitimacy issues; and to smooth out gaps in coverage necessitated by nonlinear relationships between revenue and expenses at different ages.

Proposal 16 :Congress should authorize special limited-use bond issues (or Federal agency bond issues) for two Health Savings Account purposes: to fund accounts of late age at enrollment within the transitional stage who have difficulty attaining self-sustaining status; and to create a permanent bridge between age groups which are in chronic deficit and age groups which are in permanent surplus, to the extent that such particular age disparities remain in balance. In both of these cases, it is calculated the accounts will eventually come into permanent balance after full transition has taken place within current demographic trends.

Comment: With the passage of time, it should be possible to identify age groups (for example, the first five years of enrollment) which will eventually come into balance with other age groups which permanently generate a surplus. Knowing aggregate lifetime coverage will itself bring these two groups into permanent balance, it is sensible to borrow from one and loan to the other during early transitions, at minimal interest rates. Having provided for eventual coverage of these secular risks, it becomes more reasonable to extend favorable rates to them during early transition. When the slots are fully loaded, so to speak, there will always be secular fund imbalance between age groups, where market rates are always needed to cover the overall plan design. The intent of these two interest rate levels is to distinguish between a transitional phase which is temporary, leading to an equilibrium loan imbalance which is a natural part of the design.

As a practical demonstration of the superiority of equity investing over zero-sum fixed income, invisible psychological value cannot be overstated. If our nation expects for longer longevities to rely increasingly on investments rather than salaries, it must broaden its experience with sensible risks. Whether we like the idea or not, we are collectively taking long strides toward a rentier culture, where our main hope of advancement lies in greater willingness to understand and buffer the reasons for market volatility. One of the features of even this attenuated risk-taking, is to recognize that a few people will start their investing at the bottom of a dip, while most will start at the top of a peak. The long-term result will smooth it out, but some people are destined by the luck of their birthday to make more profit in an equity market, than others. And some people are destined by the timing of their illnesses to end up with less money in the account than others, too. It may not seem fair, but tampering with investment cycles will not improve it. By establishing a system of buy-ins, both as a transition step and also for late-comers, the opportunity of market-timing is created. Almost nothing is more discredited as an investment strategy than market-timing by amateurs, but it probably cannot be completely avoided here, and will probably exaggerate the differences in account size achieved by members of the same age cohort. Somehow, the attitude must be made general, that nobody can make anything at all in the accounts if we return to annual premiums; all extra money in these accounts is "found" money. The books will not balance completely at all stages, so it becomes a political question whether to forgive the difference (as Lyndon Johnson did in 1965), or to define it as a subsidy (as Barack Obama seems to be planning for his start-up insurance system.) Perhaps in accounting for residual medical costs at the end of life, a way can be found to equalize outcomes, but it seems unwise to tamper directly with such large amounts which are mainly responding to the world's inherent volatility.

There are several other serious matters. They will be briefly noted, and then an omnibus solution presented, the IIOO. Let's answer one inevitable jibe immediately: How can poor folks afford this? Answer: They have to be subsidized, that's all, just as they are in every other proposal including Obamacare. It's important to face this, because neglecting it is the route by which every deficit has been incurred, every budget unbalanced. People who spend other people's money for healthcare characteristically have higher than average health costs themselves. But the novel discovery is Health Savings Accounts have generally proved to reduce costs by 30%. When both approaches operate at the same time, results are not reliably predicted, but can be monitored. Miscalculations usually result in debts, dropped options and dropped amenities. A politically appointed board would be wise to refuse an assignment to address this, unless contingency instructions are clear, and remain out of their hands. When Congress eventually discovers how to put a ceiling on the national debt, effective answers to this related issue may become more apparent.

Transition from Term Most transition problems (shifting from one-year coverage to lifetime coverage) have to do with whether you are a child, whether your children are gone and forgotten, or whether you are supporting everybody else in your family. As the saying goes, how you stand will depend on where you sit. The unique borrowing problem here, is complete transition takes so long, groups will differ significantly on whether to unify forward (child to grandparent) or backward (grandparent to child), until it can be worked out how to borrow as a child and borrow for a time as a grandparent, depending on particular situations. What's to be avoided is intergenerational borrowing as groups; we've tried that. The benefits of invested premiums are obvious to all groups, but the arrangements must be debated thoroughly in order to avoid just kicking the can down the road. Almost any arrangement would suffice for a brief transition, but this transition would take so long it would amount to a Constitutional Convention when it was over. The eventual goal is to place the cost burden largely on working people age 26-75, since that is the only age group in direct contact with the national economy. The tricky part is to utilize other age groups during the transition -- and then slowly work out of it. Don't forget a third generation will intervene -- their own children, as well as their parents and grandchildren. The whole construction is a job for actuaries, but the modern use of index funds puts on the table the potential of diversified investment, absolutely without stock-picking, at favorable rates of interest, allowing room for cyclicity of the economy. America seems to need increased fertility, and the compound income might make it possible, but if it is not carefully examined, it might act as an inducement for women to delay their first child even longer than they presently do. As long as you don't get overwhelmed by too many transition issues at once, almost any intergenerational problem would be eased by generating more revenue. At ten percent, money compounds to double itself every seven years, and the resulting sums can boggle the mind. But if they are not planned for, the extra money will either vanish or induce people to act like a deer frozen in the headlights.

Making ten or twelve percent on safe investments may seem impossible to those who have recently lost thirty percent on the stock market, and of course it is not guaranteed. That is why lifetime health insurance based on fixed income securities cannot be presented as guaranteeing payments for future services; only equity securities (stocks) can do that, and even they, mostly don't succeed in real terms, or net of inflation. Lifetime health insurance should only promise to supply a substantial portion of future health costs, and has little hope of doing so except for two possibilities. If the taxpayers would stand for it, you might deliberately overfund the accounts; since they won't, it is necessary to induce some to do it voluntarily, and shrug your shoulders at those who don't. That probably won't work, either, so we are left dependent on our scientists to reduce or eliminate medical costs. They are willing enough to try, but of course they can's guarantee. You can gamble on its happening, or your can wait until it is a sure thing. We are decades into a fiat currency without semblance of backing by monetary metals, and must feel our way. However, the bright side of our present finance system is that transaction costs are steadily declining for reasonably safe passive investing. Professor Ibbotson has demonstrated that total market averages have been remarkably steady for asset classes over the past eighty years, and probably will safely remain so for another century, but that's another assumption which might go wrong. When you get down to it, you either go ahead or you don't. That's all. Investing in the total domestic stock market of America, the investment is guaranteed by the full faith and credit of America, just as surely as if invested in U.S. Treasury Bonds, and it pays a little better in return for its increased volatility.

Still another question comes from people who rightly believe there is no free lunch: Where does the extra money come from? A fast answer is that it comes from correcting a blunder of long standing, called the "pay as you go" system. To some extent, this problem began with the original Blue Cross plans of the 1920s, but it was elevated to its present stature by the Medicare and Medicaid proposals of 1965. By the pay/go approach, this year's premium money is spent for this year's sick people, not the people who paid the premiums. That ruse helped get the program started, but it means current unspent premium money is quickly gone, and thus it means no compound interest or investment income is generated by rather huge revenue collections in the future. Since health expenses rise with advancing age, a great deal of floating premium money might be invested for many decades, if only it had not already been spent. Actual projections are surprisingly large, but I would prefer that others announce their calculations, employing the motto of "Underpromise, but over-perform."

Other substantial sources of reserves exist, nevertheless. Health Savings Accounts now in operation are reporting 30% savings; since it is unlikely this record can be maintained with inpatients, who are generally older, overall savings may well turn out to be closer to 15%. Inflation helped a lot to pay off the original startup costs of 1965, but at least nominally it is true the debt has been paid. We are now free to invest that ancient transition cost, so to speak, as long as we don't try to spend the same money twice. But there is considerable squeamishness about the public sector acquiring equity in the private sector, so Treasury bonds are about the only public sector investment the public will easily allow. Investment experts are however almost unanimous in feeling that equities provide greater long-term income (see graphs by Ibbottson) and security against inflation. On the other hand, if private individuals invest in common equity with index funds, less resistance is encountered. Any way you look at it, some investment income is better than no income, and for long-term investment, equity is better than debt. For political purposes, it would seem best to restrict investments to U.S. companies, and index funds are less controversial (i.e. "gambling with my money") for most small investors than actively managed funds, because the savings mostly come from reduced investment expenses. John Bogle is telling the world that 85% of most total return is diverted back to the financial industry, and this is one way to rebalance that. Fifty percent of investors would do better than average, fifty percent would do worse because of broad diversification, but not much worse, because total index diversification is fast approaching a maximum. Meanwhile, compound interest would be at work, and most people would be astonished to learn how large the long-term appreciation would grow. Tax-free, diversified, and long-term.

Finally the question arises: how can you tell whether income from this source would equal the terminal care costs of fifty years from now? You can't, of course you can't. But this transfer and invest scheme would generate a whole lot of money that presently isn't being generated. If it isn't enough, we will have to do something in addition. The monitor and mid-course correction system is expected to detect when more money is required to balance the books, and therefore more money will have to be invested in the Health Savings Accounts. If savings are insufficient, either subsidies or borrowing will have to be resorted to. Experts sometimes will be wrong, so revenue should be raised somewhat higher than the experts think we need. And if it all goes wrong, if we have an atomic war or an expensive cure for cancer, there is always the national debt. Which is where we began, isn't it?.

Independent and Impartial Oversight Organization. (IIOO)After reviewing the complexities, it seems best to create an oversight body with more time and expertise than can be expected of representatives who are subject to periodic election. However, Congress must make it clear that it retains ultimate authority to break from normal routine, occasionally concentrating its attention on conflicts between expert opinion and public opinion.

Working backwards, a mixed public/private system needs an official backer of last resort, a function which cannot be delegated, and an experienced crisis management team in place with the authority to act within defined limits, most of the time. The last resort has to be the full credit of the United States, just as unfortunately it now is with Medicare. What's mainly needed is a sort of Federal Reserve in the very narrow sense of an independent management team, under the direct governance of a Board whose composition is half public, half private. To be useful, it needs a monitoring authority provided by a mandate from Congress, a comparatively limited amount of regulatory authority of its own, intentionally limited by adequate board representation from all stakeholders. The Board needs to be constantly told what is going on, and it needs general authority and trust to act in an emergency. Many proposals require a system of mid-course corrections particularly in the first decade of operation, at the same time the Board must not usurp Congressional authority.

Congress, on the other hand, must have the restraint of private oversight by technical experts who can appeal to the public, to make very certain it does not feel it has a new piggy bank. Corruption is one thing; misjudgments are quite another. Once in a while, we manage to construct such an agency.

http://www.philadelphia-reflections.com/blog/2734.htm


Beware the Middle-man: Common Stock Index Fund Earnings are Not the Same as Investor Returns.

There's quite a lot to passive investing, if you mean running an Index fund. The rewards of this hired complexity can nevertheless be lost by carelessness in choosing an expensive middle-man. Or even by having a reliable agent who works for an organization, remorselessly devoted to its own income maximization -- in the middle. Or having a small reliable agency bought out by a corporate raider with entirely different goals from the ones you thought you selected. But if your long-term common stock index results approach 10% total return, at least you have passed the first test. As my mother repeatedly told her granddaughters: Don't marry the first man who asks you.

Asset Allocation Managing the funds of a Health Savings Account has important similarity to managing a pension or endowment fund. An important distinction: healthcare imposes random cash requirements on an HSA, compared with the steady, predictable cash requirements of an endowment fund. After the Health Savings Account has matured to a steady state, its fund balance becomes predictable, just as cash balances in a big bank eventually do. Nevertheless, the HSA is probably destined to require larger cash reserves while maturing, and a second period of volatility after age fifty, when more serious illnesses get more frequent. On top of that, when a securities crash comes along, it may take as long as two years for the market average to stop falling, and as long as three years to recover. That's by contrast with normal ripples in the markets, where 90% of important gains or losses are made in 10% of time periods. The rest of the time the market dawdles.

If most "dips" are followed by recoveries, why not just wait it out? Here, almost all organizations have the same problem of "meeting the payroll". The uproar of being late with a payroll must be experienced to be believed. While most employees will quietly accept a short, reasonable delay, the few who are stretched by a brief interruption for any reason, can be very vocal. The financial management of any fund faces the same issue, and is very reluctant to repeat it. All of them face the possibility of some sudden decline in the value of the portfolio, when at first it would be general opinion it is wiser to avoid selling from the portfolio and wait for a quick recovery. Reserve portfolios are set aside for sudden cash requirements, of course, but human nature induces most people to wait and hope for better times. In more tangible terms, it is generally the business of the investment manager to cope with a lot of small waves, but only the Board of Directors can decide to liquidate the whole reserve. In for-profit situations, there is also a question of paying taxes.

Conventional advice is to maintain a portfolio of 60% stocks, 40% bonds, with the cash flow from the bonds intended to bridge the gaps. Since bonds pay less than stocks, overall portfolio yield is lowered. If interest rates are unusually low, it may be the bond component which is itself the risk, but at least in theory, mixed assets "balance the risk." As a consequence, an 8% steady yield from an endowment or pension fund is the best performance many professionals expect, with most funds even happy to achieve 7.5%. But happiness is relative. We have just demonstrated the first step in how a 10% total return can turn into 4%. You're already down to 7.5%.

http://www.philadelphia-reflections.com/blog/2757.htm


What Is Our Final Goal?

The reader will have encountered much talk about interest rates in this book, but there are really two interest rates, public sector and private sector. Our economy is balanced on the steadiness of definitions. The definition of medical care has been steadily eroded by including new features, to the point where there is even an effort to re-name it "health care". Obviously, it is impossible to plan for paying the cost of something whose definition changes. Similarly, changing the definition of private sector and public sector befuddles the discussion at one peculiar point. It is commonly said deflation is a spiral condition which is almost impossible to rescue. Why should that be? Are these unrelated issues, or is there a common theme?

Lord Maynard Keynes invented the discipline of macroeconomics, and eventually invented the idea of curing private-sector recessions by transferring funds from the public sector to the private one. Sometimes that works, and sometimes it doesn't. Even Keynes admitted there was a limit to what public-private transfers could do, a condition called deflation. Since public sector debt is entirely in fixed income securities of up to thirty years duration, it is difficult to reduce public debt. Therefore, when private-sector prices fall in a recession, they must not fall below the point where even more money shifts out of the private sector into the public sector, where higher interest rates are to be found, and a deflationary spiral begins.

Two more things. As interest rates go up, the value of bonds go down; that's simple enough, but easy to forget. And the approaching danger of deflation is found in the ratio of GDP (Gross domestic product) to the national debt. By definition, recession is threatened when GDP goes down, or at least fails to go up. It must be qualified, however, by the size of the public sector to be used to rescue it, inversely represented by the size of the national debt. A few lucky countries have a small ratio of debt to DGP, perhaps 20%, while the dangerously unstable nations of southern Europe are running over 200%. The US ratio is now about 100%, roughly stating the public and private sectors to be about equal in size. But the point I am trying to make is that transferring large amounts of the health care industry to the public sector is invisibly reducing the borrowing power of the public sector, hence it is reducing the future power of the Federal Government to moderate a recession. At some unspecified point between 20% and 250%, nobody will lend more money to your public sector. Or if they will lend, they will demand a higher interest rate, which will reduce the value of existing government bonds. You have started a spiral, from which even Lord Keynes cannot rescue you.

The reader will thus perceive that privatization of health care, whether Medicare, Medicaid, or subsidized private programs, diminishes the ratio of national debt to GDP and reduces the danger of deflation. Paradoxically, it thereby probably increases the ability of the Federal government to borrow for other purposes.

http://www.philadelphia-reflections.com/blog/2748.htm


Buying Out Your Medicare?

The public is vaguely aware there is a problem with Medicare indebtedness, but for the most part this issue is swept aside, for fear agitation might injure the chances of funding healthcare for those of working age. The size of this debt is not well known, but can be guessed at by realizing Medicare costs are 50% borrowed. The current CMS data show a line for contributions from the general fund, equalling 50% of the total. Because cost accounting for government accounts has its special features, inter-agency transfers are referred to as assets. It's a debt, all right, and a large part of it is owed to the Chinese. For whatever reason, Treasury debt is entirely "general obligation", so it is not usually possible to tell from Treasury debt, how much is assigned to particular debts. They would have to be totalled from Medicare annual reports, which are not generally available for much of the past. So we don't -- right now -- know how much we owe foreigners for Medicare debts; but it is considerable, very likely going back to the days when deficits began to appear. That gives me a choice: I can keep quiet about the subject, or I can conjecture. I choose to conjecture.

Some, maybe all, of the transfer from general taxes in the latest year to Medicare, was borrowed. Medicare started in 1965, but during the early years the receipts from payroll deductions were larger than the expenses of the Medicare program. But when the program was fully underway, it ran a deficit. For how many years, and for what amounts, is only a guess. But I assume guessing the debt to be equal to a full year of Medicare expense, is large enough to make the point I wish to make, but may well be larger. For present purposes, let us assume the existing debt is equal to a full year's cost of Medicare, which we do know is 549.1 billion dollars. This guess is selected for illustration because it is large enough to cause alarm, but is probably on the small side. I hope it will provoke some official figure to be released, and sincerely hope my own proves to be too large..

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Because, if it proves close to the guess, it presents a future problem for paying off the debt, which would actually be worse than the healthcare cost now under such heavy debate. The past indebtedness is currently not under debate, and is still getting worse. The public, including my colleagues in the medical profession, often point to Medicare with admiration. Since everybody likes a dollar for fifty cents, that's perfectly natural. And so it is also perfectly natural for elected officials to treat the matter of replacing Medicare as if it were the "third rail of politics." Just touch it and you'll be dead. That's also fair play, until it is proposed the whole medical system of the country be covered with a "Single Payer System", which is a fancy way of proposing everything should be funded like Medicare; and that's just too much.

So I propose, discomfiting friend and foe alike, that we buy our way out of this problem by allowing the public to buy its way out of Medicare. One by one, as they approach the 65th birthday, they should have the opportunity to relinquish Medicare, by depositing $80,000 in a Health Savings Account. Assuming 10% compound income return (see Chapter Four), $40,000 should generate $433,000 by the age of 91, which I assume to be the average longevity in a few years. By taking a guess at the size of the debt, the remaining $40,000 would throw off an additional $433,000 for paying it off. With 25 million Medicare recipients paying that much, let's hope it is more than adequate right now, although it will clearly become inadequate if we delay. These numbers ought to seem like a bargain to the public, and they certainly would seem like a bargain to the government. If there is any other proposal for managing this debt, we have yet to hear it. That's probably because of "third rail" concern, but unfortunately it may also reflect there is no other solution to talk about.

Issues and Problems In the first place, $40,000 at 10% will only yield $202,000 by age 83, the present average longevity. It will slowly grow, as will the medical expenses from 83 to 91. The debt is already too conjectural to justify more precision, but a decade or so is not unusual for oriental negotiations. Sooner or later, we must expect this progressive longevity to flatten out, and make the problem harder to solve.

In the second place for a long time to come, people arriving at their 65th birthday will have a history of payroll deductions when they were young. This will eventually dwindle down, but it begins as a quarter of Medicare costs, and must be returned as part of the buy-out. Meanwhile, persons older than 65 will have fulfilled their payroll deduction, and are paying annual premiums, which also equal a quarter of Medicare costs. This seems to be approximately prorated, so only the payroll deduction is owed these people during the transition.

And to go on, there will surely be medical developments. Some of them may raise costs, some lower them, and all of them summarized by a hoped-for cure for cancer, which may raise costs or lower them, more likely raising them before eliminating them. Once the discovery is made and announced, its price will be known, and appropriate adjustments demanded. For this and a host of similar issues, only a scientific body with the power to adjust prices can be expected to make the appropriate response with mid-course corrections. Given the present affection of the public for subsidized Medicare, it appears likely, voluntary buy-outs will be a slow and protracted process. They should provide ample time for basing reasonable adjustments to what would be mainly favorable developments.

http://www.philadelphia-reflections.com/blog/2749.htm


Deductibles Too High?

In 1981, John McClaughry and I devised the Health Savings Account, and in 1996 it became law, in 2003 permanently. It features a high-deductible health policy, linked to a tax-exempt savings account. One of the purposes of the savings account was to contain enough ready cash to cover the deductible. Since there have been recent reports of public unhappiness with the high deductible of almost all Obamacare policies, I suggest the participants open up Health Savings Accounts in addition to their insurance. An amount equal to the deductible can probably be deposited, since the current top limit is $3250 per year. Very likely, only one deposit would be necessary until a second major illness made its appearance, and all deposits are tax-deductible. They accumulate compound interest if unused, and usually a debit card is provided for other medical expenses, once the balance to reach one deductible has been reached. At this point, a second tax shelter is available for medical expenses--the only qualified pension program to offer both front-end and back-end deductions.

Double tax deductions are common in Canada, but Health Savings Accounts are the only available American plans which provide this. Furthermore, you can't lose money on them. If you should be so lucky as to reach age 66 without using the deductible, it turns into an ordinary IRA for retirement income. By that time, many people would find the compound interest had greatly multiplied the original deposit.

As a bit of history, 14.5 million people have these accounts already, containing several billion in deposits. Among employer-based insured, 31% have these accounts, and 41% made no withdrawals in a year. One New York bank manages 900,000 accounts.

The Health Savings Account was devised as a money-saving device for Catastrophic health insurance. That is, for high-deductible policies, which happened to have the feature that the higher the deductible, the lower the premium. But although Obamacare has higher premiums to pay for extra features, there is no reason why the Health Savings Account could not be used in conjunction with Obamacare.

Most people don't have $3000 in savings lying around, so they may have to make smaller deposits over time, to build up to the deductible level. Most banks and brokerages don't welcome the expense of handling small deposits, so you may have to accumulate $3000 independently, and there may be an unexpected squeeze. But every program has to start somewhere, and it may be inevitable that some people are a little too late for this one. But millions of people have already found out about Health Savings Accounts, so it's a real thing when you are ready.

George Ross Fisher MD

Philadelphia PA

http://www.philadelphia-reflections.com/blog/3464.htm



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