Philadelphia Reflections

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


Health Reform: A Century of Health Care Reform
Although Bismarck started a national health plan, American attempts to reform healthcare began with the Teddy Roosevelt and the Progressive era. Obamacare is just the latest episode.

Health Reform: Children Playing With Matches

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.

Second Edition, Greater Savings.
The book, Health Savings Account: Planning for Prosperity is here revised, making N-HSA a completed intermediate step. Whether to go faster to Retired Life is left undecided until it becomes clearer what reception earlier steps receive. There is a difficult transition ahead of any of these proposals. On the other hand, transition must be accomplished, so Congress may prefer more speculation about destination.

Consolidated Health Reform Volume
To unjumble topics

(Front Stuff for Health Savings Accounts: Second Edition) George Ross Fisher, M. D.

Health Savings Accounts: Second Edition George Ross Fisher, M. D.

Health Savings Accounts: Second Edition

Health Savings Accounts : Planning for Prosperity

George Ross Fisher, M. D.



This book was intended to be part of a larger volume concerning the Affordable Care Act of 2010, possibly even extending into a whole series on Healthcare Reform in the Past Century. However, I did not anticipate the Obamacare episode would be so protracted. Since I still remain uncertain how that colorful episode will turn out, I put it aside and produce this slimmer volume on what I might have offered, if ACA had not come along. Additional commentary is obviously necessary because it did.

That puts me in the position of implying I want the ACA discarded, root and branch. Events may eventually bring me to that position, but I must say I thoroughly endorse the idea of direct payment of insurance (as a replacement for using using employers as unwilling brokers), in the spirit of efficient cost reduction -- even though the intermediation of business owners does dilute political control of the system. The incompetence displayed at the introduction of insurance exchanges was appalling however, and may poison direct-pay indefinitely. In addition, the use of a cap on out-of pocket payment seems like a clever way to avoid a costly layer of re-insurance. These two features could easily be added to Health Savings Accounts, which already demonstrate success for several million Americans.

Having endorsed these two features, I nevertheless regret how adding "service benefits" to a casualty insurance model has befuddled things for a century, and look for little good to come of it in the future. Service benefits make cross-subsidies entirely too hard for a political system to restrain. Admittedly, individually owned accounts create technical difficulty for cross-subsidy, but technical difficulties seem far less threatening than the risks of national insolvency. Essentially, the basic idea is that saving and investing for ones own later life, is easier to swallow than cross-subsidizing whole demographic groups. If it gets squandered, there is no one to blame but yourself and your choices.

George Ross Fisher


October, 2015

Better, but More Complicated: Lifetime HSAs

Health Savings Accounts are a big improvement over traditional health insurance, and this book stands behind them -- as is, without major adjustments. Go ahead and get one right now, regardless of what other coverage you have. Let me repeat: Their secret "economy" lies in keeping everyone spending insurance money as carefully as he would spend his own -- but not being too dictatorial about it. No one washes a rental car, as the saying goes, so you can't act as if someone has committed a crime, just because he doesn't do everything for you. But just you let the individual keep what he saves, and millions of HSA owners will find ways by themselves to save up to 30% of traditional healthcare costs. HSAs provide an incentive for the medical consumer to shop more carefully, and consumers seem to respond. The difficulty is, some people are too sick to worry about rules. So, substitute a catastrophic high deductible for your present coverage if the law lets you do it (which is presently uncertain) but go ahead with a Health Savings Account and add to it when you can.

{top quote}
Looking ahead to what might follow HSA, is one of the main reasons for doing it. {bottom quote}
In practice, the Savings Accounts (and their debit cards) are almost entirely used for out-patients, where an effective shopper can arrange a reduction in costs. For hospital bed patients there is no choice but to allow the hospital to set its own prices, except those prices must more fairly correspond to direct costs. Fair prices are mostly an accounting effort, concentrating on reducing indirect overhead cost attributions, with a few legal rules to ensure uniformity. But everyone must wait for that to resemble true costs more precisely, after indirect costs have been evaluated. Having repeated it all as a preamble, we now look ahead to how we might extend it to lifetime coverage, instead of the year-at- a-time variety. Looking ahead to what might follow it, is one of the hidden complexities of doing it.

One further simple idea: costs not prices. We have all assumed that catastrophic coverage is basic. If everybody ought to have something, he ought to have a very high deductible for a bare-bones indemnity policy. But just consider an addition: insurance for the health costs of the first year of life, plus the last year of life. That's technically simple to do retrospectively, although it takes most people a few moments to get it. And 100% of the population would receive both benefits, at a restrained cost by remaining uncertain just what the last year of life is, until it is too late to run up its cost. Indeed, transition costs would be minimized by eliminating the historical part of costs for the transitioning population, and phasing in the ongoing expense. Ask your friendly actuary; he'll get it, immediately.

Revised DRG coding and Methodology. Either way, if you guarantee to provide something for everyone, you better have a plan for controlling its boundaries. Inpatient costs affect patients too sick to argue about price, so hospital bed patients might as well be presented with some different options. They are more or less suitable for the DRG approach, but we have gone to some length to show what's wrong with the DRG coding methodology. The coding, among other things, must be fundamentally modified. As informed doctors will tell you, ICDA-11 isn't it.

DRGs ("Diagnosis Related Groups") are something Medicare started, which with more precise coding could be made ideal for the catastrophic insurance part of Health Savings Accounts. Medicare now contributes half of average hospital revenue, so its rules effectively dictate most other methods of hospital reimbursement. There are many problems with Medicare, but paradoxically, escalating inpatient cost is not one of them. Inpatient billing has been so muddled, most people do not realize that DRG has been a somewhat overly-effective rationing device. Like all rationing schemes it causes shortages, as inpatient care is shifted toward the outpatient area. Office and hospital outpatient costs are quite another matter, so the whole hospital accounting system has been turned on its ear. In particular, components of inpatient costs must be re-linked to identical outpatient charges, in the instances where they are really market-based. Then, a system of relative values needs to be applied to that base. For that, we will need a Google-like search engine for translating the doctor's exact words into more precise code.

{top quote}
Single payer is not a solution, it is pouring gasoline on the flames. {bottom quote}
The Single-Payer Delusion. If the eyes glaze over at this endless complexity, take a moment to unveil this thing called single payer, which sounds as though it ought to be a great simplification. It's just Medicare for all ages, what could be better? Entirely too many people now spend their money on luxuries which they really can't afford. In a sense, the whole country plays make-believe that serious sickness is for old folks, who will be generously cared for, by Medicare. The facts are that Medicare is already running unsupportable budget deficits, and depends on foreigners to lend the money to pay for it. Extending that process to a lifetime of single payer is not a solution, it is pouring gasoline on the flames.

Furthermore, both catastrophic insurance and last year of life insurance are more similar than they sound. What most people don't appreciate is the risk of a catastrophic health cost is rather remote in any given year. But in a whole lifetime it is almost certain to happen at least once, which is often the last year of life. When you consider an entire lifetime, you cannot delude yourself it won't happen. Someone must plan for it, and the books must roughly balance.

Add Many Years to Lifetime Compound Income. Mathematically, it is fairly easy to show that healthcare costs will go down at the end of life; it's cheaper at 95 than at age 85. But that's probably a trick. We don't know what diseases will terminate life a century from now, so we can't count them. They are not cheaper, they are just unknown, and so we record the cost of the survivors of the race of life, not the average runner who will take time to catch up. If we are looking for lifetime healthcare revenue, recognize that practically all revenue is now generated by members of the working age 21-66. A lifetime system needs to extend its revenue even further to other lifetime age groups. It seems only right that everyone's longevity should be included, but laws may currently block the way.

It would help a lot to include the first 21 years, adding several doubling-time periods. It would also be useful to let HSAs run for a full lifetime instead of mandatory rolling-over to IRAs at 66. Obviously, the idea behind terminating at age 66, was that Medicare would take care of everyone's medical needs. But with time, Medicare has consistently run big deficits, to the point where it is 50% subsidized by competition with other federal funds, or by international borrowing. Adding forty years would multiply extra investment returns by four doublings at 6%, and at little cost to the government. This would be particularly useful during the transition, when many people start their Accounts at zero balance, but at a more advanced age. It would be a significant improvement to all these programs to end them with at least one optional alternative; terminating a health program at a fixed age is something to avoid.

Proposal 13: Health Savings accounts should include the option to be individual rather than family-oriented, and therefore should include an option to extend from the cradle to the grave, rather than age 21-66, as at present, and consider options for Medicare buy-out and transfers within families between accounts.

Permit Tax-free Inheritances of Funds Sufficient to Fund One Child's Healthcare to Age 21. In other words, we should make some sort of beginning to the knotty difficulty of making The State responsible for what used to be the family's responsibility. A second adjustment would recognize that essentially all children are dependent on their parents for healthcare support, until they themselves start to work. Children's health costs are relatively modest, except for costs associated with the first year of life, and the bulge would be even greater if insurance shared obstetrical costs better between mother and infant. Even as we now calculate it, the baby's health costs, from birth to age 21, are 8% of lifetime costs. A cost of 3% for the first year of life alone, makes lifetime investment revenue essentially impossible for many young families to support lifetime costs, because any balance would start from such a depleted level. So, the idea occurs that a considerable surplus appears when many people become older, if grandpa could effectively roll over enough of his surplus to one grandchild or designee. The average American woman has 2.1 children, so it comes close to a 1:1 ratio of children to grandparents. Young parents often have a big problem financing children, whereas in a funded system, the transfer from grandparents could be supported by a fraction of it, by application of compound interest.

With two statutory adjustments along these lines, financing of lifetime healthcare by its investment revenue becomes considerably easier.

Whole-life Health Savings Accounts.(WL-HSA) It has developed in my mind that Lifetime Health Insurance would become even better for cost savings, with the addition of one more feature, copied from life insurance, and combined with the needed DRG revision. It is, broadly, the difference between one-year term life insurance, and whole-life insurance, which offers lifetime coverage as a variant of multi-year coverage. Life insurance agents frequently argue that whole-life is much cheaper in the long run than term life insurance. What they may not tell you is that most of the apparent profitability of term insurance derives from so many people dropping their policies without collecting any benefits at all. Comparing apples with apples, whole-life insurance is not just cheaper, but vastly cheaper.

For those who don't understand, one-year term insurance covers illnesses for a single year, and then is open for renegotiation. By contrast, a whole life policy covers a lifetime of risk, overcharging young people for it in a certain sense, meanwhile investing the unused part for later years when health risks are greater. Does that start to sound familiar? The client is seemingly overcharged at first, but in the long run his lifetime insurance cost is far cheaper. Not just a little cheaper, but just a fraction of what a chain of yearly prices would cost.

It doesn't mean you must enroll at birth and remain insured until death; it means any multi-year insurance becomes cheaper, depending on the age you begin and the age you cash out -- often at death but not necessarily. What makes the saving so astonishing is the way life expectancy has lengthened. We have been so uneasy about rising medical costs we didn't much notice that people were living thirty years longer than in 1900. As a rule of thumb money earning 7% will double in ten years; in thirty years, it become eight times as big. If you lose half of it in a stock market crash, you still end up with four times as much. This is what would be new about lifetime accounts, and it can be easily shown that overall savings for everyone would be more than anyone is likely to guess.

Let me interject an answer before the question is asked. Why can't the government do the same thing? And the answer is, maybe they could, except two hundred years of history have shown the American public is extremely averse to letting anyone be both a player and an umpire. For more than a century at first, there was a strong political suspicion of the government running a bank, or even borrowing money with bond issues. Yes, the government could invest in businesses, but we would then be guaranteed a century of rebellion if we tried to have government do, what any citizen is free to do on his own. Indeed, a review of Latin American history shows what disaster we have avoided by retaining this negative instinct to allowing the camel's nose under the tent. The separation of church and state is a similar example of how our success as a nation has been based on gut feelings. The separation of business and state is at least as fundamental as separating church and state. And for the same reason: we instinctively avoid having the umpire play on one of the teams.

Proposal 14: Congress should authorize a new, lifetime, version of Health Savings Accounts, which includes annual rollover of accounts from any age, from cradle to grave, and conversion to an IRA at optional termination. Investments in this account are subject to special rules, designed to produce maximum safe passive total return, and limiting administrative overhead to a reasonable, competitive, amount. The account should be linked to a high-deductible catastrophic health insurance policy, with permanently guaranteed renewal, transferable at the client's annual option. The option should also be considered of linking the HSA to a policy for retrospective coverage of first year of life and last year of life, combined. These two years are disproportionately expensive, and they affect 100% of the population. Subtracting their costs from catastrophic coverage should greatly reduce catastrophic premiums.

Lifetime Health Savings Accounts (L-HSA) would differ from ordinary C-HSA in two major ways, and the first is obvious from the name. In addition to meeting each medical cost as it comes along, or at most managing each year's health costs, the lifetime Health Savings Account would try to project whole lifetimes of medical costs and make much greater use of compound income on long-term invested reserves. The concept seeks new ways to finance the whole bundle more efficiently, and one of them is health expenses are increasingly crowded toward the end of life, preceded by many years of good health, which build up individually unused reserves and earn income on them. Since the expanded proposal requires major legislation to make it work, it must be presented here in concept form only, for Congress to think about and possibly modify extensively. This proposal does not claim to be ready for immediate implementation. It is presented here to promote the necessary legal (and attitudinal) changes first needed to implement its value. And frankly, a change this large in 18% of GDP is better phased in gradually, starting with those who are adventurous. By the time the most timid among us have joined up, the transition will have become routine. As a first step, let's add another proposal for the present Congress to consider:

Proposal 15. Tax-exempt Hospitals Should be Required to Accept the DRG method of payment for inpatients from any Insurer, although the age-adjusted rates should be negotiable based on a percentage surcharge to Medicare rates. The DRG should be gradually restructured, using a reduced SNOMED code instead of enlarged ICDA code, and intended to be used as a search engine on hospital computers rather than printed look-up books, except for very common hospital diagnoses. Also to be considered for those who are too sick for arms-length negotiation of hospital costs, are uniform reimbursements among insurance carriers and individuals, and between inpatients and outpatients, including emergency rooms, as well as a major expansion of specificity in DRGs.

Overfunding and Pooling. Lifetime Health Savings Accounts, beside being multi-year rather than annual, are unique in a second way : they overfund their goal at first, counting on mid-course correctionsto whittle down toward the somewhat secondary goal of precision -- amounting to, "spending your last dime, on the last day of your life". To avoid surprising people with a funding shortfall after they retire, we encourage deliberate over-estimates, to be cut down later and any surplus eventually added to retirement income . For the same reason, it is important to have attractive ways for subscribers to spend surpluses, to blunt suspicions the surpluses might be confiscated if allowed to grow. An acknowledged goal of ending with more money than you need, runs somewhat against public instincts, and is only feasible if surpluses can be converted to pleasing alternatives.

Saving for yourself within individual accounts is more tolerable than saving for impersonal groups within pooled insurance categories, but probably must constantly defend itself against the administrative urge to pool. Pooling should only be permitted as a patient option, which creates an incentive to pay higher dividends for it. The menace of rising health cost at the end of life induces more tolerance of pooling in older people, whereas small early contributions compound more visibly if pooling is delayed. Young people must learn it gets cheaper if you don't spend it too soon. The overall design of Lifetime HSAs is to save more than seems needed, but provide generous alternative spending options, particularly the advantage of pooling later in life. Because it may be difficult to distinguish whether underfunded accounts were caused by bad luck or improvidence, the ability to "buy in" to a series of single-premium steps should both create penalties for tardy payment, as well as create incentive rewards for pooling them. This point should become clear after a few examples.

Proposal 16: Where two groups (by age or other distinguishing features) can be identified as consistently in deficit or surplus -- internal borrowing at reduced rates may be permitted between such groups. Borrowing for other purposes (such as transition costs) shall be by issuing special purpose bonds. These bonds may also be used to make multi-year intra-family gifts, such as grandparents for grandchildren, or children for elderly parents.

Smoothing Out the Curve.There is considerable difference between individual bad luck with health costs, and systematic mismatches between average costs of different age groups. Let's explain. An individual can have a bad auto accident and run up big bills; as much as possible, his age group should smooth out health costs by pooling within the age cohort to pay the bill. On the other hand, compound investment income sometimes favors one age group, while illnesses predominate in a different experience for another. It isn't bad luck which concentrates obstetrical and child care costs in a certain age range, it is biology. No amount of pooling within the age cohort can smooth out such a systemic cost bulge, so the reproductive age group will have to borrow money (collectively) from the non-reproductive ones. With a little thought, it can be seen that subsidies between age groups are actually more nearly fair, than subsidies based on marital status or gender preference, or even employers, who tend to hire different age groups in different industries. On the other hand, if interest-free borrowing between age cohorts is permitted, there must be some agency or special court to safeguard that particular feature from being gamed. All of these complexities are vexing because they introduce bureaucracy where none existed; it is simply a consequence of using individual ownership of accounts to attract deposits which nevertheless must occasionally be pooled later. Because these borrowings are mainly intended to smooth out awkward features of the plan, every effort should be made to avoid charging interest on these loans. However, if gaming of the system is part of the result, interest may have to be charged.

Proposal 17: A reasonably small number of escrowed accounts within a funded account may be established for such purposes as may be necessary, particularly for transition and catastrophe funding. Where escrowed accounts are established, both parties to an agreement must sign, for the designation to be enforceable.(2606)
Escrowed Subaccounts. Both Obamacare and Health Savings Accounts are presently expected to terminate when Medicare begins, at roughly age 65. Nevertheless, we are talking about lifetime coverage, where we have a rough calculation of the cost ($325,000) and the Medicare data is the most accurate set, against which to make validity comparisons. We want to start with $325,000 at the expected date of death, spend some of it in roughly 20 installments, and see how much is left for the earlier years of an average life. Then, we repeat the process in layers down to age 25, and hope the remainder comes out close to zero. There are several things missing from this, most notably how to get the money out of the fund, but let's start with this much, in isolation for the Medicare age bracket, age 65-85. We are going to assume a single-premium payment at age 65, which both life expectancy and inflation in the future will increase in a predictable manner, and changes in health and health care eventually reduce healthcare costs, not increase them. Not everyone would agree to the last assumption, but this is not the place to argue the point.

We know:

(a) The average cost of Medicare per year ($10,900)

(b) How many years the beneficiaries on average are in the age group (18).

(c) Therefore, we know how much of the $325,000 to set aside for Medicare ($196,200),

(d) And know how much a single premium at age 65 would have to be, in order to cover it. ($196,000 apiece)

(e) We thus know how much all the working-age groups (combined as age 25 to 65, 60% of the population) must set aside, in advance for their own health care costs, when they reach Medicare age ($196,000 apiece).

(f) And by subtraction therefore how much is left for personal healthcare within age 25 to 65 ($128,800).

(g)We can be pretty certain average Medicare costs will exceed those of anyone younger, setting a maximum cost for any age.

(h) All of this calculation ignores the payroll deductions for Medicare and premiums. Since this is nearly half of the cost, it changes the conclusions considerably, depending on how you treat these points. During the transition phase, several approaches may be necessary. Furthermore, the size of accumulated debt service is unknown, or what the alternative plans are, for it.

Shifts in age composition of the population produce large changes in total national costs, but should by themselves not change average individual costs. What they will do is increase the proportion of the population on Medicare, thereby paradoxically making both Obamacare and Health Savings Accounts relatively less expensive. Obamacare can calculate its future costs with the information provided so far. But the Health Savings Account must still adjust its future costs downward for whatever income is produced by investments. We don't yet know how much each working person must contribute each year, because we haven't, up to this point, yet offered an assumption about the interest rate they must produce. We should construct a table of the outcome of what seem like reasonably possible income results. There are four relevant outcomes to consider at each level: the high, the low, and the average. Plus, a comparison with what Obamacare would cost. But there are two Medicare cost compartments: the cost from age 25 to 64, and the cost from 65-85, advancing slowly toward a future life expectancy of 91-93. These two calculations are necessary for displaying the relative costs of Medicare and also Obamacare.

Children's Healthcare. Someone is sure to notice the apportionment for children is based on income rather than expenses. The formula can be adjusted to make that true for any age bracket, and a political decision must be made about where to apply an assessment if income is inadequate; we made it, here. We have repeatedly emphasized that if investment income does not match the revenue requirement, at least it supplies more money than would be there without it. Somewhat to our surprise, it comes pretty close, and we have exhausted our ability to supply more. Any further shortfalls must be addressed by more conventional methods of cost cutting, borrowing, or increased saving. In particular, attention is directed to the yearly deposit of $3300 from age 25-65, which is what the framers of the HSA enabling act set as a limit, somewhat arbitrarily.

Privatize Medicare? And finally but reluctantly, the figures include provision for phasing out Medicare, which everyone treats as a political third rail, untouchable. But gradually as I worked through this analysis, I came to the conclusion that uproar about medical costs would not likely come to an end, until the Medicare deficit was somehow addressed. I believe we cannot keep increasing the proportion of the population on Medicare, paying for it with fifty-cent dollars, and pretending the problem does not exist. So it certainly is possible to balance these books by continuing our present approach to Medicare. But it would be a sad opportunity, lost.

In summary, we have concocted a guess of the outer limit of what the American public is willing to afford for lifetime health coverage ($3300 per person per year, from age 26 to 65), and added an estimate of compound income of 8% from passive investing, to derive an estimate of how much we can afford. From that, we subtract the cost of privatizing Medicare if our politicians have the courage for that ($98,000 -196,000) and thus derive an estimate of how much is available for health care of the rest of the population ($128,000). Because of the longer time spans available for compound income, at 8% it would cost more out-of-pocket to finance the $128,000 than the $196,000; it would actually be financially better to include it. The non-investment cost, on average, would only be $ 148,000 per lifetime, for an expense which otherwise almost insurmountably crowds out everything else in the national budget. It might be $98,000 less because of Medicare payments, or it might prove to be more, depending on interest rates and scientific progress. Believe it or not, that could be a wide improvement over the present trajectory.

That's how it seems at first when you approach the topic of multi-year health insurance. But there are several exciting additions, when you really get into it. It plods along, and then it explodes.

Front Stuff, Health Savings Accounts: Planning for Prosperity;SECTION ONE: HSA and its Competitor, in brief

...Also by the same author:

The Hospital That Ate Chicago, Saunders Press, 1980

Health Savings Accounts: A Handbook, Ross & Perry, Inc. 2015 (Forthcoming)


Ross & Perry Book Publishers

3 South Haddon Avenue

Haddonfield, New Jersey 08033



Copyright: 1-2540412791

ISBN #: 978-1-931839-44-0



For advice and support about the thrust of this book, I owe spiritual debts to John McClaughry of Vermont, the late F. Michael Smith, Jr. of Louisiana, and the late Bill Niskanen of Minnesota and Washington, DC. It's heartening to remember strong support coming from wide corners of America, and from strata of society ranging from a country doctor, to the former Chairman of the President's Council of Economic Advisors. All three of these men worked their way up to being either a candidate for Governor of his state, the President of his State Medical Society, or the Chairman of a famous Washington think-tank. All three brushed aside the problems they created for themselves by constantly thinking outside of the box. My fellow Philadelphian John Bogle, whom I have only fleetingly met twice, deserves a lot of credit for demonstrating in his books how to invent a complicated concept, and then simplify it for outsiders. I've adopted his investing strategy.

And for personal support and tolerance from my family editorial board, consisting of my two sons and two daughters. My son George took time out from climbing the tallest mountains in the world, to develop a computer algorithm that instantly created the answers to a multitude of math problems hidden in certain assertions I blithely make, but now have confidence in. Likewise, my CPA daughter Miriam, told me some things which may be commonplace among corporate Chief Financial Officers, but astonish the rest of us. And her siblings Stuart and Margaret, who understood my tendency to wise-crack, but having long practice with its consequences, talked me out of most of it. Especially Margaret, who persuaded me it was more important for the title to be accurate, than to be witty.

Good Ol' Health Savings Accounts

In 1981 at what was then called the Executive Office Building of the Reagan White House, John McClaughry and I conceived the Medical Savings Account, later known as the Health Savings Account. John was at that time Senior Policy Advisor for Food and Agriculture, but he had read my book The Hospital That Ate Chicago, and it inspired him to think about a better way of financing health care. He asked me to come down to Washington to discuss the issue. We met and fleshed out the idea. Little did we then suspect how many delightful features would pour out of the simple little invention with only two moving parts.

It was patterned after the tax-deductible IRA (Individual Retirement Account) which Senator Bill Roth of Delaware was bringing out the following year. But with two major variations: our account contained the unique feature of a second tax exemption, given on condition the withdrawal was spent on health care. Otherwise, a regular IRA subscriber pays the usual income tax on withdrawals, and gets only one tax deduction, the one he gets when he deposits money into the account. Bill Roth later produced his second kind, the Roth IRA, which allowed a tax-exempt withdrawal, but took away the tax-exempt deposit. Only the Health Savings Account gives you both. In Canada, by the way, they do allow both deductions in their IRA, but in America only the HSA offers it.

Garlands of Unexpected Good Features. So the first part of a Health Savings Account is just that, a tax-exempt savings account, obtainable in the same way you get an IRA or a Roth IRA, although a few eligible outlets were slow to take ours up. And the second combined feature was to require a high-deductible, "catastrophic", stop-loss health insurance policy -- the higher the deductible, the cheaper the premium gets.

Further, the more you deposit in the account, the higher is the deductible you can afford, so you save money going either way, and get extra benefit in your account for having a tailor-made insurance program. The industry term for this kind of insurance is "excess major medical", which the two of us wanted to avoid because of its implication it was somehow frivolous or unnecessary, when in fact it is central to the whole idea. Linked together, the two parts enhanced each other and produced results beyond the power of either, alone. The savings account was first envisioned to cover the deductible, but nowadays it also commonly attaches a special debit card to purchase relatively inexpensive outpatient and prescription costs. That led to further administrative savings to the subscriber if he shopped frugally for optimum proportions of deductible insurance. Right now, it's a little uncertain what the current Administration will permit in the way of catastrophic health insurance, so unfortunately it is just about impossible to give concrete examples of what the ultimate cost will prove to be. But we do know that in the old days, a $25,000 deductible was available for $100 a year. Nowadays, a $1000 premium is more likely. When we get to explaining first year and last year of life insurance, it will become clear that this premium can be appreciably reduced.

But while the savings account allowed someone to keep personal savings for himself, the insurance spreads the risk of an occasional heavy medical expense at what ought to be a bargain price for bare-bones insurance. You needn't spread any risk for small expenses because you control them yourself, but no one can afford some of those occasional whopper expenses. There's no reason why you couldn't set the deductible level yourself, weighing your own ability to withstand bigger risks. In practice, the actual savings were reported to approach 30% (compared with "First-dollar" health insurance), quite a pleasant surprise. But because of the younger age group of the early adopters, much of this saving was achieved in the out-patient area.

(Let's start using the present tense to talk about it, although right now it's hard to know what politics will permit.) So, hidden in this bland dual package are lower premiums, less administrative red tape, less moral hazard, but complete coverage. Right now, that's somewhat subject to change. It provides complete coverage in the sense that the insurance deductible can be covered by the savings account, but contains the option to be saved, invested or used for small outpatient expenses. Furthermore, the account carries over from year to year and employer to employer. So it eliminates job-lock, use-it-or-lose annoyances, and allows a healthy young person to save for his sickly old age. Curiously, many of the subscribers have elected to pay small expenses out of pocket, in order to make the tax deduction stretch farther.

In one deceptively simple feature, many of the drawbacks of conventional health insurance have been removed. The bank statement from the debit card can even do the bookkeeping. The first part of the two-part package, the savings account, creates portability between employers, opens up the possibility of compound interest on unused premiums, eliminates pre-existing conditions even as a concept, and creates a vehicle for transferring the value of being a "young invincible" forward into age ranges when the money really is likely to be needed for healthcare. Maybe some other features can be added later, but introducing an unfamiliar product is always greatly assisted by having it all appear so simple. The HSA only has two features, but they solve a dozen pre-existing problems.

To return to its history, nearly 15 million accounts have been opened, containing $24 billion. John McClaughry and I (neither of us received a penny for any part of this) were seeking a way to provide a tax exemption to match the one which employees of big business get when the employer buys insurance for them. That is, Henry Kaiser inspired us to do it. Although we got the general tax-free savings idea from Bill Roth, we did him one better by giving a deduction at both ends, provided only -- you must spend the money on healthcare to get the second tax relief. An additional novelty at that time was a high deductible, which permits a "share the risk" feature unique to all insurance, but invisibly limits it to expensive items. It wasn't the original idea, but it turns out you get spread-the-risk and limits to out-of-pocket patient costs in the same package. Who could have guessed?

Volume control versus Price Control in Helpless Patients.We did know a third automatic advantage, not fully exploited so far: it seems possible the hateful DRG system (with its codes restructured) could become a useful tool for dealing with a major flaw in the Medicare system. Professional peer review has become pretty good at controlling the volume of services, but prices still escape effective control. No amount of volume control can, alone, address the price issue. Controlling vital services for helpless people is a delicate matter.

Quite a few of those services match (or contain) identical items in the outpatient area. The outpatient area faces outside competition from other hospitals, drugstores or vendors. Instead of letting helpless inpatients generate unlimited prices for the outpatients, why not let competition in the outpatient area define standards of prices for inpatient captives? Outpatients and inpatients overlap in the ingredient components, considerably more than most people suppose. Inpatients may have higher overhead because of the need to supply their needs at all hours, but a standard extra markup around 10% ought to take care of that. No doubt some services are unique to the inpatient area, but a relative value scale is then easily constructed, thereby linking unique costs to other services which are exposed to competition. Ultimately, provable relationships to market prices might even discipline big payers demanding unwarranted discounts. This last is a deal breaker, provoking suspicions of abused power by a fiduciary. Government in the form of Medicaid, is often the worst offender, so we need not imagine laws will prevent discounts so long as law enforcement remains crippled. Every business school teaches that discounts below cost are a path to bankruptcy, but business schools have apparently not had enough experience with governments to suggest an effective remedy.

Other than two variations (double tax deductions, and incentives if used for health care), a Roth IRA would be nearly the same as an HSA, with independently purchased Catastrophic backup. But the assured presence of low-cost, high-deductible insurance provides security for another needed feature : Using individual accounts with year-to-year rollover , we could introduce the notion of frugal young people pre-paying the healthcare costs of their own old age. For all we knew, there weren't any frugal young people, but we were certainly pleasantly surprised. And catastrophic insurance added the ability to share the opportunity of that feature -- subsidizing the poor at bearable prices. As we will shortly see, it also offers an incentive to save for retirement. Think of it: almost nobody can afford a million-dollar medical bill, but almost everybody welcomes low premiums. Catastrophic coverage offers the only chance I know, of approaching both goals at once. And it offers the fall-back, that if you are lucky and don't get sick, you can use if for your retirement.

As the only physician in the room, I also pointed out another pretty gruesome fact: either people end their lives having a lot of sickness, or they end up paying for a protracted old age. Only infrequently, do real people encounter both problems. It can happen of course; breaking a hip after a long confinement in bed would be an example.

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People end their lives with sickness, or else they must pay for protracted old age. {bottom quote}
Still More Good Features. Including these self-canceling needs in a single package allowed some flexibility between them -- something badly needed for a century. We cannot go on passing a new regulation for every quirk of fate; a good program must allow some latitude. Extended longevity tends to be hereditary, and so separate policies (sickness care and long-term care) are more expensive individually than the two combined, because the patient can out-guess an insurance company. Health Savings Accounts balance an incentive to save for one's own future health costs "at the front end" with reasonable cost limitations "at the time of later service", even though two time periods are decades apart. That's obviously superior to increasing the sickness subsidy at the back end, because, among other things, the patient will later have even more clues about his impending future. If cost reduction goes too far at either end, it amounts to an incentive to spend carelessly. Saving becomes fruitless.

A tax deduction is a tax deduction, but this one has two: An incentive to save, and a later option to spend the savings on either healthcare or retirement. That's nearly specific enough. Furthermore, it offers a choice between saving preferences -- you can have interest-bearing savings accounts, or you can invest in the stock market, or a mixture of both.The HSA automatically converts to a regular IRA (for retirement) at age 66 when Medicare appears; that should be optional for all health insurance, but isn't. The IRA up in Canada includes both front and back features, but in the United States the HSA is the only savings vehicle to have dual deductions, so it's more flexible. As the finances of Medicare become shaky, it may be time to provide additional alternatives. At least, we ought to consider extending age 66 to a lifetime coverage option.

This harnessing of two familiar approaches makes a deceptively simple package which ought to be considered in other environments, unconnected with medical care. In most public policy proposals, the deeper you dig, the more problems you turn up. In this one, we found the proposal already had hidden answers to most concerns we could discover. It's possible to fall in love with an idea that does that for you. It lets you sleep at night, secure in the knowledge you aren't mucking things up for people.

Another surprise. Overall, the Affordable Care Act has probably helped sales of HSAs, since all four "metal" plans of the ACA contain high deductibles, serving in a (rather over-priced) Catastrophic role. This may be a way of covering the bets in a confused situation. The ACA is a needlessly expensive way to get high-deductible coverage, because it pays for so many subsidies. Frankly, it baffles me why subsidies swamp the costs of Obamacare, but are made unworkable for HSAs. Many of the details of the subsidies are obscure, including their constitutionality, so we have to set this aside for the moment.

One good motto is don't knock the competition, but we must comment on a few things. The Bronze plan is the cheapest, therefore the best choice for those who choose to go this way. But uncomplicated, plain, indemnity high-deductible, would be even cheaper if its status got clarified. The good part is, current rapid spread of high deductibles suggests mandatory-coverage laws may, in time, slowly go away. At first, the ACA looked like a bundle of mandatory coverages, all made mandatory at once. But they may be learning a few basic lessons as they go. Mandatory benefits are an example of mixing fixed indemnity with service benefits, with the usual dangerous outcome. Like many dual-option systems, they create loopholes. The HSA seems to avoid this issue by effectively being two semi-independent plans, for two separate constituencies -- who are the same people at different ages. Once more, we didn't think of it, the features just emerged from the plan.

That's about as concise a summary of Health Savings Accounts as can be made without getting short of breath. But of course there is more to it, particularly as it affects the poor. For example, there is an annual limit to deposits in the Health Savings Account of $3350 per person, and further deposits may not be added after age 65. They can be "rolled over" into regular HSAs when the individual gets Medicare coverage, and supposedly has no further financial needs. So plenty of people have health care, but can barely support their retirement. These plans are absolutely not exclusively attractive to rich people, but it must be admitted, poor people start with such small accounts that companies can't operate profitably unless the client sticks with them for a long time. If people possibly can, they should scrape together one $3300 maximum payment to get a running start.

The problems of poor people can nevertheless be eased, within the limits of the plan's design. Since people will be of different ages when they start an HSA, it might be better to set lifetime limits, or possibly five-year limits, to deposits, rather than yearly ones. Some occupations have great volatility in earnings, and sometimes a health problem is the cause of it. To reduce gaming the system, perhaps the individual should be permitted to choose between yearly and multi-year limits, but not use both simultaneously. As long as the self-employed are discriminated against in tax exemptions, that point could certainly be modified. There remains only one major flaw, which we propose should be fixed:

Proposal 6: Congress should permit the individual's HSA-associated Catastrophic health insurance premiums to be paid, tax-exempt, by Health Savings Accounts, until such time as elimination of the present tax exemption for employer-based insurance is accomplished by other means.

Subsidies for the Poor? Here's my position. If poor people could get subsidies for HSA to the same degree the Affordable Care Act subsidizes them, Health Savings Accounts should prove at least as popular with poor people as the Administration plan. Mixing the private sector with the public one is always difficult. Why not make subsidies independent of the health programs? There is no point in having the poor suffer because someone prefers a different health system. Quite often, a subsidy program is mixed with a public program, in order to make its passage more attractive; that's not necessary.

Proposal 7:That health care subsidies be assigned to patients who need them, rather than attached specifically to one or another health system that happens to serve them.
Let's just skip away from all those digressions, and return to the poor in other sections. If the concern is, health care is too expensive, why in the world wouldn't everyone favor the cheapest plan around? Part of the answer, politics aside, is that young people have comparatively little illness cost, while old folks have a lot. Since Medicare therefore skims off the most expensive healthcare segment of the population, the fairness of any health subsidy program is difficult to assess. Evening out the tax deduction for the catastrophic portion equalizes the unfair tax deduction for self-employed and unemployed people. Perhaps the equality issue should be re-examined after each major revision, since many moving parts get jostled, every time..

The government is going to have trouble affording the existing subsidy, so it may not endure, particularly at 400% of the current poverty level. But if we can subsidize one plan, we can subsidize the other, instead. The government would then be seen, and given credit for, saving a great deal -- by inducing destitute people to use HSA as an alternative option, equally subsidized by an independent subsidy agency. As for single-payer, the government for fifty years borrowed to continue Medicare deficit financing, and got it to 50% universal subsidy without much notice. That's like boiling the frog too gradually to be noticed, until it is too late. But suddenly expanding the 50% subsidy to the whole country at once, would definitely be noticed. Extending such levels to the whole country should anyway be buttressed with accurate cost data. Administrative cost savings are just a smoke screen. Total costs are the real cost. Other people also point out Medicare was financed after we had won some wars, but now we seem to be losing wars.

The Customers Help Out

There was a second major difference between ACA and HSA, as we will increasingly call the two programs. This difference was philosophical. The ACA runs to thousands of pages of regulations, while the HSA could be described in a few paragraphs. You get the feeling hundreds of eager kids are at work prescribing every conceivable contingency of Obamacare, providing for every imaginable angle. Much merriment is provoked by the new ICDA code when it provides a code for injuries sustained in falling out of a spacecraft and many other remotely conceivable medical events of little interest to a practitioner. But that is quite typical of the whole approach, which took six years after passage to get to the point where it could launch the fumbling mess of computerized registration.

By contrast, some of the most prized features of Heath Savings Accounts was discovered by the clients. The originators of the idea had assumed there was no further use for them once Medicare was in their picture, but what would you do with any left-over surplus? So, it was provided that HSA became an IRA at the age of 66. You weren't forced to disgorge them, but you lost the extra tax deduction for healthcare usage. The use of this quirk became apparent when it was discovered that many subscribers paid small medical bills out of their pocket rather than deplete the tax exemption. They were saving the exemption for later when they might need it for really big medical bills, a really shrewd assessment of the situation. From this came the concept of deliberately overfunding the accounts, so the compound interest would be available for retirement, and the available funds could be more appropriately apportioned between the two needs of old age. It's now recognized as one of the best features of the program, apparently unique among health plans. And as we will see, it was the foundation for other extensions of the interest-bearing interval.

How often have readers of this book had the experience of finding a flaw in a company's procedures, only to get the cold shoulder from the manager when it was requested he fix it? John Wanamaker famously repeated the slogan "The customer is always right," but even the department store he made famous forgot his warning, and has gone out of business.

Martin Feldstein Does It Again: Eliminate Tacit Tax Exemption for 70% of Workers Denied To the Rest

Headlines in the Wall Street Journal announced collapse of Congressional healthcare reform. In the same edition a small short article buried in its depths, described a possibly major step toward its reform. Martin Feldstein calmly observed, a tax exemption for healthcare insurance of 2.9% really amounts to a wage increase whose elimination might go a long way toward paying for the eighty-year mess Henry J. Kaiser had created. (In fact, it was effectively taxable income of 4%.)

It was all so simple: healthcare extended longevity, created thirty years of new retirement cost. In turn, exempting the premium for healthcare became a tax-exempt increase in wages -- for the 70% of employees getting insurance as a gift. Maybe not at first, but wages adjust to expect it during eighty years. Social Security could not cope with an extra thirty years, so SSA was going broke, while health insurance was actually the main cause of increased longevity.

But notice how unused Health Savings Accounts automatically turn into retirement accounts (IRAs) for Medicare recipients. So if you are lucky and prudent with healthcare, or if you overfund an HSA, unused healthcare money makes a reappearance in retirement funds where it belongs. If you have used up the money, you have probably been sick, and maybe won't need so much for a shortened retirement. Increasingly, expensive healthcare hits the elderly hardest, so there are many years during which compound interest overcomes inflation. At the rate things are going, retirement may become four times as expensive as Medicare, so let's consider that future.

Medicare doesn't save its withholdings, it uses "pay as you go" and spends the money on other things, like battleships. Therefore, to make any use of this windfall, it is necessary to save it, invest it, and use it for retirement. Just doing that much might redirect the other 30% of withheld tax to its intended purpose. So the economic effect would be considerable, just by stirring around in that corner of it.


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Better, but More Complicated: Lifetime HSAs
Start with a Health Savings Account (a tax-exempt IRA with catastrophic insurance backup, payable only for Healthcare). Add a concept: add other age groups, like working people (26-65) who indirectly pay almost all health costs, and children. We try to integrate this pattern into a lifetime health insurance design:
Obstetrics and Pediatrics through age 25 are really special loans from parents to children, usually not repaid.
Medicare, on the other hand, owes an unpaid debt for their 50% subsidy. Failure to recognize the subsidy tempts the public to extend it with "Single payer" disasters. Public education is the first, and rather major, step toward fixing this before it ruins us.

Front Stuff, Health Savings Accounts: Planning for Prosperity;SECTION ONE: HSA and its Competitor, in brief

Good Ol' Health Savings Accounts
Possible fixes in HealthSavingsAccount to adjust to Obamacare. HSAs remain available and have millions of pleased subscribers. A debit card pays (tax deductible) medical expenses, and does the book keeping. High-deductible health insurance is also required, mostly to cover hospitalizations, but primarily to smooth out the unevenness of disease. Bronze plan is the cheapest Obamacare option, but private catastrophic coverage would be cheaper.

The Customers Help Out
New blog 2015-11-03 01:18:31 description

Martin Feldstein Does It Again: Eliminate Tacit Tax Exemption for 70% of Workers Denied To the Rest
The Henry Kaiser tax exemption for health would pay toward Social Security, indirectly paying for retirement, which health insurance prolonged.