Philadelphia Reflections

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

Volumes

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.

(3) Obamacare: Speeches

New topic 2015-09-25 21:48:47 description

New topic 2015-09-25 21:48:47 contents

Paying for Healthcare

At my age, I reflect on inheritance tax once in a while. It's taxed at sixty percent, but there's some consolation. Every time I spend a dollar, I tell myself I'm really only spending forty cents. In spite of a lifetime of resisting such thoughts, it does affect my attitude about spending. And it must affect corporate decision-makers, at least somewhat, as a consequence of paying twice as much income tax as I do. Come to think of it, corporate tax is a double tax on the earnings of the shareholder. Since corporations flourished as outgrowths of the Industrial Revolution, they are probably an extremely efficient way to conduct business, or they couldn't withstand such tax treatment. No doubt, small businesses resent their disadvantage.

But the point to notice is how this tax treatment must affect willingness to spend company money. When companies give a dollar of health insurance to an employee, it really only costs them forty or fifty cents. It isn't even the employer's money, it's the government's tax money. And since the employee gets the insurance for something like seventy-five cents on the dollar counting his own tax reduction, the resistance to spending is even further reduced. As a matter of fact, a clever financial officer can improve on these numbers, but the point is sufficiently made without going into that complexity. Both the employee and the shareholder enjoy a greatly reduced reluctance to spend company money on health care. It just has to be true. And it also just has to be true that the half of us who don't get such a tax dodge, resent it.

It must additionally be true, avoiding this heavy taxation is a major factor in why we have had an employer-based system for a century, with progressive inflation in evidence. It probably contributes to our willingness to tolerate a loss of coverage when employment terminates, and steady price inflation when it doesn't. Rather than go on with a list of problems created by loss of price resistance, let's get down to the root, in the very design of the system. We have had the wrong kind of insurance for a century. Now that corporate income tax has risen to the highest in the world, our corporations are seen to be fleeing to foreign countries to escape it. So, perhaps it is time to do something about it.

Health insurance is upside down. It pays for small items, and then it runs out of money for big ones. "First-dollar coverage" was once the favored style, but nowadays for the most part a token deductible is imposed, but the principle is the same. Even before the Great Depression, young people had comparatively little serious illness and demanded "something for their money." In a sense, it really doesn't matter what the motive was, we started with insuring small illnesses and tended to run out of funds when expenses really got heavy. Whereas, if we had been concerned with getting the most insurance for the money, we would have begun with very expensive illnesses and then paid for cheap ones only if money was left over. Expensive illness is a threat to everyone, but medical catastrophes are fairy rare. The technical way to achieve this is well worked out, it's called high-deductible insurance, and its motto is "The higher the deductible, the cheaper the premium." Back in the 1960s, I was offered a $25,000 deductible policy for $100 a year. I forget, but I believe it had a top limit of a million dollars coverage. Almost everyone would be floored by a million dollars of expenses, but almost everyone (in spite of their protests) could afford $100. Although you probably couldn't get the same prices, that still seems like the kind of health insurance everyone ought to have. And, regardless of current discussions, it's the kind of insurance we are always going to have, unless we wake up.

If you can afford the kind of coverage that includes paying for cough drops, go ahead buy it. But if you are talking about mandatory coverage for everyone, start with catastrophic coverage and then shrink the deductible to what you or the government can afford. And then stop, because you can't afford it. There's really nothing hard about this..

Two Exceptional Health Coverages

There are two exceptional situations which might also be considered for universal coverage, even mandatory coverage if you insist. They are the first year, and the last year, of life. Some people get Tuberculosis, some people get cancer, some people live to be a hundred. But absolutely everybody is born, and everybody dies. Those are the two most expensive years of most people's lives, they almost always occur in hospitals, and nobody can fake them. The hospitals and Medicare keep careful records, so we know what they cost, both individually and on average. If we reimbursed the average cost to whoever paid it, the administrative expense would be small.The reason for doing this maneuver would be to take these costs out of the catastrophic insurance cost, both smoothing it out, and reducing it by 15%.There would be a transitional cost, because of the differing number of years before death appears. On the other hand, it would take a number of years before the births came up to average. But two major health costs would be universally covered.

Principles of Invesment Income, Multiplied by Compound Interest

One secret of success for Classical Health Savings Accounts lies in recognizing a single approach is inadequate; at least two approaches are required. Catastrophic health insurance spreads big risks (mainly hospitalizations), while tax-free accounts promote more frugal spending for small ones (mainly ambulatory care). Combined in an HSA, they do what neither does alone, by covering overlaps. Now I contend, six principles in combination can create even greater savings, when separately they might create more confusion.

1. Redesign Insurance. Health insurance has traditionally been upside down. Starting with "first dollar" coverage, really sick people feared bankruptcy when medical costs outran policy limits for the last dollar. Obviously it would be better to insure big catastrophes first, skipping small ones if funds run out. If we must have mandatory health insurance, the thought ran, let it be the high-deductible catastrophic variety, with out-of-pocket limits protecting outliers. To a certain extent, the Affordable Care Act moved in that direction, possibly opening room for compromise. Deductibles should be high, but co-payments are useless, and should be eliminated. Subsidies should subsidize people, not specific programs, and should avoid taxing the same program they are supporting.

2. Indirect Transfers Between Age Groups. Working age people largely finance the health system but mostly don't get sick themselves, whereas sick people are mostly retired and on Medicare. That makes young people restless, while Medicare breaks the national budget with a 50% subsidy. (It's largely accomplished through bond-loans from foreign countries, like China.) The age-related funds transfer is desirable, but is now largely left to hospital cost-shifting. Cost could be lessened by letting the worker keep health money in his HSA, earn interest, and spend it on himself when he ages. 2b. Furthermore, I propose we shift the cost of the two most expensive medical years of life to individual escrow funds during the period of investment. To be specific, shift the cost of the first and last years of life from coverage by catastrophic health insurance and Medicare -- to repaying average national cost (reported by Medicare) back to the insurers who originally paid the bills. That's technically known as first and last years of life re-insurance.

3. Funds Creation. How might we pay for this transfer? Well, in the first place, living people are assumed to have somehow already paid for their birth year. It will be forty more years before new ones are even half-way phased in. Even terminal care costs will not level out until life expectancy stops lengthening. Revenue, on the other hand, could commence immediately. The hard part of revenue production lies in fixing "agency" failures. That is, avoiding spending it in the meantime, and keeping middle-men from poaching on it. I propose individual escrow accounts are preferable to agency management by either government or private sector financial institutions. Saving for your own rainy day is much more palatable than taxing for transfers between demographic groups. The cost of passive investment in index funds is small, and long-run gross returns approach 11%, or 7% net. But middle-man costs are often too high. Considering the trillions in index fund potential, these inert investments might even be considered for a substitute currency standard. Gold is too rigid, government judgment always proves too inflationary.

4. Compounding. Meanwhile it helps to recall what the Ancient Greeks knew about compound interest. Money at 7% doubles in ten years, and therefore with life expectancy now at 84, can expect to double more than eight times. 2,4,8,16,32,64,128,256, (512- 1024). Unfortunately, the rounding errors also get compounded. Therefore, although the general concept is unchanged, one dollar at birth actually grows to about $289 at the average time of death by present expectations of it. By that time, life expectancy will likely grow by unpredictable amounts, so it might actually transform one dollar into $500 if inflation is held to no more than 3% -- or to some other value, more or less. The main hope for price stability lies, not so much with the Federal Reserve, as in medical science reducing the burden of disease and increasing the productivity of the delivery system. I feel confident last-year costs can be covered, either by patient contribution or by government subsidy, if -- transition costs are absorbed over the first decade or so, if the Federal Reserve can successfully hold inflation below 3%, and if medical science can cure one or two major diseases inexpensively in the next fifty years. Otherwise, this could merely be a proposal for generating tons of new revenue, but would fall short of paying for all the healthcare affected. Even covering by only 10% would produce staggering sums, however.

Let me remind you, those extrapolations are for only one dollar invested. More specifically, the goal of the proposal is to pay for the last year of life by some variant of one-time investing of $150 at birth, possibly even as much as $50 per year. This should be enough to relieve the debt pressure on Medicare, and to reduce the cost of catastrophic care for the rest of the population considerably. It's still much less costly than continuing the present approach.

5. Adding a Generation to the Family. To include the cost of children, we propose increasing the $150 at birth to $200 (potentially, $25 a year) and transferring the resulting surplus, from the grandparent's "bequest" to the Health Savings Account of no more than one grandchild at birth, thereby adding 21 years of compounding, broadening the scope to the first 21 years of life, and further reducing the premiums of catastrophic coverage for the rest of the population. Child-care costs are far more significant than they sound, and all health care plans have faltered on them. It is nearly impossible to prefund the day you are born, particularly when the responsible parents are young and financially insecure, facing the cost of an automobile, a house, a college education and another child. For a remarkably small dollar cost, compound interest can greatly relieve this social environment, and therefore I advocate the small additional cost of extending the first year of life to the first twenty-one of them. And funding them via the grandpa route.

6. Tax Equity. Additional required regulations are more or less self-evident, but the most important one would be to permit paying for catastrophic insurance premiums by the Health Savings Account itself, thereby creating tax exemption equivalent to employer-based insurance.

(7) The overall result presented here is to shift the costs of children up to age 21, plus the last year of life, to a longer compounding period and to their ultimate source, which is working people from age 22-66. It adds a major source of revenue through extended compounding, and it does this at the re-insurance level, mostly insurance company to insurance company. By shifting these costs, other programs cost less, and cost-shifting at the hospital level should greatly reduced. As scientific research reduces costs, Medicare is destined to shrink, so its revenue can gradually be shifted to retirement income. That isn't exactly privatization, although politics may describe it so. In the far, far, future, health care might reduce along a designated pathway to nothing but the first and last years of life. Or, the concept may be dismantled and pieces of it used in other ways.

(8) The alternative for tax equity is much more drastic -- of reducing corporate tax rates, sufficiently to compensate companies for losing their existing tax preference. For years, reformers have advocated tax equalization by eliminating the tax deduction for employees. It hasn't been successful, so now we advocate: equalization first, reduction later. If that is blocked, there is no choice but to lower corporate taxes, paradoxically the source of the problem.

Health and Retirement Savings Accounts: to Privatize Medicare and Save Money, Too

As earlier sections outlined, Health Savings Accounts were developed by John McClaughry and me in 1981, as a bare-bones health insurance scheme for financially struggling people. The package consisted of the cheapest insurance we could imagine (a high-deductible catastrophic indemnity plan with no co-pay features), attached to what others have aptly described as a tax-sheltered Christmas Savings Fund. That's essentially what you get if you sign up, today. What was this linkage supposed to accomplish? The Account part was intended for folks who must accept a high deductible to lower the cost of health insurance, but who then struggle to assemble the deductible. A combination package thus became the cheapest healthcare coverage we knew how to devise -- the higher the deductible, the lower the premium.

As deposits build up in the account, the remaining deductible falls toward zero, but the premium of the insurance does not rise because the extra cost is excluded from the insurance part. At that point, you could easily describe it as "first-dollar coverage for a high-deductible premium." Stepping through the process should clarify for anyone, how expensive it had always been to include the deductible costs inside the insurance! It certainly compares well with so-called "Cadillac" plans, where the underlying motivation really was to include as many benefits as possible, money no object, with someone else paying for it and then writing off its cost against artificially high corporate tax rates -- which were then eliminated by the healthcare deduction. If the government elected to subsidize our plan to provide it even more cheaply to poorer people, inter-plan subsidies could easily be arranged for seriously poor people, just as the Affordable Care Act does, by offering to transfer the same subsidy to it. Although HSA is itself absolutely the cheapest, neither it nor the Affordable Care Act is completely free of any cost, so additional features like charity must be supported by additional revenue from somewhere. Cheaper is simpler, simple is easier to understand. But cheaper doesn't mean free.

{LYOLG2}

First-dollar coverage by any mechanism generates the danger of spending health money unwisely. That undesirable feature was neutralized by letting subscribers keep what is left over at age 65, thereby generating (and greatly increasing) retirement income. Retirement income is generally in short supply, and there may exist a future danger, that well-meaning attempts to supply generous retirements would destroy this incentive to be frugal. But right now it isn't a worry.

Other Incentives. One thing we didn't immediately verbalize was, making it a bargain entices people to save, even when they are sort of inclined to consume. We didn't think to include regular paycheck withdrawals, but that's another common savings incentive with proven effectiveness. Having loose cash does seem to create a vague itch to spend. But the Health Savings Account specifies an invitation to save for health care, using any surplus for retirement, a much more specific appeal. With that addition, it became a more attractive program, appealing to a larger segment of the population without reducing its appeal to the original ones. Our reaction was that everyone was complaining about high health costs, so the more people Health (and Retirement) Savings Accounts appealed to, the better.

The real game-changer was this: When a subscriber later acquires Medicare coverage, anything left in the fund is automatically turned into a tax-exempt retirement fund, an IRA. As enrollments in HSAs began to boom, it was realized this provision creates an unmatchable retirement fund if someone puts extra money into the account. I wish I knew whose idea originated that. So you might as well say the basic package has three parts: a high-deductible health insurance, a spill-over retirement fund, and a Christmas savings fund to multiply savings with compound interest -- useful for both purposes.

It's amazing how many people think HSA has only one feature. It is a double savings vehicle for two sequential stages of life, with the tax advantages of the first stage getting it on its feet. The separation of the account from its re-insuring catastrophic health insurance, also identified the incentive to save, distinguished from a natural desire to share the risk like a hot potato. Adding compound interest adds particular attractiveness for the later stages of life, because compounding takes a long time before it means much. It connects two benefits end-to-end, lengthening the time for compound interest to become meaningful for the second one, as it would not, if it waited for retirement to begin. We eventually realized the deductible-funding and overlapped retirement-funding package, was the most attractive investment vehicle most ordinary folks could find. Beating it as a retirement fund alone was therefore nearly impossible.

Hence the double-strong incentive to save, sadly missing from every other form of health insurance. We strongly suggest adding this feature to Medicare, which badly needs some such incentive, although retirement is parallel to Medicare not sequential. Experience shows this unique set of double incentives to buy HSA was effective, so a 30% reduction in premiums for total health insurance began to emerge among pioneer clients, not merely claimed in theory. The recognition of all these advantages led millions of frugal people to sign up without an expensive marketing effort. Everything seemed to fall in place. Even though mandated coverage might have speeded up acceptance, slower adoption avoided the catastrophes of taking on more than could be handled.

So that's where HSA stands today -- the best little health insurance idea available anywhere, unless someone monkeys with it. Even the remote possibility of getting very sick very often, was covered by adding the feature of a top-limit to out-of-pocket costs, paid for by dipping into a small portion of savings generated by other features. Anyone who thinks of a better health insurance plan than this one, is welcome to offer it. Every addition added to its complexity, but every feature added to its cost-saving.

Let's whisper a reminder to resisters: the policy is owned by the individual rather than his employer, so it doesn't suddenly stop when you change employers or move between states. To a different audience we could whisper, it could bring a second bad feature closer to an end, the business of paying for Medicare with debts which have to be borrowed from foreigners. The Account gathers interest, instead of costing interest. The best part is: it induces the subscriber to hold back from using the account, saving it for more distant requirements, which inconveniently come without warning. Paying for your old age is wonderful, but starting to save while young is vital, and more likely to work. Most plans now maintain an upper limit to the subscriber's out-of-pocket costs, protecting against a second illness with its second deductible. When we say, "That's all there is to it," we really mean that's all the advantages which have so far emerged. It's ready to be renamed HRSA, the Health (and Retirement) Savings Account.

Technical Amendments, Needed at Present.

Now, let's pick the nits, noticing how hard it gets to improve on it. If Congress could pass a few amendments, the following flaws could be more or less immediately repaired:

1. Full Tax-Deductibility. Attractive as it is, HSA still isn't as fully tax-deductible as the health insurance many employed people are given at work. The savings and retirement portions are indeed tax-sheltered, but unlike some of its competitors, the high-deductible health insurance itself stands outside the funds (as what insurance experts might call re-insurance) and isn't covered. Employers get around this difficulty for their employees by buying the insurance themselves and "giving" it to the employees. Without monkeying around with this rather dubious maneuver to maintain tight control, we propose the premiums for the Catastrophic health portion of the HRSA might instantly become tax-exempt if the Savings Account paid the premium. That would appear cheaper for the Treasury, than proposing to make the whole package deductible. Because the other parts are already tax-exempted.

To permit something like that would require a one-line amendment to the HSA enabling act, but would restore fairness to the system, and bring out how much cheaper the Health Savings Account really is. Making it cheaper means more people could afford it, thus relieving the Treasury of the need to subsidize those people under the Affordable Care Act. That would compensate for some of the loss of revenue to the IRS of making the Catastrophic Health Insurance tax-exempt. Regardless of how the CBO scores this complexity, it should be remembered that poverty is not a lifelong condition for most poor people; after a temporary period of poverty, many if not most of them rise toward becoming tax-payers. Equal treatment under the law is itself a valuable asset; it could paradoxically be provided by lowering the corporate income tax, since many corporations already eliminate the corporate tax with the healthcare deduction. But that's not so self-evident, and politically hard to explain. If the Congressional Budget Office would extend its dynamic scoring to include retirement taxation on the HSA's eventual compound interest (instead of limiting its horizon to ten years), it would visibly be better to choose the compromise of letting the Accounts buy the re-insurance.

2. A better Cost of Living Adjustment for HSA deposit limits. There is presently an annual limit of $3400 for deposits into Health Savings Accounts, whose limits have seldom been raised very much. This new COLA should be formalized into a continuing cost-of-living adjustment which is somehow related to the current rate of inflation in the medical economy, and perhaps takes account of a potential transition to HRSA by people over age 60. These late arrivals simply do not have sufficient time to catch up within the present deposit limits, even should they possess the savings to do so.

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Young people contribute more time for interest to grow, old people must contribute more money to catch up. {bottom quote}
3. Age Limits for HSAs It is a quirk of compound interest (originally noticed by Aristotle) that interest rates rise with the duration of investment. Consequently, much or most of the revenue appears after forty years, and consequently HSAs get more valuable with advancing age. To put it another way, young people contribute more time for interest to grow, old people must contribute more money to catch up. At present, HSA age limits are set to match employment, but the HSA will inevitably focus on funding retirement. Removing all age limits might go a little too far, but would substantially increase the amount of investment income generated, at almost no extra cost to the government. It might also supplement the platform for funding childhood health costs, a problem age group which stubbornly resists improvement. It might greatly enhance revenue for older subscribers as well (by reducing their health insurance cost), the surplus from which could be used at their death for the grandchildren generation.

{Privateers}
Extending the age limits would potentially also serve as a platform for re-adjusting dangerous imbalances in the healthcare financing system. We are fast approaching a demography of thirty years of childhood and education, followed by thirty years of working life, followed by thirty years of retirement. Substantially all of the revenue comes from the middle third, while the remaining two thirds of the population contain most of the health costs. To some extent this is unavoidable, but the whole health financing system becomes a dangerously unbalanced transfer system for well people to subsidize sick ones. It is possible to foresee the beginnings of class warfare, based on age alone. Consequently, society would be well served to create the more stable system of subsidy between yourself as the donor and yourself as the beneficiary. The alternative is to continue the process of having one demographic group collectively subsidize two other groups of strangers who generate most of the cost. Eventually this could induce well people to dump the burdensome sick people. I hope I am unduly concerned, but to extend the age limits for individual self-financing seems a very cheap way to begin stepping out of that particular mud puddle.

Finally, there is the conflict with inheritance laws. By extending the age limits for the funds to the legal boundary of perpetuity (one lifetime, plus 21 years), the ability to transfer funds between generations is enhanced without the perplexities of inheritance. It would be particularly useful to permit the fund to remain active until a grandparent's death, or even extend to the birth of the designated grandchild's 25th birthday. Like a trust fund, it could gather interest after the death of the owner, leaving the selection of heir to the last possible moment.

To return to the subject narrowly at hand, it is easy to see so many projects are made possible, you end up with an aggregate of goodies which eventually sink the lifeboat. Something must be chosen, something must be deferred, and the choice should be a delayed one, left to individual choice as much as possible. It can be commented in advance that retirement costs potentially dwarf sickness costs, and small single payments held at interest for long stretches have the greatest efficiency. There seems little choice but to constrain retirements to what the individual can manage independently, rather than permit retirements to absorb all the benefit of a new windfall. The theme is, and should be, one step at a time.

As an aside, it's true the subscriber to a Health Savings Account is not fully covered in his first few years, until the account builds up to the deductible. That makes a very good argument for starting the accounts while you are quite young. At first, that was a concern, but it has proved largely unnecessary to provide for it, among young healthy subscribers. Apparently, by the age hospital-level illness becomes common, ability to meet the deductible has mostly been achieved. Nor has it proved necessary to resort to sliding-scale deductibles hidden in the slogan, "the higher the deductible, the lower the premium" -- probably because lower premiums immediately transform into more money for saving. These features might be reviewed when self-selected frugal applicants taper off, since HSA enrollment has so far attracted younger enrollees. For the moment, sales incentives seem adequate; everything else may be indirectly changed by HSAs, but very little is changed directly.

Future Expansions.

How far these three short amendments would extend retirement solvency, is hard to predict into the future, but it would be considerable. Aside from any improvement never seeming like enough, it is almost impossible to guess the future timing of health costs, even when you can see them coming. But while the amendments might assure a comfortable future for Health and Retirement Savings Accounts, they do seem unlikely to address the full over-expectations of retirement. So the problem for many, many afternoons' deliberation, would be to expand the potential of HSAs until they become objectionable to competitive concerns. For that, I have four additional proposals which might work, but inevitably collide with professions who would be quick to suggest narrower limits. Let's describe them, meanwhile waiting to assess objections from those they would discomfit:

1. A re-insurance scheme (insurance company to insurance company), called First and Last Years-of-Life Re-Insurance.This has already been described.

2. Medicare should be modularized but without other basic change, so recipients need only buy pieces they need, using the invested proceeds for retirement. Obstetrical coverage immediately comes to mind. Sometime during the next fifty years it can be predicted at least one of the five most expensive diseases (Alzheimers, diabetes, cancer, psychosis, and Parkinsonism) will be inexpensively cured, once the initial cost increase is absorbed. We need a way to fine-tune the transfer of such medical savings into retirement income, understanding many competitors will hope to divert a windfall to themselves. Redirecting the Medicare withholding tax makes an easy way to channel the funding, as would reductions of Medicare premiums. Scientifically, Medicare is eventually destined to shrink as we find cures, but funding the resulting longevity must be given first call on the savings.

3. The investment component of Health Savings Accounts should be dis-intermediated, partially if not completely.Ibbotson reports the stock market has produced--for a century--10%-11% long-term returns on large-cap stocks and less steadily, 4-5% on bonds, minus 3% inflation. You might not expect that, judging from the returns investors often receive; investors are definitely absorbing most of the risk. The volatility is much less than most people imagine, and there is every reason to suppose Index funds of these entities should perform better with less volatility at far less cost, perhaps 0.1-0.3%. The days fast fade, when the public will continue to surrender the present level of stockmarket transfer costs and fees, which now sometimes erode investor return to as low as 1%. The fast-growing and simpler system is "passive" investing with index funds, and its goal should be an average return to the retail customer of at least 6.5% after inflation and costs. The struggle will be a fierce one, but the retail finance industry must re-examine who is at risk, and who is rewarded for taking that risk.

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The wrong people are doing the medical commuting. {bottom quote}
4. The center of medical care should migrate from medical centers toward shopping centers attached to retirement villages. Architects report it will always be cheaper to build horizontally than vertically. Since we seem destined to spend thirty years in retirement, and the principal occupation of retired people is taking care of their own medical needs -- the wrong people are doing the medical commuting. Teaching hospitals were located close to the poor, in order to use them for teaching material. But now "meds and eds" are fast becoming the principal occupations of high-rise cities. If there is ever a good time to place medical care closer to the patients, this is it.

And if ever there is a way to put the doctor back in charge of medical care, decentralization is the way to do it smoothly. We will always need tertiary care, but we don't need indirect overhead, skyscraper construction, or multiple layers of overcompensated administration. Even continuing-education is becoming a revenue center. No one can claim the present centralization made things cheaper, and the disadvantages of medical silos certainly call the quality issue into question. The Supreme Court failed us in the Maricopa Decision; so let's see what Congress can do with reconciling the Sherman Act with the Hippocratic Oath.

The Nature of Ownership Relationships

It does seems appropriate to limit the actively managed portfolio of an HSA to health-related corporations, but it raises suspicions about motives. You want to stick with what you know, but you don't want to raise anti-trust concerns. There is a rather long history of medical organizations starting hospitals, drug stores and the like when there was no one else to do it. Eventually, however, competition did present itself along with arguments of conflict of interest, and rather forcefully. Since the purpose of this enlarged and actively managed portfolio would be to manage the shares rather than the business, it probably could be done if care were taken.

Furthermore, the range of businesses which would qualify as health related is extremely varied. Over the past century, we have seen Medical Societies own malpractice insurance companies, medical journals, post-graduate educational tape recordings, health insurance companies, and hospitals and rehabilitation centers. Even more enticing are drug companies and medical device makers. Among all this variety could probably be found choices which avoid legal criticisms, but still serve the essential purpose of choosing superior investment vehicles. This is a vital central point, and we will return to it in later chapters. After all, members of almost any professional field would be likely to predict winners and losers in related industries with more accuracy than the public would, and therefore experience better performance in its choices. That would be particularly true when companies remain relatively small, unattractive to professional portfolio managers. And it's entirely different from buyer collusion to suppress producer prices of companies they control, but that distinction must be kept clear from the outset. Small companies grow, merge, and assume new characteristics over time, so a track record of selling profitable portfolio members who wander from original purposes, provides additional protection from this sort of suspicion.

At this early point of discussion, it should be recalled there is nothing magic about the level of interest rates, which in a general sense determine the returns of the stock market. Interest rates reflect the relative scarcity or abundance of money in the economy, and are sometimes spoken of as the rental cost of money. Since governments control the supply of money, central banks tend to modify interest rates in order to stimulate or restrain the economy, as well as to reduce the cost of governmental borrowing. The consequence is a rather permanent inclination for interest rates to be held lower than they would be without government control, and a latent hostility of government to activities, such as this one, to derive a source of income from investment. The situation is further complicated by the increasingly important role of foreign governments, who sometimes make it difficult for the central bank to raise rates, even when it wants to. This oversimplification leads to the need for HSA managers to be measured by total return, not dividends, and common stock rather than bonds. Splendid returns can sometimes be produced at the time of reversals by doing otherwise, but can safely be shunned by maintaining a many-year horizon of complacency.

In all this potential complexity of starting an untried idea, it seems likely some laws must be changed. Not only must a selection be made of the most congenial legal environment (state or federal), but in the huge welter of existing regulation, it may well be the case that some existing law conflicts inadvertantly, and a political argument must be made to adjust the blockade, or at least to make it clear no attempt was intended to circumvent the unintended awkwardness. We start with whether the various pieces of this approach might be combined into an umbrella corporation. The closest approach to such a corporation might be a whole-life insurance company, although we do not claim the similarity is perfect. It will require two chapters to cover this approach, one to examine the similarities, the other to devise solutions for the dissimilarities.

Whole-Life Revenue Model

Just to clarify the jargon, life insurance companies are of two types: one-year term of risk ("term insurance"), and whole-life term of risk ("whole-life insurance"). In this chapter, we use whole-life insurance as a model for the idea we have for health insurance, but there are many significant differences.

The premium is lower for term insurance, because you buy it one-year-at a time, it expires if you don't renew it, but the premium may go up in subsequent years, and the insurance company makes most of its profit when people don't renew it. Most health insurance is run on a one-year term basis, rather inappropriately, because it protects against risk rather than to reimburse claim losses. As a matter of fact, a well-run term insurance company might never pay a claim, although it does happen. So in the long run, term is more expensive for healthcare than whole-life. In a whole-life policy, by contrast, the premium is level each year until you die. Because the subscriber of whole-life has contracted to pay the premium for many years, the insurance company is comfortable with making long-term investments, which pay them more for the float than short-term. Furthermore, the insuring company can enjoy long-term compound interest, which is eventually what makes whole-life coverage cheaper than term, assuming you are even allowed to keep renewing it.

In whole-life coverage, a whole lot of wheels are invisibly turning as premiums are paid yearly, your lifetime gets shorter but your life expectancy increases, new investments replace old ones. To ensure a margin of safety, premiums are higher than actuaries say is actually necessary, and yearly discounts are often (but not promised to be) paid back, or reinvested at more compound interest. Underneath all of this turmoil, the risk of your dying is gradually increasing, and a few people actually do die and collect benefits, terminating the policy. Life insurance is generally a state-regulated activity, and state taxes vary. There are special taxes for certain types of insurance, and there is a distinction between estate tax and inheritance tax. All of this, and more, is all taken care of for you by the company, and is particularly suitable for children and infirm elderly. Just sign on the dotted line, pay the premiums, and wait to die. Simple.

As a matter of fact, the whole-life approach is more suitable for paying the constant nibbles of health insurance than it is for the single lifetime benefit of paying for a coffin, but the two businesses took different paths, long ago. If you simply wanted to set aside enough money for a funeral, you could buy an index fund, put the certificate into a lock-box, and direct your heirs to use it when the time comes. Although passive index-fund investing has made it possible for an individual to manage it all by himself, it's a nuisance and management gets particularly awkward for children and old folks. But that's not primarily why we began looking at other models; we're looking for somewhat higher returns than are currently offered. And that in turn is spurred by the realization that protracted retirement costs are just part of the costs of not getting sick. If you treat prolonged retirement as an inherent cost of health insurance, it's almost five times larger than the direct healthcare costs. Social Security was supposed to take care of it, but it simply cannot cope with such rapid increases. Are you supposed to starve to death? You can't keep working forever, your insurance doesn't cover it, and our whole economy was once based on the idea of dying at "three score and ten." But now the average person lives to be 84, soon to be 90, and we haven't even cured cancer yet. Making retirement cost an entitlement without funding it put the whole economy into a predicament with no ready answer, as soon as we started curing diseases.

So the Health Savings (and Retirement) Account was devised to be a Christmas Savings Fund for this need, but even HSA can't produce money out of thin air. So we now turn to professional investors, professional accountants and others with sharp pencils, for help. Life insurance makes payments year by year for the final moment when you have to pay for your funeral. It was expanded to help support your widow. It's big and well spoken, housed in impressive big buildings. Maybe it can help by adding investment experience, computers, actuaries, and business degrees. Just a little extra efficiency would pay for a lot of extra administrative help; even half a percent extra for 90 years would make a big difference. And the sums involved are significant. Lifetime healthcare costs are estimated to average $300,000 per person. To add a generous retirement, would make it well over a million dollars -- per client. And please hurry up. Inflation is constantly making things worse.

As a matter of fact, judged from the outside, life insurance doesn't seem to be as frugal as it might be. Its marketing costs are high, and its investments are certainly conservative. Its executives are certainly well compensated. There would appear to be room for efficiencies. If health insurance adopted a whole-life approach for its revenue, it is not claiming too much to conjecture it would add 1% extra return to pay for retirement claims losses.

Whole-Life Disbursement Model

Although we intimated retirement funding vastly exceeds the rest of health funding as a problem, everyone in America is also aware that paying for health costs is a tangled, expensive mess. Far from simplifying matters, computers have forced us to stop to justify every step of the process. For a simple example, it would be a great comfort to know someone has seriously studied the details, and can assure us the cost of examining claims generates more savings than its cost of doing it. No one doubts more cheating would occur if we paid claims without looking at them, but are we really confident the savings justify such a cost?

After all, the cheating is encouraged by passing it through a third-party, which makes it appear to be cost-free. Meanwhile the Health Savings Account essentially pays claims with a debit card, relying on the depositor to howl when the charge seems unwarranted. Most managers of HSA would rebel at imposing extra claims processing costs onto a system which keeps customers quiet with a 30% reduction in overall costs. The vast majority of personal expenditures are paid directly by a two-party transaction. Are we really so concerned about chiseling we wish to impose a third-party system on the whole retail economy? Put it another way. Is there something so especially evil about healthcare costs which forces us to single its transactions out for the undeniable costs of claims processing? The problem, dearest friends, is not whether claims processing costs so much. The real problem is why in the world do we use a third-party system to pay for them.

The Health Savings Account asked that question three decades ago, and lets the customer be his own policeman with his own money, so long as the amount is less than the deductible. It really is necessary to have insurance to spread the risk of health catastrophes, and so catastrophic health insurance is the cheapest form of it. It happens a reasonably high deductible and the minimum cost of a hospital admission are pretty much the same, so third-party reimbursement is pretty much a hospital problem. There's not much difference in cost between one breakfast and another, so I would interject the comment the hospital problem boils down to the accounting fiction of indirect overhead. Every single hospital expenditure must be assigned to a reimbursement, so by calling it indirect overhead it gets paid for by someone, no matter who, and "costs" go up, employees get raises, equipment gets purchased. Just call in ten CPAs drawn from the phone book, and ask them to establish a justification system for any item to be included as indirect overhead. If that doesn't solve your problem, you don't have a problem and might as well stop complaining about it.

So to return to the whole-life model, it seems reasonable to include the Health Savings Account as a model for expenditures. It might be reasonable to impose some standards for catastrophic high-deductible insurance compliance, with the indirect overhead approach as a default option in cases of dubious performance. Otherwise, cost overruns can be restrained by dropping insurance company participation where suspicions are warranted.

Design of the insurance approach is thus fairly simple, leaving energy left over for designing incentives and efficiencies, which we would hope would collectively generate another one percent investment return or its equivalent. Together with the one percent picked up with revenue efficiency, the additional 2% return on investment income might be going far enough. As I see it, we still haven't got to the crux of the matter, however. It's to generate sufficient profit and reserves to carry the system several decades through the transition to full implementation. Unfortunately, everybody wasn't born on the same day, and won't have the same personal reserves. Either we implement this system in stages, or we find some massive funding mechanism to carry it through the rough spots. It isn't adequate to dump the transition problem on the Congressional staff and go on to unrelated matters; this is the make or break issue. Even at the best, it will take several decades to be fully implemented, satisfactorily running, and solvent. So even if we do it this way, it will displease many people, unless--. Unless the scientists soon find an inexpensive cure for two or three major diseases.

So let's look at several pieces of the financing puzzle which might be included within the main structure, or they might remain independent. The choice must save money however, or it won't serve the purpose.

Social Politics

After the Second World War, the medical costs of children were small enough to be written off cheerfully. We entered an era of lavish gifts to children's hospitals, probably prompted in part by the memory of obstetrical write-offs. Many of these gifts paid for research costs, but part of them went for rather lavish hospital facilities, making it impractical to consider recovering the losses of the past. In all this uproar there was room to develop a credit system, but our mind-set had been changed. Primarily, the child was not legally responsible for the debts. From the point of view of the indigent mother, her only recourse was to disappear from sight. If she had several children, it was beyond her imagination. As it still would be today, in many cases. If we had taken the legal position that half of those costs were the responsibility of the child, they at least would not have multiplied within a multi-child family, so the prospect of a hopeless situation might not appear so soon.

Equal Pay for Equal Work(?) The same problem now surfaces when the girl first applies for a job with health benefits. She is of an age group with trivial medical costs on average, except for pregnancy and all its associated costs. Her premium cost is high, a similar male's would be quite low. Even with considerable cost-shifting, the male is a cheaper employee. In fact, males can easily take their chances on being uninsured, while females would be terrified of being uninsured. It is not going too far to suggest the whole configuration of employer-based health insurance is a result of trying to patch up this situation, working with what you have. I believe the whole system of employer-based health insurance would not have got so advanced and intractable, but for lack of alternative to this patchwork. After all, a rationalization of this issue by male-female pooling would not affect the employer, the tax deduction would be the same for him in any case. For people in marginal finances, there is too little flexibility to provide room for gradual work-arounds, and the employer generally has other things on his mind. It might take ten years to show an effect, but a system of re-assigning personal responsibility on a legal level, is the first step in taking risks with a benefit program. Let's summarize it this way: health insurance up to age 40 is insuring obstetrics plus the risk of getting sick. After age 40, it becomes less a matter of risk, and more a matter of reimbursing actual health costs. Obstetrics needs to be taken out of this equation, and the cheapest way to do it is through a hundred dollars added to the contingency fund of an HSA at the time of a birth, but that's a later step.

Mandates do get immediate attention, but the distraction often makes evasion of mandate seem a quicker route to savings than slow, steady efficiency improvement. We invite the reader to revisit the major advantages of incentives over rigid mandates. In particular, the concentration of medical care into the end of life permits idle income to be invested, creating wholly new revenue in the meantime, and making less borrowing cost necessary. Potentially, savings might be doubled by reversing some borrowers and lenders. Contrariwise, the limitation of government revenue to taxation and borrowing lowers interest rates, ultimately favoring inflation of medical costs. That's just supply and demand. It's not unusually true of healthcare financing, and we don't advocate changing it. It's just a fact we might as well use to general advantage in health insurance re-design.

Equity Investing Within IRAs. Workers tend to overvalue labor and undervalue risk-taking, so they use their voting power to force interest rates down by increasing government debt. As a consequence, interest rates are generally too low, and debt levels too high, even though demographics are now forcing nearly everybody to become an investor for his old age. Ruminations along these lines suggest a more efficient balance results from increased equity investing by everyone, regardless of how he earns his primary living. Medical care is just an example of a consumer necessity, big enough (18 % of GDP) to bend the curve back to commodity levels without undue resistance. If the topic became hula hoops, these ideas probably wouldn't work, because people would simply eliminate hula hoops. And by the way, by "equity" investing we mean the use of total market index funds, not direct investing in companies themselves.

We previously calculated passive investment of healthcare payment float returning 7.5% might do the entire job, of reaching a lifetime individual health cost averaging $300,000 in year 2000 dollars, without private supplements. It's another way of saying equity investing could reduce costs on average by $200,000 per lifetime. But that's on average, and people get sick in bad market years, too. If you want to do it all without supplements or subsidies, you must increase the interest return, engage in risky investment, or reduce the lifetime medical cost with research. But the investing approach promises to make a substantial improvement without affecting medical care very much. That's the better approach when you have no precise way of estimating future costs. Experience is showing there are better investing years and worse ones too, but it gets pretty tough to average more than 5%, net. So if we could find 2.5% extra somewhere, a cost-free health system might be in sight. Successful corporations can probably expect to make 10% profits for their stockholders, so the addition of 50% worth of stock producing a 10% return, might result in an overall portfolio yielding 7.5%. It wouldn't be easy to get there, but it identifies the goal.

{top quote}
Protracted retirement is a hidden cost of improved medical care. {bottom quote}
Passive Investing at Birth for Medicare(?) That's only one way to put it. A radically different one would grow out of imagining a gift of $100 at birth, with a dollar a month added to the balance, starting at age 25, and assuming a 90 year life expectancy. That would cover a lifetime of medical care to a total of $300,000, assuming the account itself was generating 5% interest. That isn't precise, because people will get sick at different ages, but it clarifies a different approach to the same set of facts.

Retirement Costs Attributable to Medicare (?) However, we regard prolonged retirement as a hidden cost of improved medical care, currently unfunded except for Social Security. To cover this cost for the twenty-five years from age 65 to 90 would require an additional $876,000 at the 65th birthday, assuming we get the 7.5% return. What we have come to is the problem of making every inhabitant of the the nation into a millionaire. But compare that with $2500 at birth and $29 a month (from age 25 to 65) to supplement Social Security by $1,000 a month. Although it may not sound it, this is really a bargain, incompletely certain of success. If a married couple both did this, they would enjoy a comparatively modest retirement of $4000 per month, including Social Security. It can thus be seen that although retirement is still a bargain, it is far more expensive to provide extra retirement than the healthcare which, in a certain sense, created the need for it. In that sense, the later protracted retirement living is the most expensive part of healthcare costs. It needs no apology, it is what it is.

However, the difficulty we have in proposing a system for reducing the cost impact is primarily explained by the rather ambitious size of the cost, which is likely to get even worse. It is not entirely to my taste to propose a Scandinavian cooperative system to pay for it, and no doubt some will propose short-cuts and expedients, but at least this approach has a chance of breaking even, whereas pay-as-you-go and inflation financing just kick the can down the road, for another generation to face the grim realities of still higher costs. The only remaining alternative which might work is to continue spending as much on research as we spend on Medicare. It seems likely science will eventually cure cancer. But unless it cures cancer cheaply, all is for nothing. Even in spite of being offered a bargain, a great many people will take their chances on a government bail-out, rather than accept the frugality being suggested. That's why membership has to remain voluntary, and why hard times are surely ahead of us.

Summary. We seem to wander from the subject, but it is intentional. Emphasizing the difficulty of solving the health financing problem by conventional means, makes it easier to consider unconventional ones. We ask for sober reflection on the advantages of the following:

1.Considering at least half of the cost of Obstetrics. to be a financial debt of the child.

2.Considering each grandparent to owe a replacement debt of one grandchild's medical costs, up to age.26.

3.Considering it a government obligation to subsidize those who cannot afford these obligations.

Conflicts of Interest. In order to avoid turning this idea into either a boondoggle for hedge funds or a gigantic tax dodge, it might be wise to limit the portfolio to health-related corporations. Over the past century, we have seen Medical Societies own malpractice insurance companies, medical journals, post-graduate educational tape recordings, health insurance companies, and probably a few hospitals. Even more enticing would be drug companies and medical device makers. In all of these areas, the danger of conflict of interest would arise, but somehow it has always been managed. In fact, medical ownership or control of ancillary services has probably declined, although it is likely the medical owners have usually been happy to be rid of the distraction. Medical malpractice insurance is probably an example of medical owners filling an unfilled need. When competition returned to the field, the owners have generally preferred being rid of the unpleasantness, rather than enjoying profits from conflicts of interest.

If, to all these associated for-profit corporations, is added the educational loan system for healthcare providers, plus the myriad institutions to house the patients, it starts to become clear the danger of monopoly control is a small one. While there is no doubt local monopolies would arise, and some instances would occur of subscriber control of them, the industries now making up 18% of gross national product would greatly dwarf the number of providers. Physicians were paid 20% of the healthcare dollar in 1980, but only 8% today, as an example of how greatly the field has become dominated by non-professionals. The scientific field has become so huge and so attractive in itself, that comparatively few professionals of eminence are interested in business careers. It is true professionals lacking eminence are sometimes more attracted to such activities, but the resulting peer pressures strongly favor the power of a few eminent professionals who allow themselves to get involved. In a power play, the rest of their colleagues will support them.

 

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