Consolidated Health Reform Volume
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Lifetime Healthcare and Retirement Accounts (Future HSAs)New topic 2016-03-23 17:06:36 contents
Let me say at the beginning, what could be repeated in a summary: The present healthcare dilemma has three interlocked parts, scientific, financial, and political. The scientific component is capsulized by three symbolic life expectancies: in 1900: age 47, today: age 83, and fifty years from now: age 100. We're living a lot longer, and soon expect the population to divide into thirds (one third getting educated, one third retired, and one third working to support the whole population. It probably won't work very well. Most health reforms amount to finding some way to shift income from the working third to the other two thirds.
The main scientific problem in the past was to avoid dying too young. But the problem in the far future will be living too long, running out of savings. Right now we can imagine having both problems, and few can guess which problem to fear. Maybe there is enough money for one of those two life terminations, but we don't have enough money for both of them, for everyone. We would have to give up something else, like national defense. Let's try to use the same money twice, if we can.
Finance. The payment systems need to be more interchangeable for alternative uses. But be careful. This could seemingly lead to merging Medicare and Social Security (some day) into one interchangeable program. Interchangeability of funds might plausibly seek to be at the family level instead of over-reaching to the level of demographic groups of whole thirds of the population. We do need to devise ways to transfer from one stage of a person's life to another, Saving for a Rainy Day, as it were. Some solutions will inevitably turn into problems. Proposals to integrate all health care into one vertical single-payer medical system would likely clash with more useful integration of Medicare and Social Security. These arguments can possibly wait for a later time, but only if we recognize they remain undecided. Generally speaking, they translate into recognizing that it is easier to shift money than people. Governments regard such shifting with indifference, but we train children from birth to be possessive about their own money. And we elect politicians to see the difference.
Both the insurance spread-the-risk approach and the government pooling process skirt the difficulty there is not enough money to cover both possibilities for everyone. Either to borrow or insure, postpones repayment for a while, that's about all. Meanwhile, healthcare costs are subject to more sudden changes in greater ranges than the economy as a whole.
Finally, let's see if we can put these shifts to work, and get some extra money from investment income, with compound interest working its magic over the whole expanse.
Politics. Meanwhile, we move toward a time when voters who earn money aren't sick, and the sick voters don't earn money. But they all have a vote. Already, we conduct transfers of money on a scale people may rebel against. It must become their own money, in their own accounts, spent later on themselves -- rather than forced transfers between demographic groups. At most, we might try extending that to the family unit, and even that should be kept as voluntary as possible.
Constitutional equal justice tends to make political solutions resemble one-size fits all.
So that's the general nature of our problems. Healthcare does become less expensive in the long run, even though more expensive in the short run. And through recent advances of financial management, Health Savings Accounts can generate surprising amounts of extra money on their own, overall helping with the other problems. The abstruse issue of inflation also arises here, where you might not expect it, because if trillions of dollars eventually migrate into passive investments through Health Savings Accounts, the elderly will hold shareholder voting rights they would be unwilling to surrender. The course of further inflation, the main concern of the elderly, would shift toward the hands of savers, away from borrowers. Unfortunately, what the proper balance is, isn't yet clear.
Here's an idea which has been bouncing around in my head for several decades. The first year of everybody's life resembles the last year in several unique ways. Everybody has a first and last year of life, but essentially no one pays for his own healthcare during those two years. They are pretty expensive years, amounting to 3% for the birth year and something like twenty percent for the last one, so if these costs were removed from the calculation of health insurance premiums, it would make a substantial relief. So, why don't we invent a kind of health insurance which pays for those two years, relieving the rest of the system of this cost? Paying for it during years of employment, would shift the cost to the earning third, from the non-earning two thirds.
This kind of health insurance would have to be retrospective, but the dates alone would make it fairly easy to administer. Someone else would have to pay these costs first, so it's likely this insurance would largely be a new insurance company. It would reimburse another insurance company which could prove it legitimately paid the cost, that the prices were fair, etc. Whether this was a mandatory requirement for people who had this payment responsibility, or a function of the government on everybody's behalf -- makes less difference because this health issue is universal, so it might as well be unspecified. On the other hand, if it is made a voluntary liability of people who have payment responsibilities, they would require some proof the whole arrangement is on the up and up.
Health care can't get more basic than being born or dying.
This idea, in somewhat greater detail, might be examined in conjunction with universal Catastrophic health insurance. There would be many overlaps, and practicality might dictate the choice. But when we seem to have got it about right, either one of these choices or possibly some hybrid of both, would likely be a better thing to make into mandatory coverage. Or at least mandatory in the sense it might become illegal to have coverage for less universal, and less urgent coverage -- unless you have one of these more basic coverages, first. Society, whatever it may claim, has almost always proved to be pretty stingy. So, other coverages would have to be depended on to provide the extras, and to defend their practicality as insurance. It would seem to be a useful thing, to have one insurer arguing cost, and the other insurance company arguing quality, so that neither one would try to threaten the other with unbearable legal costs as the main pressure.
On his 66th birthday, a Health Savings Account owner has only one choice: to turn any surplus from healthcare into an IRA (Individual Retirement Account), for taxable retirement living. However, that's a step better than Medicare or employer-based insurance alone, which return the unused surplus to the donor of the gift, either the government or the employer, in the form of reduced premium cost. However, economists agree the salary soon adjusts downward to treat the confidently expected gift as part of wage costs. Therefore, the health insurance is more expensive than it would be if the surplus were returned to the beneficiary. These forms of health insurance have been dominant so long, everyone feels they describe necessary features of health insurance, rather than simply terms of a contract negotiated by parties other than the beneficiary.
The presumption is made the individual has Medicare, so any accumulated surplus in his HSA needs to be spent after age 66, but not on health, since he assumes he will then be completely covered. This presumption is strengthened when the employees of a group plan are merged into a group, so any surplus is an average of the group, not specific to the individual. Data is not available to determine whether the size of this issue is enough to worry about. But a pathway probably was not created for overfunding Medicare to create retirement savings through employer-based insurance. In the first place, surplus does not exist. In the second place, any surplus was probably expected to flow back into Medicare to reduce its cost. In 1965, it was probably expected that Social Security would fill this need, but increasing longevity has created resistance to enhancing all entitlement programs.
However, if changes in laws and regulations would make it possible, there might be other choices, one of which would be to overfund Medicare coverage, continue the HSA, and spend the generated surplus on retirement. But notice this: as things stand, if you don't need Medicare any more, you don't get anything back and the government can spend the surplus on battleships. Just as, in plain fact, a commercial insurance company can spend a surplus on executive salaries. It's not fair to say Medicare will "never" have a surplus. By design, any surplus will always be used for healthcare, because that's thought to be part of "share the risk". It's a design feature common in share the risk programs, although not a devastating one.
In short, the designers of Medicare never imagined it would run a surplus, and at present it is far from it. But in the long, long run, scientists will eventually cure those chronic diseases of the elderly, and then there might actually be such a surplus. It is already clear things are moving in the direction of making Social Security a larger if not more important program than Medicare -- in the short run -- and could largely replace Medicare, in the long run. Because expensive illness is often fatal illness, a great many people do not survive it. So, one ray of hope in this situation is relatively few people will have both devastations, so the future is probably one expensive entitlement transforming into the other with relatively little overlap. In that case, dual catastrophes are best addressed by insurance. With luck, the people who drop dead without warning or cost will equal the number of overlaps, smoothing down national expense to only two groups, which eventually merge into one as science merges chronic disease into the growing group whose problem is outliving their savings. There are other ways of approaching that problem, but at least a flexible health program could provide a source of funding for it, and a general outline of where it might be headed. Notice that compound interest works in favor of this solution, and could be an important component. In fact, unknown treatments will increase future expense, but by definition are not counted. Therefore, statistical projections can show a revenue surplus after the age of 90, which may in fact never materialize.
Therefore it would be easier to pass a seemingly meaningless amendment, right now, while it doesn't cost anything. We've just shown how HSA does it, and Medicare could do it too, if it tried. The more likely circumstance would be to get a reduction of either payroll deductions or Medicare premiums in return for surrendering some particular benefit, like transfusions for members of Jehovah's Witnesses. At the moment, religious objectors cause lawsuits and other commotion, just because they don't want some particular feature of health insurance, and actually I can think of no reason why we should make it mandatory. In fact, doing things for someone's own good is a suspect idea, generally.
The long-range reasoning, however, is this: in 2015 the great need is for flexibility. Some of us will need to spend every dime we have on staying alive. And some of us will need to save every dime we can, in order not to outlive our retirement funds. But that probably won't be the same dilemma, fifty years from now. Almost every one of us could be threatened with poverty during extended retirement into an undefinable longevity. It strains the imagination to think of ways to pay for both the present elaborate Medicare and an extended retirement in addition. So, by that time, I fully expect people to have come to the realization that Medicare must be liquidated piece by piece. Not to fund Obamacare, but to pay for their own retirement. When you go to a funeral every week, the idea doesn't usually occur that dying too early might ever become a thing of the past.
Neither employer-based nor Medicare, returns unused surplus to subscribers.
Proposal 1:At present, Health Savings Accounts are limited to age 21-66. There should be no age limits at either end, and some provision should be made for inheritance of surplus to newborn children, sufficient to cover their healthcare up to age 21. (3320)
Proposal 2: At present, contributions to Health Savings accounts are limited to $3500 per year, age 21 to 66. This should be changed to an aggregate lifetime amount, at least until latecomers have had an adequate transition to the program. (3320)Health Savings Accounts provide the flexibility to do this, but at present many Medicare program details are awkwardly designed to anticipate the need. Right now, the program is not sufficiently modular to permit dropping one feature but retaining others, and letting the funds follow the needs. And designing partial proposals is inhibited by political terror that the public will misinterpret motives. So the first step is for people like me, who have nothing to lose, to step forward and start talking about it. The need for retirement money is looming ahead; we need to prepare Medicare for gradual liquidizing, to pay for it.
The first step is probably to design a way to buy out of Medicare, save some money by substituting an HSA for their healthcare, and buy something more appealing with the surplus. The first version will probably be crude and awkward, but it provides a platform to build on. Most politicians, whatever they may think of Medicare and its financing, regard talk of privatizing Medicare as political suicide, so we should be thinking of pilot studies, think tanks, and experimental projects. The old folks who have, or will soon have, Medicare coverage regard it as such a treasure, they tell their elected representatives that privatizing Medicare is the third rail of politics: touch it and you are dead. But a Washington sage once remarked that if things can't go on, they will stop. So, what would it require, to induce potential Medicare beneficiaries to select something else, before circumstances abruptly force it on them?
That's probably not the best way to go about it. The early initiatives should be generated by scientific advances.The likelihood is great that science will cure one or two of the big five (cancer, diabetes, Parkinsonism, Alzheimer's Disease, schizophrenia) and bit by bit, Medicare will get cheaper in spite of the rent-seeking. As it does, it will seem attractive to increasing numbers of people, to consider cheaper health insurance, shifting Medicare funding to retirement income. The rules should be relaxed to let early-adopters test the changing environment. We already have a flexible funding vehicle in Health Savings Accounts, and fifteen million existing subscribers who will endorse it.
The Problem With Medicare. Medicare is 50% self-funded by payroll deductions and premiums, and is 50% subsidized by the federal government. The old folks get a dollar for fifty cents, and are not about to give it up. They obviously should get their own fifty cents back. It's the fifty cents of government subsidy which is at issue, and the published budget should reflect that fact. Just notice how retirees display almost no interest in the Obamacare controversy, except for one thing. Old folks are uneasy that funding for Medicare might get squeezed in order to finance Obamacare, particularly if the two were in the same budget compartment. When the conversation gets around to that point, retirees suddenly wake up and start talking loudly. If the discussion centered on the subsidy, things might subside, somewhat.
But hold on. A retiree approaching his 66th birthday has already pre-paid approximately a quarter of the costs of Medicare, and when he joins, his premiums will later amount to another quarter of the cost. That 50% is the retiree's share of the present costs of Medicare, and naturally he doesn't expect to see it disappear. The 50% subsidy provided by the government, on the other hand, is what concerns everyone. Even the people who advocate "single payer" systems are talking about extending Medicare to the whole population, gradually perhaps, but probably including the 50% subsidy to everyone. Since healthcare now consumes 18% of Gross Domestic Product, are we willing to see 9% of GDP go from the private sector to the public sector in extra taxes? Or in increased borrowing from foreign nations? We will have to let the politicians wrestle with issues like that, but it will be hard to persuade the public to go along with it.
Meanwhile, let's see what persuasion can do, if we offer a good enough deal. For a start, let's presume someone in his late fifties had invested in his HSA while he was young, and is approaching the age where he could augment his retirement income from a substantial balance in his IRA (recently converted from HSA). Then, let us say he also wakes up to the realization he gets a second tax deduction from an HSA if he spends extra retirement money on medical care, either on Medicare payroll deductions or Medicare premiums. And if he stops spending some other obligation, he effectively gets a further tax deduction from spending the money on something else which is tax-free. Potentially, that could add a few thousand dollars a year to his income from age 21 to the day he dies. It's a very attractive goal, and while it really would be legitimately spent on healthcare, Congress might well decide they can't afford to lose that much tax revenue.
So, the rumination goes, the proposal must somehow save some money for the Government, too. If the subscriber were allowed to make a deal to buy out his Medicare, he might make a payment out of his HSA of about $86,000 untaxed, which with 6.5% declining income, would repay the costs of Medicare throughout his remaining life expectancy, all from the invested lump sum. That might seem like enough on paper, but the government has been going in debt for some time to foreigners, and would like to stop doing that. If possible, it would like to pay back the earlier loans. If you include this debt, the Medicare cost is revealed as greater than it seems. Furthermore, the GAO will quickly tell you, if you save tax money, you unfortunately make it harder to balance the federal budget. The details of all this may be hard to explain, but the general sense of it all, is pretty clear.
Let's qualify the simplifications. Different people will have different payroll deductions, at different ages. To some extent, these balance out, because if you have a larger balance in your HSA, you are likely to be older, and likely to have paid more into your Medicare payroll deductions. And to some extent, averages will cancel out and vary with the economy from time to time. A change in the tax code would scramble all of these numbers, but it's preliminary. Medicare is best privatized in pieces, and for that you need prices, so a preliminary pricing should be devised for those people who for religious or other reasons, would be interested. Furthermore, accumulating money of this order will require normal interest rates, not abnormally low ones as at present. Since that time is hard to predict, it is necessary to supply minimum interest guarantees , best approximated by index funds of 10-year treasury bonds. Buying out Medicare is a very delicate matter, and should be approached very slowly. The first step is to talk about it without starting a panic. The initial appeal will be found among those who perceive a greater risk from outliving their income than their risk of a major illness cost. They are rare at present, but times will change,
Medicare had been in existence for fifteen years when Health Savings Accounts were designed. Medicare was popular and apparently permanent. Accordingly, the HSA proposal was intended to phase out when the individual became a Medicare recipient. Since there might be an unspent surplus at that time, it was provided that the surplus be turned into an IRA, partly as a gesture of deference to Senator William Roth of Delaware, who was the originator of the tax-exempt fund idea.The consequence is that the HSA now bridges the transition, between health care and prolonged longevity. That's a feature now seen to be an enhancement.
However, experience with the program shows we overlooked something. The plans are attracting a following between the ages of 35 and 50, which is to say they turn unattractive to people 50 to 66, who ought to be in their highest years of earning. On interviewing them, the difficulty seems to be that diseases start increasing at about that age, and a depletion of the account gives it scant opportunity to recover before the program terminates. Compound interest is fine, but if you have used it up for disease A, it cannot compound enough to support disease B. By contrast, a subscriber at age 35 might well be in a position to pay for one bout of illness, followed by compound interest build-up. So the plan covered two or three more severe illnesses before age 66 is attained. The contribution limit of $3300 annually is just not enough to provide a comfortable margin. Furthermore, the purpose of the limit is not clear. If a subscriber contributes more, it would be his own money, not the government's. True, it would be tax exempt, but a very large proportion of the population are tax-exempt through their employer, anyway. People whose income is concentrated may be especially affected, such as those who sell a farm or business, or athletes. Finally, everything said about unexpected illness would be true of unexpected stock market fluctuations.
Proposal 3: The annual limit of deposits to HSA should be increased by a COLA based on medical costs, rather than the cost of living. Furthermore, the limit should be a lifetime limit rather than an annual one. At present, this would substitute a lifetime limit of $132,000 for an annual limit of $3300.This proposal, while welcome, may still not be enough. The employee with recent experience with healthcare costs, has by the age of 50 come to realize that the personal cost of an HSA has three sources: the deposits which we have mentioned; plus the premium of his required Catastrophic insurance; plus the compound interest rate which his HSA manager is allowing to pass through to him. Additional deposits cost the manager nothing, but the insurance premium and the interest rate are passed through to him from vendors, and their cost is largely obscure to the customer. "Kickbacks" are particularly obscure.
First, the interest rate. The stock market has gone up 12% a year for a century. With transaction costs of perhaps 0.5%, the customer should also subtract 3% for inflation. That creates the remote possibility of paying 8.5% to the customer, and we have in this book generally assumed a net return of 6.5%, with a profit to the middle-men of 2.0%, assuming the middle-man accepts the risk of "black swan" volatility. This is generally about 50% every 28 years. However, the broker probably does not look at it that way. He notices the stock market has gone down in the past few months, may go down more in the next year, and might then take ten of fifteen years to recover to a profitable level. Furthermore, new HSA subscribers may well be young and improvident, have few assets to supply a cushion, and a background of judging a consultant's value by the labor he applies, rather than the risks he takes. The customer wants 6.5%, the broker offers 1%. Each sincerely believes the other is cheating him.
Disintermediation, def. Eliminate the middle-man.
|The Nut of It.|
So, there are other places to look for the difference. The employer can afford to give up the difference, providing he gets a 40% tax deduction directly, borrows the money at 6%, and is making profits this year. The HSA manager can afford to make up the difference, providing he treats the HSA deposit as a pass-through rather than a paid service, and makes it up by adding a surcharge to the insurance premium. The insurance company can make up the difference by lowering its prices and profits. It would take subpoena power and open books to know what was a fair proportion for each to contribute. However, the customer must receive a higher income rate, or the complicated interactions will not work. That's where we start. The HSA becomes feasible because transaction costs have been lowered by computers, and near-zero interest rates. The customers cannot enter into the bargain, if the finance industry refuses to share the windfalls along with the risks. The customer is going to get 6% or forget the whole thing.
Perhaps a simpler way to summarize the unfortunate confrontation is to recognize it is going to be difficult to support 6.5% retail interest rates in an environment of 1% bank rates, and historically low interest rates, generally. That is particularly true in an environment of falling stock market prices. Unless it can be convincingly shown that someone in this circle is making outrageous profits, or unless someone is willing to put up the capital to buy this business at a discount, the following dangers must be faced and surmounted:
1. The medical customer will eventually resort to what he did in the 1930's. He will neglect his teeth, his gallstones, his varicose veins and hemorrhoids, his eyeglass refractions, and other optional, delayable, services. Consequently, the accident rooms of hospitals will be full of treatable but neglected cases.Which will we choose, if we are headed toward a 1930s depression? All of them. But assuming for the moment that things aren't so bad, let's start with #2. The stockbrokers are doomed, anyway. Almost all banks have some empty floor space, where a fee-only wealth advisor can function with his computer terminal. Alternatively, CPAs can absorb a new business model, in addition to filling out tax forms. One thing is not going to remain the same: the finance industry has a whole lot of disintermediation to do.
2. The stockbrokers will recognize that the era of $250 commissions is over, and the retail customer is going to buy index funds over the Internet from wholesalers, and conduct his medical business dealings out of a bank safe deposit box. The history of discounts in closed-end investment funds, is part of this conversation.
3. The insurance companies will surrender their surveillance role, and strip down to a re-insurance role. Something like the PSRO (Professional Standards Review Organization, see Senator Wallace Bennett of Utah) will take their place.
4. The hospitals can survive a long time on their present surplus assets, particularly buildings. In time, much of their role will be taken over by retirement villages. Doctors and pharmaceutical companies will be squeezed in ways unique to maintaining their function, more or less.
Modern health insurance is a century old in America, and much of its interesting history is irrelevant to present controversies. However, a few features are important to know as a preliminary. It started as a benevolence by business to its employees after the First World War, at a time when most businesses were family-owned. In 1945, Henry J. Kaiser discovered health insurance could mostly be financed by successful corporate employers donating it to their employees, thus transforming a gift of health insurance into a business expense.
The gift soon became accepted as a normal part of wages, so the pay packet drifted downward to expect it. The employer paid the same total tax, but the employee got a tax reduction. When the corporate income tax rate became double the individual rates, the employer got twice the deduction the employee got. As other taxes began to be based on the remaining pay packet rather than the total wage cost, employers escaped the extra tax. The employer overall got more benefit from the tax shelter than the employee did, and he got it for every one of his employees. Less successful businesses (with less tax to pay) often could not share in these last two features, and often preferred to remain with Subchapter S incorporation, although their employees lost out on deductions and in general were the only losers. If this is new to you, read that last paragraph again.
In this way, the tax exemption became a normal part of business life, and tinkering was greatly resented. By a century later, CEOs have turned this matter over to Personnel offices and financial officers, forgetting its complicated mechanics, and have gone on to other matters. It was a gift, so the employees were seldom consulted about its details, and in time most employees became oblivious to them. The situation began to be known as "third-party" insurance, and in time the basic decisions were made without much consideration of either the employer or the employee, who seldom raised a fuss. In the course of a century, it was the wishes of the insurer that mainly dominated the decisions, mostly because decisions had to be made, and nobody else cared very much. A century of unopposed decision-making gradually warped the employer-based system into a very expensive, inexplicably complicated combination of incentives, all leading to escalating prices for healthcare. The foxes were in charge of the hen house, and everybody's incentive was to let healthcare prices drift upward.
It is the organization of incentives rather than greed or malice which led to this predicament, so it is not justified to attack anyone. But someone who has benefits to defend can become quite offended when the benefits are disparaged. For insurance company reasons, the useless and expensive 20% copayment system has persisted, while the deductible has remained too small to serve a purpose. For political count-the-votes reasons, the benefit package has favored numerous small pills over major surgery, warping the reimbursement system in favor of more transactions. As disease has receded in younger people, young people have demanded "something for their money", even though it distorted the benefit package unwisely to use limited funds for small bills rather than large ones. Short-term gains repeatedly triumphed over long-term considerations, slowly but relentlessly warping it away from intended directions.
It is my feeling the average reader needs a little more background: in overfunding for Retirement, buying out Medicare gradually, first and last year-of-life insurance, and the plight of the latecomer to lifetime health insurance-- before we are ready to solve problems in the last five sections of this book. There are a few other salient issues to learn, and a century of history to skip, before the casual reader is likely to be ready to address the issues in central contention. So, skip it or study it, that's what the rest of this section is all about.
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.
The Plight of the Latecomer to HSA
New blog 2015-08-23 21:04:57 description
Employer-Based Health Insurance in a Nutshell
New blog 2015-09-15 18:38:46 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.