The musings of a physician who served the community for over six decades
367 Topics
Downtown A discussion about downtown area in Philadelphia and connections from today with its historical past.
West of Broad A collection of articles about the area west of Broad Street, Philadelphia, Pennsylvania.
Delaware (State of) Originally the "lower counties" of Pennsylvania, and thus one of three Quaker colonies founded by William Penn, Delaware has developed its own set of traditions and history.
Religious Philadelphia William Penn wanted a colony with religious freedom. A considerable number, if not the majority, of American religious denominations were founded in this city. The main misconception about religious Philadelphia is that it is Quaker-dominated. But the broader misconception is that it is not Quaker-dominated.
Particular Sights to See:Center City Taxi drivers tell tourists that Center City is a "shining city on a hill". During the Industrial Era, the city almost urbanized out to the county line, and then retreated. Right now, the urban center is surrounded by a semi-deserted ring of former factories.
Philadelphia's Middle Urban Ring Philadelphia grew rapidly for seventy years after the Civil War, then gradually lost population. Skyscrapers drain population upwards, suburbs beckon outwards. The result: a ring around center city, mixed prosperous and dilapidated. Future in doubt.
Historical Motor Excursion North of Philadelphia The narrow waist of New Jersey was the upper border of William Penn's vast land holdings, and the outer edge of Quaker influence. In 1776-77, Lord Howe made this strip the main highway of his attempt to subjugate the Colonies.
Land Tour Around Delaware Bay Start in Philadelphia, take two days to tour around Delaware Bay. Down the New Jersey side to Cape May, ferry over to Lewes, tour up to Dover and New Castle, visit Winterthur, Longwood Gardens, Brandywine Battlefield and art museum, then back to Philadelphia. Try it!
Tourist Trips Around Philadelphia and the Quaker Colonies The states of Pennsylvania, Delaware, and southern New Jersey all belonged to William Penn the Quaker. He was the largest private landholder in American history. Using explicit directions, comprehensive touring of the Quaker Colonies takes seven full days. Local residents would need a couple dozen one-day trips to get up to speed.
Touring Philadelphia's Western Regions Philadelpia County had two hundred farms in 1950, but is now thickly settled in all directions. Western regions along the Schuylkill are still spread out somewhat; with many historic estates.
Up the King's High Way New Jersey has a narrow waistline, with New York harbor at one end, and Delaware Bay on the other. Traffic and history travelled the Kings Highway along this path between New York and Philadelphia.
Arch Street: from Sixth to Second When the large meeting house at Fourth and Arch was built, many Quakers moved their houses to the area. At that time, "North of Market" implied the Quaker region of town.
Up Market Street to Sixth and Walnut Millions of eye patients have been asked to read the passage from Franklin's autobiography, "I walked up Market Street, etc." which is commonly printed on eye-test cards. Here's your chance to do it.
Sixth and Walnut over to Broad and Sansom In 1751, the Pennsylvania Hospital at 8th and Spruce was 'way out in the country. Now it is in the center of a city, but the area still remains dominated by medical institutions.
Montgomery and Bucks Counties The Philadelphia metropolitan region has five Pennsylvania counties, four New Jersey counties, one northern county in the state of Delaware. Here are the four Pennsylvania suburban ones.
Northern Overland Escape Path of the Philadelphia Tories 1 of 1 (16) Grievances provoking the American Revolutionary War left many Philadelphians unprovoked. Loyalists often fled to Canada, especially Kingston, Ontario. Decades later the flow of dissidents reversed, Canadian anti-royalists taking refuge south of the border.
City Hall to Chestnut Hill There are lots of ways to go from City Hall to Chestnut Hill, including the train from Suburban Station, or from 11th and Market. This tour imagines your driving your car out the Ben Franklin Parkway to Kelly Drive, and then up the Wissahickon.
Philadelphia Reflections is a history of the area around Philadelphia, PA
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Philadelphia Revelations
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George R. Fisher, III, M.D.
Obituary
George R. Fisher, III, M.D.
Age: 97 of Philadelphia, formerly of Haddonfield
Dr. George Ross Fisher of Philadelphia died on March 9, 2023, surrounded by his loving family.
Born in 1925 in Erie, Pennsylvania, to two teachers, George and Margaret Fisher, he grew up in Pittsburgh, later attending The Lawrenceville School and Yale University (graduating early because of the war). He was very proud of the fact that he was the only person who ever graduated from Yale with a Bachelor of Science in English Literature. He attended Columbia University’s College of Physicians and Surgeons where he met the love of his life, fellow medical student, and future renowned Philadelphia radiologist Mary Stuart Blakely. While dating, they entertained themselves by dressing up in evening attire and crashing fancy Manhattan weddings. They married in 1950 and were each other’s true loves, mutual admirers, and life partners until Mary Stuart passed away in 2006. A Columbia faculty member wrote of him, “This young man’s personality is way off the beaten track, and cannot be evaluated by the customary methods.”
After training at the Pennsylvania Hospital in Philadelphia where he was Chief Resident in Medicine, and spending a year at the NIH, he opened a practice in Endocrinology on Spruce Street where he practiced for sixty years. He also consulted regularly for the employees of Strawbridge and Clothier as well as the Hospital for the Mentally Retarded at Stockley, Delaware. He was beloved by his patients, his guiding philosophy being the adage, “Listen to your patient – he’s telling you his diagnosis.” His patients also told him their stories which gave him an education in all things Philadelphia, the city he passionately loved and which he went on to chronicle in this online blog. Many of these blogs were adapted into a history-oriented tour book, Philadelphia Revelations: Twenty Tours of the Delaware Valley.
He was a true Renaissance Man, interested in everything and everyone, remembering everything he read or heard in complete detail, and endowed with a penetrating intellect which cut to the heart of whatever was being discussed, whether it be medicine, history, literature, economics, investments, politics, science or even lawn care for his home in Haddonfield, NJ where he and his wife raised their four children. He was an “early adopter.” Memories of his children from the 1960s include being taken to visit his colleagues working on the UNIVAC computer at Penn; the air-mail version of the London Economist on the dining room table; and his work on developing a proprietary medical office software using Fortran. His dedication to patients and to his profession extended to his many years representing Pennsylvania to the American Medical Association.
After retiring from his practice in 2003, he started his pioneering “just-in-time” Ross & Perry publishing company, which printed more than 300 new and reprint titles, ranging from Flight Manual for the SR-71 Blackbird Spy Plane (his best seller!) to Terse Verse, a collection of a hundred mostly humorous haikus. He authored four books. In 2013 at age 88, he ran as a Republican for New Jersey Assemblyman for the 6th district (he lost).
A gregarious extrovert, he loved meeting his fellow Philadelphians well into his nineties at the Shakespeare Society, the Global Interdependence Center, the College of Physicians, the Right Angle Club, the Union League, the Haddonfield 65 Club, and the Franklin Inn. He faithfully attended Quaker Meeting in Haddonfield NJ for over 60 years. Later in life he was fortunate to be joined in his life, travels, and adventures by his dear friend Dr. Janice Gordon.
He passed away peacefully, held in the Light and surrounded by his family as they sang to him and read aloud the love letters that he and his wife penned throughout their courtship. In addition to his children – George, Miriam, Margaret, and Stuart – he leaves his three children-in-law, eight grandchildren, three great-grandchildren, and his younger brother, John.
A memorial service, followed by a reception, will be held at the Friends Meeting in Haddonfield New Jersey on April 1 at one in the afternoon. Memorial contributions may be sent to Haddonfield Friends Meeting, 47 Friends Avenue, Haddonfield, NJ 08033.
The cost of gas at the pump has soared, and conspirators are suspected. But, awkwardly, nice respectable pension funds and university endowments may be responsible.
Although gasoline in the U.S.A. costs only half what it does in France because of their taxes, prices at our friendly local pump have nearly doubled in a year. Scoundrels are suspected. The major oil companies have no trouble showing they are not profiteers but victims of high prices of crude oil, but not everyone believes them. The oil consumption of developing nations is assuredly increasing but not enough to cause prices to jump this much; the oil-producing nations are pumping about all the refining system can absorb; and American gasoline consumption is trending down a little, not up. So who's the speculative villain, here? An offshore trader named Michael Masters pointed out to befuddled congressmen at one of their show-trial hearings that the marketplace for crude oil is mainly divided between actual producers and actual consumers, plus a buffer of middle-men who may buy and sell but neither produce nor consume. Normally, middlemen are involved in about 20% of crude oil transactions. Recently, they constitute almost 80%. Aha!, we are starting to get somewhere.
Lukoil Gas Prices
There will be, however, little political mileage in hounding these speculators, because they indirectly represent mostly retirees and grandmothers whose purchases are not predatory but prudent. Life savings (encouraged by Congressionally created tax shelters) have accumulated in pension funds and custodial accounts of one sort or another, run by professional managers. Since the stock market is down over a thousand points and bonds look risky, these pooled funds have accumulated cash. Moreover, falling interest rates drop the value of the dollar, and real estate is presently a special catastrophe. So essentially only one investment asset class is rising in price -- commodities. Gold is a commodity but has already seen a big price runup, while agricultural products are seasonal. So, essentially, the huge global tidal wave of liquidity has exhausted one safe harbor after another. The current soft spot, where the tire bulges out, is the price of oil.
It has long been difficult to invest in commodities as an asset class, but modern investment theory devoutly believes in combining unrelated asset classes, and continually searches for more of them. So, investment managers have lately created index funds to facilitate investing in commodities as a general class. These funds are more costly and complicated to run than index funds of stocks and bonds, and there is rent to be charged for scarce expertise in a non-traditional field. Consequently, the low-hanging fruit for managers of commodity funds has been to solicit and even limit access to non-profit endowments, pension funds, and sovereign wealth funds. All of them are cash heavy, and almost all of them are touchingly trustful. So, a very large pool of money has switched from cash to commodities without much notice by its ultimate owners, and the main commodity at the moment is oil. These pensioners and rentiers through their surrogates don't want to burn oil, they want to own oil. But the effect is the same; increased demand with constrained supply leads to higher prices.
An illustration makes the point quite simple. An oil tanker filled with many thousands of barrels of oil takes five days to go from Venezuela to Philadelphia, somewhat longer to come from Africa, and considerably longer to go from the Persian Gulf to Japan. But even in the mere five day trip from Venezuela, it is quite common for owners of the cargo to change hands ten or twelve times, each time at a slightly higher price. The ship plows along uneventfully, but ownership of the cargo is held anywhere in the world and transferred over the Internet; the captain of the ship could care less. There's only one buyer in Venezuela and one seller in the Delaware Bay, but five or six other parties have the feeling they owned the cargo. The value of the cargo could well rise by millions of dollars in the interval between sale by the producer of the oil in Venezuela, and purchase by the refiner of the product in Philadelphia. It's hard to say whether aggregate demand has risen, but virtual demand certainly has and is capable of affecting the price. With this picture in mind, the aggregate total produced or the amount refined, or the amount burned in SUVs, are sometimes irrelevant to the price at the pump. And the speculative owners of the money involved can be blissfully unaware, or even vocally critical of what they are doing.
Where this will lead depends on whether the imbalance of true supply and virtual demand is a bubble or merely a sign of inflation. Another way of describing the matter is to ask what the "real" value of crude oil is. Some pretty experienced oil traders believe oil is only worth $45 a barrel, but the larger consensus is that it would sell at $80 rather than $140 if the "speculative" element were removed. Essentially, this analysis suggests that oil has moved from $15 to $80 because of inflation, but the further move from $80 to $140 is a bubble. The distinction is not whether consumption is out of balance with production, but whether the supply of oil and the supply of money are out of balance. If that's approximately accurate, all we need to worry about is the Federal Reserve, the European Central Bank, and the likes of George Soros. Always remembering the destructive potential of wars, hurricanes, and presidential candidates.
One final point needs to be made to the skeptical customer, encouraged by politicians to believe big oil companies headquartered in some other state are ripping him off. Without resorting to statistics and computers, the gut feeling of most motorists is based on quick notice that gasoline prices are asymmetrical. That is, they go up promptly when the price of crude oil does, but slyly are more sluggish in going down after a fall in crude oil. Asymmetry is quite verifiably a fact of the gasoline marketplace. However, it is not true of wholesale gasoline prices, which track the price of oil quite closely, both up and down. The observed delay in adjusting prices downward in response to wholesale gasoline prices is due to your friendly local retailer. When there is a sharp drop in wholesale gasoline prices, the retailer finds himself with gasoline in his underground tanks which tank trucks delivered earlier at a higher price. Until that inventory is exhausted, the retailer is reluctant to lower prices below his cost. That normal reluctance is heightened when prices are jumping up and down frequently, because it becomes possible for him to sell gas, both below the cost of what is in his tanks, and below the cost of new gas that hasn't arrived yet. For the retail gas station, cautious behavior isn't speculation, it's survival. And in case you believe that retail gas pumping wallows in unjustified profits, notice that the big oil companies are now doing their best to sell off the retail stations, after decades of buying them up. That probably accounts for all those new names you recently see on the old gas stations, possibly reflecting penetration of American domestic markets by Russians, Venezuelans and other enemies of democracy. Possibly so, but more likely it just reflects a decision by big oil to let someone else experience the hostility. Call it, if you like, Yankee ingenuity.
Chairman Bernanke of the Federal Reserve refuses to believe present high oil prices will persist. Although motorists mutter about it, the price of oil is excluded from the present calculation of America's inflation rate, which has been renamed "core" inflation. To simplify a little, core inflation reflects wages. In Bernanke's view, we don't have inflation until we have inflation expectation; and he chooses to measure expectations by the degree to which employers raise wages, in response to protests from employees. When wages go up, consumer spending also goes up, which forces up the price of goods. If rising prices of goods provoke another round of wage inflation, things are spiraling out of control. But if the price of goods like oil goes up without provoking a rise in wages, it's something else, maybe stagflation. Or, one can hope, a prediction that the price of oil will soon come back down where it belongs.
The steepness of the federal interest rate curve -- ten-year treasury bonds pay more interest than three-month treasury bills, and the rate for intermediate time intervals slopes gradually from one to the other -- is a function of the Federal Reserve; the slope of this curve concisely describes current Fed policy. The Federal Reserve controls the money supply by raising or lowering short-term rates, which "affects the slope at the short end", and mainly in this way restrains or encourages inflation, or alters the exchange value of American currency. For the most part, long term rates are set by the public bond market. Once in a while, the Federal Reserve does buy or sell long-term treasury bonds to modify long-term rates in the economy. By affecting rates at either end, the result is some kind of change in the slope of the curve.
Because banks make interest payments to depositors near the short-term federal rate, while the same banks charge borrowers at near the public long-term rate, the current slope is the main determinant of bank profits. Banks borrow short and lend long. If Federal Reserve tinkering steepens the curve more than it would be without interference, then bank profits are subsidized. Of course, it works the other way as well; in a banking crisis, yield curves can be steepened to rescue banks from failure, thus potentially sacrificing ideal monetary levels temporarily. For the most part, what is good for the banks is good for the economy; but it remains that bank profits are subsidized much of the time. Artificially widened yield curves either punish savers by lowering interest rates on their savings accounts or else punish borrowers by increasing interest rates on mortgages and other credit. For political reasons, the pain is usually shared among voting blocs. It can be argued this invisible subsidy of banks by the public creates a compensating benefit of economic stability despite occasional bubbles and recessions like the present one. However, the Federal Reserve system has been in operation for almost a century, revealing a long-term bias in favor of inflation, which is a subsidy of debtors by creditors. Present policy deliberately targets a steady rate of 2-3% inflation; the gold market responded to a century of this by raising the price of gold from $17 to $900 an ounce. A 1913 penny has become a dollar (before taxes) you might say. You might also say it took the Federal Reserve less than a century to make the present dollar worth a penny.
If gradual inflation is a consequence, a fair question must arise whether the Federal Reserve is worth its cost. Compared with an inflexible, relentlessly deflationary Gold Standard, yes, it is. Even accepting the monetary crisis as partly created by central banking, the international dominance of the American economy and recent smoothing of banking instability testify to the durable use of the Fed. But another criticism must be faced: In subsidizing depository banks with an artificial yield curve, is the Fed backing the wrong horse for the future? To answer that question, examine two components: With computer technology rapidly advancing, can the Federal Reserve accommodate non-banking competitors to banks? And secondly, international central banking appropriately accommodate globalization? There are, after all, aspects within the 2007-20?? a crisis which suggests -- maybe it can't.
Steady inflation of 1000% per century may well be preferable to 19th Century volatility of 1000% every ten or so years. But a gradual rise of, say, 500% or less each century might be even better. Relentless political pressure on the Federal Reserve has typically been used to explain its slow retreat from truly stable prices, and this defense takes the form of mentioning its dual mission of minimizing unemployment while holding prices as steady as possible. In recent years, European political rhetoric goes further, aspiring to add the right to employment to their fifty-page Bill of Rights; similar utopianism has crept into our own news media. Governments for thousands of years have cheapened their currencies. But while the drift is clear, our own pace is set by the amount of subsidy required to maintain a steep yield curve. As retail banks have struggled to compete with the wholesale investment banks, their increasingly uncompetitive costs require a greater subsidy from the yield curve. It is always going to be more expensive to aggregate deposits for lending purposes than to raise large sums by floating a bond issue. Securitization is here to stay because retail banks have consolidated and savings banks have gone out of business by the thousands; the mortgage industry can no longer survive without substantial amounts of mortgage-backed securities. Nor should it; securitization is a sensible route for importing capital from nations with a trade surplus. Depository banks long ago lost the borrowing business of corporations large enough to float their own bonds; securitization provides a means for smaller borrowers to share the same efficiency. After it has tried everything else, Congress will eventually devise a reasonable regulatory system for derivatives. Except for smoothing the transition to whatever proportion of market share the investment banks can justify, perhaps all of it, the subsidized yield curve impairs efficiency. It would be a mistake to allow some foreign nation to exploit such an opening before we do. The technical problem for all central banks is to devise a suitable alternative method of controlling the currency, other than by targeting inflation with adjustments in interbank lending rates.
Observers led by Martin Wolfe the economist for the Financial Times feel the 2007-20?? financial crisis can be adequately explained by Chinese pegging their currency too low, and could be rectified by persuading the Chinese to float their currency. Regardless of this extreme view, globalization is clearly both a good thing and an inevitable one. Thus some form of discipline must be devised to prevent central banks from destabilizing it for their own advantage. Wolfe proposes the use of a strengthened International Monetary Fund, which is unfortunately apt to project international politics into a process which could be harmed by it. An alternative to be examined might be to pool sovereign wealth funds as a pooled currency reserve, although this system probably could not withstand present extremes between surplus and debtor nations, so getting world acceptance could be protracted. Ultimately, everyone realizes that the real backing for an international finance system is the net worth of the whole world. But the example of Lloyd's of London is a haunting one; no one relishes putting absolutely everything at risk, down to the last shoe button. In the event of a disaster, everyone wishes to hold back some nest egg to use for recovery. Because of the same line of thinking, almost no one would trust foreigners to control more than a limited share of their future.
The future of international monetary relations is thus quite murky, but current pressures would seem to be driving something fundamental to change. When it does, regulating artificially manipulated yield curves had better be kept in mind.
All right, Health Savings Accounts once appeared to be merely Christmas Savings Funds, helping people of modest means accumulate the money for their high "front-end" deductibles. The high-deductible design of health insurance paradoxically reduces the premiums of catastrophic health insurance policies. At least that's how they began; with higher deductibles on the claims, annual premiums could become lower, and the effective deductible gradually disappeared with contributions to the Christmas Fund. Subscribers to the savings accounts did run a small risk they might not deposit the full deductible before serious illness appeared, but the serious illness itself was otherwise fully covered. In fact, the effective deductible was reduced by whatever they had deposited but the premium did not rise; after a few years most of them had no out-of-pocket deductible left to pay, at all, and no extra premiums to pay for it.
So the first consequence to appear from Health Savings Accounts was first-dollar coverage without higher premiums. A small risk of small ongoing outpatient costs remained, but after a few more years even that was covered, again without raising premiums. Financial protection gradually increased with time, starting first with the worst disasters, working down to trivial ones, eventually to none at all. To repeat, without a rise in premiums, so gradually the whole package provided better coverage without increased premiums. That's why they got cheaper; the former insurance profit turned into a consumer investment. Wasteful spending was also restrained by subscribers protecting their investments, an impact which actually increases over time. With a little luck, or else starting young enough, it was possible to slide past the risky period of time, unaffected. That pretty much summarizes the medical part of the two-part plan to surpass "first dollar coverage" as fast and as cheaply as possible. The power of the Christmas Savings Fund was much greater than it appeared to be.
But after that, subscribers still had an increased cost of retirement income to worry about. It's an integral part of the medical issue because retirement costs inevitably rise with improved longevity. That's not hard to see, but if it's forty years away, it's easy to neglect. However, it becomes almost impossibly hard to get this result, if it's only two years away. That's called the "transitional problem"; everybody isn't twenty years old on the same day, and some people have simply lost their chance. Some people are already sixty-four, with variable amounts of savings. Since they can't arrange thirty years of retirement funding in a single year of saving, they have to fall back on the next-best approach. Which is to make the whole thing cost as little as possible, thereby reducing the number of people hurt by differences in age.
Fine, but how would all that theory enhance retirement income, except in pitiable amounts? What's been accomplished so far, has been accomplished collectively. The rest is up to the individual. Everyone can, for himself, make it less pitiable.
At 6.5% compounded quarterly, it's impossible to catch up with $400 at birth, with annual deposit limits of $3350 after age 59.
Be Frugal If You Must Spend From This Pocket. It's surely pitiable if you spend it as fast as you save it, but can build to a meaningful level in retirement if you just don't spend it. Our national leaders often say we don't spend enough. But they are talking about investing in factories, not spending on hula hoops. Nobody seriously sees any value in useless spending except a salesman. Frugality almost has to become a way of a person's life, because its impact consists of many small savings in accumulation, then multiplied by compound interest. For example, people have trained themselves to avoid paying cash for whatever insurance already covers. Here, many must deliberately re-learn to pay cash for small services, even if covered by insurance. That may sound like paying double for medical service, but its intention is to save the tax exemption for bigger things later. Let's examine that in detail, later.
Usually, premiums are set a little high to provide a margin of safety; a resulting surplus is diverted to reducing future premiums. If you think it through, the insurance company shifts its own risk onto future subscribers. (If the company goes broke, the remaining subscribers may find the risk shifted to former subscribers who dropped their policies.) Insurance companies call this a defined-term, or "term" insurance model because employer-based groups contain people of all ages, so a one-year term of insurance risk is safer for them in dealing with older subscribers. That's a good thing, by the way; you don't want your insurer to go broke.
In employment-group health insurance, surplus or deficit is made up after a year or two of "experience rating", because final health insurance risk reaches an artificial end at age 65-66, with Medicare then shouldering the remaining healthcare risk. Unfortunately, the sharp pencils of the company groups tend to make the individual (non-group) policies serve as a sort of contingency-risk fund, although employers are generally unaware they are having this effect on people who do not share their tax exemption. Nevertheless, someday, current low-interest rates must go back up to normal levels, investment income once more becoming a meaningful gain; so look for investment income to return to normal for individual policies. There are myriad reasons behind the yield curve slope, which relentlessly defeat the convenience of any Federal Reserve Chairman who wishes to continue low rates. Call it supply and demand, for shorthand.
Individual ("non-group") insurance also contains people of many ages, but people using it are expected to know how old they are. Health Savings Accounts are always individual accounts, not pooled ones. (The required pooling of risk is situated within the catastrophic health insurance, attached to every savings account.) Individual unpooled accounts offer two advantages to younger people: of a longer time horizon to work out the leads and lags, plus some savings from not subsidizing older subscribers, as employer group policies tend to do. In an HSA you subsidize yourself at a later age, which is a whole lot different.
You do share your major health risks in the insurance part, but you don't share your individually compounded savings from frugality, in the savings account. Older working people might be wise to set aside some personal savings to supplement the one-year term health insurance, adjusting for the more frequent risk of a second sickness in older people. Because the Affordable Care Act mandates the deductible, it also mandates an "out of pocket limit" to recognize the risk of a second illness coming along too soon. So Health Savings Accounts usually do the same. That's safer but raises the cost. Furthermore, interest rates have been unusually low for nearly a decade, so banks have made a habit of paying lower cash dividends longer than rising earnings can justify. However, in spite of the superficial theory that Health Savings Accounts cannot accumulate much money for retirement, demand for them has been heavy and fairness has become balanced. At present, their aggregate deposits are already reported to be over $30 billion.
Deductibles vs. Copayments. This seems a good time to emphasize the good feature of a front-end deductible, compared with the uselessness of copayments (traditionally 20% of claims cost.) Both of them reduce premium levels, but for different purposes. Deductibles induce patient frugality, as we have noted.
The purpose behind the typical 80/20 co-pay is less obvious since it is only calculated after a claim is made, or let's say after a wasteful procedure has already been performed. Repeated studies have shown it has a little net effect on premiums or service usage. Instead, it is favored by negotiators who must make quick decisions in a bargaining session, because a 20% co-pay results in a 20% reduction of premium, a 40% co-pay would result in a 40% premium reduction, etc. Co-pay has the additional perverse effect of making a second supplemental insurance policy attractive to most subscribers, including a doubling of its insurance profit and overhead.
Consequently, we favor high "front-end" deductibles, but reject copayments from insurance design. And subscribers ought to do the same.
Perhaps not surprisingly, most new subscribers to HSA have been younger than age fifty, and forty percent have so far never made a single withdrawal from their accounts. It's hard to measure, but the aggregate small incentives of saving for retirement have resulted in 30% less spending for disease, so the size of account balances grows faster than expected in spite of the current recession. Ultimately there must be some surplus because competition will force at least some savings to be distributed to subscribers. Subscribers are nevertheless on the lookout for investments which pay more than ordinary bank savings accounts; stock index funds ("passive investing") are the most popular alternative. Please notice that all of these explorations grow out of the unusual feature that Health (and Retirement) Savings Accounts are the only available form of health insurance which surrenders all termination surplus directly to the consumer, rather than return it to him via the insurance company as lower premiums. In theory, the amounts should eventually seem to be about the same, but compound interest over the fifty-year interval spreads them apart. (See the graph, above.)
Portability in a Larger Sense, Leading to Hidden Cost savings. The fact that HSA accounts are proving financially attractive, is surely a sign they may contain some previously unsuspected advantages, in addition to just being portable between employers. Additional portability -- between only paying for health care and paying for retirement in addition -- is more smooth and natural than we expected. Improvements in longevity reflect improvements in health care and are the natural consequence of the population getting healthier. (The saving in one compartment, is a cost for the other, with compound interest exaggerating the difference.) Furthermore, there is a consequence more evident to physicians than to patients: if you get really sick, you won't need to worry much about retirement costs, so here too a saving in one is still a cost in the other but in reverse. By far the largest accelerator to the balance is to overfund it up to the legal limit. No attempt is made in this book to claim we know what future costs will be, except to point out -- whatever they are -- increasing longevity will clearly push costs into different compartments, some upward, and some downward. It seems certain flexibility between compartments will become more desirable over time and might save considerable money. The clause in Health and Retirement Savings Accounts that any leftover tax-exempt surplus transforms into an IRA (Individual Retirement Account) when Medicare eligibility is attained, is probably the forerunner of others. More potential flexibilities are explored in this book, and advocates of other systems are invited to add features to their favorite program. In other words, at age 65, a subscriber does lose a doubly tax-exempt HSA with a surplus, but gets back Medicare plus a regular Retirement Account (IRA) in return, unless middle-men eat up the float. It's logical it would save money, but the heartening discovery is, it actually does.
The Battlefield. The HSA derives a double tax deduction in the sense that whatever is spent on qualified health service is not taxed, neither when it is deposited nor when it is spent. That appears to be a major inducement for HSA subscribers to be frugal, and the longer it continues the more it accelerates. That's in itself the main reason not to tamper with the incentive since the alternative incentive is to employ brute force to hold prices down, a probably futile gesture of amateurish administrators. Since a few dollars saved while young, compounds into many more dollars later, the double exemption is often the best investment an average person can find. It is, to say the least, an attractive alternative investment vehicle, if not a windfall.
Splitting the healthcare product into two compartments (savings account and Catastrophic health insurance) has proved particularly suitable for saving within the account for out-patient costs. Price-shopping for cheaper medical expenses seems irrelevant to truly sick persons in a hospital bed, however. Spread-the-risk insurance was inevitable for disrobed patients, whatever the related temptation for overspending. It's important for customers to be convinced the spread-the-risk quality of insurance continues but is confined to circumstances where it has no real alternative. Those professions coming from different cultures who scoff at the self-restraint of physicians are in some danger of enraging doctors into behavior everyone will regret, encouraging behavior which is being resisted. Nevertheless, some degree of slippage is inevitably part of insurance. As soon as you spread the risk, for example, it gets harder to itemize the bill fairly.
Be Careful Who Your Subsidy Partners Are. Insurance companies and hospitals both share risks with clients, and boast it reduces premiums. Young people almost always have lower costs than older ones, so it's tempting to mix a few expensive old folks with a large number of young ones in group policies. However, the client doesn't usually consider the overall effect of his choosing either a particular insurer or a particular hospital. No matter how old he is, he should want to be mixed with a lot of young clients (except premature babies).
The Affordable Care Act seems to have overlooked the refinements of this homily; by striving to include all the uninsured, they managed to include a large number of newborns and specialty children's hospitals, who are effectively (however reluctantly) subsidized by the rest of the community. Employer groups trying to do the same thing, necessarily avoid most people under 25 years old, who were suddenly included in population-wide averages of uninsured, by the new law. Patients over 65 may be similarly under-represented. Furthermore, about twenty cancer hospitals have been exempted from DRG constraints. Regardless of how it got composed, the ACA found it was subsidizing more than it expected, and (because they were the subsidizers) premiums for good people consequently threatened to rise more than expected, even though sometimes enjoying incomes which exceed the uninsured.
Employer groups were thus cross subsidized, but to differing degrees; outcomes were hard to predict and smaller groups proved more agile than larger demographic subgroupings. Out of these unexpected aggregate costs, arose a need to subsidize employer groups unexpectedly, and explains some unlikely favoritism for prosperous political groups originally targeted for income redistribution. In most employer groups, young people subsidize older ones; that's definitely not the same as rich people subsidizing poor ones. The detailed extent of these problems will probably not emerge until after the November elections.
Hospitals differ in their costs for similar case-mixture reasons. If you don't need a big-city tertiary hospital, you need to ask why you should pay for it by secondarily cross-subsidizing its expensive clients. This may explain some of the surprising successes and failures of HMOs, private insurance companies, and other allegedly share-the-risk groupings. Small, agile and for-profit companies seem to maneuver more readily than big non-profit ones.
Cheaper. These and other mechanisms probably underlie the claim that HSAs are 30% cheaper. Because there are many small explanations rather than a few big ones, they will be harder to imitate. Such an accumulation, doubly tax-exempt, over a period of several decades aggregates to a surprising amount of compound interest. Money at 7% only takes ten years to double, for example. Most people would have difficulty finding a superior way to save for retirement, then by reflexly putting any spare cash into an HRSA. It's true you have to get sick to be entitled to the double deduction, and you may not survive severe illnesses with much savings. But the peace of mind of just knowing you have been covered by shrewd exertions of skillful management creates some cost-free benefit not to be scoffed at. Everybody needs a consolation in despair, and this one turns out to be powerful.
"Overfunding" the Account. Therefore, enlisting patient participation extends the argument for durably separating the account from the insurance. Indeed, it makes a significant argument for overfunding the account among young people, who badly need to hear it. "Overfunding" in this case means trying to spend as little of the account as you carelessly might spend. If a considerable number of people become so-minded, a relatively realistic market price can emerge for out-patient costs. This is America, after all. That's not so true of inpatient costs, but it nevertheless provides a relative-value base for even those costs -- with a few adjustments in the regulations related to major changes in the diagnosis code employed.
Summary. So that's how we see the simple change in the payment structure into a Christmas saving account transforms a device for helping poor people afford insurance, and adds to it an incentive for the patient to be frugal for his vulnerable old age. Instead of paying to borrow money, he is paid to save it. Pinch pennies for healthcare, in order to save dollars for retirement. And then multiply it by compound interest A mutually beneficial system actually reducing medical costs, is the underlying description. It does this by providing a pathway, and an investment vehicle, for deriving meaningful retirement insurance out of unused health insurance. (This boils down to a sterner message: if you abuse the healthcare system, your own retirement will suffer.) The demographic group may not suffer, but because it's individually owned, the careless individual may shoot himself in the foot.
Resistance to Disintermediation. But, it must be noted, since this can also transform health insurance from a cost center into a revenue center, it creates some uncomfortable resistance from the financial community (because it seems to them to be a zero-sum loss). The resistance is this: financial transaction costs have declined 70% in the past ten years, so the financial community is hurting, at least compared with the Gilded Age. After all, declining prices of anything are a major reason for profitability to fall. If, in addition to attrition in revenue, a formerly insignificant income for the subscriber (interest on the accounts) transforms into an important mechanism for building up a retirement fund in six figures lasting thirty years -- it starts trouble with its zero-sum counterparty. Subscribers begin asking uncomfortable questions and making cost comparisons, at a time when the financial community sees its own income under stress. Already, there is agitation in Congress to replace buyer-beware with fiduciary advisors. The subscribers will win because they have the votes, and control the flow of funds into accounts. But it may turn out to be a slow bloody battle, notwithstanding its far more dignified potential for transforming into an attractive opportunity for both sides.
The Source of Subscriber Sluggishness. When individuals compete with corporations (tax authorities and investment managers), it is usually a matter of youthful inexperience futilely competing with the experience and immortality of corporations. It seems to take a long time for young people to discover how much difference a steady, small interest rate can make to the process of converting small savings into big ones -- providing one starts early in life. Immortal corporations do have a more distant horizon and an indelible memory. But the immortality isn't as great as many think; for a glaring example, it's a comparatively rare corporation which stays in business for a hundred years. The greater advantage which a corporation has is it has been given a solitary legal mandate to make as much money as possible. The movies call that "greed" but a corporation either sticks to its business (making money) or falls out of that business, sometimes after being sued by its stockholders.
A large corporation can lose lots of money. Those who wish to penalize excessive profits should more logically favor elimination of corporate income taxes, allowing high profits and large losses both to fall upon richer individuals. The present system, allowing profits to go to stockholders at lower rates than corporate taxes would, encourages corporations to get bigger, less profitable, and to flee the country which started them. None of these outcomes is likely to appeal to populists. Since healthcare has grown to 16-18% of GDP, the present tax arrangement of health insurance probably exerts an appreciable drag on the economy.
Imposed Self-control by Escrow Accounts. Young people constantly face the competing priority of consumption, and many never do learn to restrain it in order to accumulate larger savings. Others learn but too late, after several decades of potential doubling have been forever lost. Odysseus knew this but he also understood himself, so he had himself lashed to the mast of his ship while he sailed past the temptations. The shocking truth is that very small differences in interest rates, differences which some would have you believe are trivial, accelerate savings faster than most young people ever imagine. Taxing authorities and investment companies have already learned compound interest grows best over long stretches of time, and small differences in interest rate (as little as 0.1%) are quite sufficient if continued for a lifetime. This is a simple point, but so vital we must soon devote more time to the requirement of "escrow" accounts, perhaps more aptly termed "Siren Song Accounts". Call them to lose insurance or even credit default swaps if you please, but at least recognize they impose an opportunity cost.
True, many banks do offer Health Savings Accounts without either an attached health insurance policy or brokerage service. Both services are essential, but selecting insurance managers in these cases remains the customer's problem. You might think banks would have a similar response to the investment management of savings, except they have a complicated relationship with insurance companies they may not wish to disturb. By contrast, they also have a losing competition with investment banks, who have found cheaper ways to acquire large-sized investable funds by selling bonds and stock certificates. The time-honored method for banks to acquire funds is by dribs and drabs from the float of deposits -- quite an inefficient source, compared with $100 million bond sales. From time to time, as in the recent mortgage disaster, the government puts its thumb on the scales, and right now all banks are afraid to lose market share to competitors. Secret kickbacks may play some role in all this, so acquiring and integrating a whole company's operation seems a safer business alternative for them. One way or another, your account may be transferred to a different manager without your knowing it.
The conflicted outcome at present is for the potential HSA customer to discover which HSA vendor declines to make choices between insurance companies, but does look for ways to acquire the investment end of the business and overcharge for it, either directly or with kickbacks. In a curious twist, this pressure shifts to the customer to choose stock-pickers, whereas his best interest is usually served by choosing total-market index funds. Watch out for fees, however, which can upset any generalization about investment type. This situation can shift rapidly in the present environment since it would not be surprising for these financial behemoths to purchase market share indirectly, or else for failing stockpicker firms to sell themselves to banks of various descriptions. A much more productive approach for the small investor would be to look for a firm which will segregate accounts into "escrow, and non-escrow", leaving the choice of a high-deductible health insurer to the customer. Likewise, accounts could still be designated "captive, or self-selected", and leave the choice of investment management to the customer. It's true the average investor is often poorly equipped to make such choices but should have no difficulty in telling 1% from 8%, when (see below) the difference of one-tenth of a percent can result in a lifetime swing of $30,000. The importance of escrow accounts is described in the section which follows this one. Essentially, you can get a higher income if something forces you to shift short-term into a long-term investment.
The Importance of Small Differences in Interest Rates. To pay expenses in a stripped-down HSA, banks often charge for smallish balances, waived when the balance reaches their business break-even point, usually about $5000 per account. Similarly, investment latitude is often stratified, with larger accounts are given more choice of investments. Those are generally good arrangements because of their flexibility and elimination of conflicts of interest, but they impose some responsibility on the customer -- who must be willing to make security selections in return for possibly greater return. It's all quite understandable and suggests novel uses of the account. The best example before us is to "Overfund" it at the beginning, and use its surplus after compound interest, to supplement retirement income decades later; let's explain.
Improving the Retirement Benefit At present, the HSA law permits a maximum deposit of $3350 per year per person, with even higher limits for whole families. By constraining out-patient expenses or paying cash for them, the balance can thus build up to $5000 in less than two years, eliminating bank surcharges of roughly $50 a year by immediately reaching the waiver level. Since doing this also eliminates any remaining question whether the HSA will provide full coverage for hospital charges, it's pretty easy to endorse a $5000 investment which produces $50 a year tax-exempt income until Medicare kicks in, and then compounds it, adding more than 1% tax-free to its investment income. If the transaction then permits investment in total market indexes, paying off the investment was very wise. Let's now extend the frugal idea to more prosperous customers.
The Outer Limits of What is Possible. If an employee deposits the full limit of an HSA and makes no withdrawals from age 20 to age 65, his balance will be increased by $154,550. In fact, it should grow by more than that, possibly much more, if the income compounds. He can start with the present abnormally low-interest rate of 1%, and find annual maximum payments compound the balance to $196,225 in 45 years. With a more normal interest rate of 4%, this rises to $442,527. At 6.5% interest rate (which probably requires stock index investment to achieve), the result would be $959,760. Since the stock market for the past century has averaged 11% return, and inflation has averaged 3%, a net-of-inflation return of 8% is conceivable -- before taxes and expenses -- and so we'll set 8% as the theoretical maximum goal. $1,578,977 retirement account (at 8% net) is thus the utmost goal which is realistically achievable, adjusted for inflation. But the difference between roughly $908 thousand and $1.5 million ($650,000) is a difference still worth pondering since it identifies the maximum potential difference attributable to middle-man costs, and that's a lot. And if you think the bank is entitled to something, it probably can get compensated by compounding daily but paying compounding quarterly, and additionally by requiring deposits monthly but crediting them yearly. As far as inflation is concerned, these are uninflated numbers, both at deposit and withdrawal. That is to say, they are all in 2016 currency, and leave a generous potential profit for the manager.
Just squeezing out 6.6% instead of 6.5% makes for a final difference of $30,500, or roughly a fifth of the net (of medical outpatient expenses) deposited. Without resorting to insulting language, this large difference achieved by such a small income increment is a legitimate goal for technology improvements and management streamlining. The amount is seemingly within reach, and the consequences are worth it. So although the Standard and Poor 500 actually averaged 6.6%, and the modal return was even higher, we round it off to 6.5% in most of our illustrations. Several such small yield improvements can boost net returns by 1%, which makes an enormous difference in eventual yield after decades of compounding. That's particularly true in a compound yield curve which turns up at its far end. Since transaction costs have decreased by 70% in the past ten years, it definitely seems possible to extract an equal amount again by relentlessly pressing for it. It misjudges the public mood to say there is no room for improvement by educating the public. Right now, everybody involved would probably agree it is high time to increase the deposit limits, after several decades of their having remained stationary. That alone would significantly assist the transition from a nuisance to a central bulwark of retirement security. The financial industry wrongly misjudged this transformation to be trivial, so it's getting a little late to adjust it gracefully. Working out some examples from beginning to end, is very persuasive.
True, about a fifth of the contribution to this scheme is provided by income tax reduction, but the line between public and private obligations to health care is already too blurred to hope for an agreement on the fairness issue. Just look at the combined state and federal tax contribution to the cost of group employer-based insurance, which probably approaches 60%. Still more important is the hidden contribution to increased longevity made by medical care. It seems hardly debatable that improving health was largely responsible for lengthening the time in retirement. The problem of outliving savings is pretty much a by-product of improving medical care; if you want one, you must cope with the other. For this reason alone, it seems entirely proper to include rising retirement costs as part of the cost of improving health care. If you want to solve the whole problem, however, you look for any solution and forget about assigning blame. Is there anyone reading this chapter who doesn't want to live an extra thirty years?
This book will appear in print around the time of the November 2016 presidential election, and therefore have little effect on its outcome. I expect the election to polarize both political parties still further on the Affordable Care Act, sucking all the oxygen out of the room, as the expression goes. It is likely to create a sort of lame-duck situation during November and December, no matter who wins. Therefore, I decided to present a book which superficially seems to have little to say about the Affordable Care Act, in order to grasp the microphone first, about health issues which got ignored by the Affordable Care uproar. Even when discussion seems to focus on the A.C.A., trade-offs are blithely apt to ignore "germane-ness". And thus get to issues which have been debated very little, and pass very quickly. This book primarily attempts to do two things to re-focus attention:
1. To draw attention to the Health Savings Account legislation as a fall-back from almost any deadlock. HSA is already enacted, tested, and distributed. If Congress reaches a deadlock, the HSA is existing law, and anybody in a jam can simply go down the street and buy one. It's simple and cheap to get started, is approximately as inexpensive as any other health insurance, and you can discard it whenever you like. (Naturally, I hope people will keep it.)
It does have a few flaws, which I hope Congress might correct. It unnecessarily limits buyers to people who are employed. That seems purposeless to me, while it prevents minor children from being enrolled, limits the deposit of funds to a fixed amount of their own money, and forces people out of the HSA at age 65. Forcing people to drop it as they acquire Medicare, impairs one of its most important virtues, the incentive to apply unspent money to retirement living, just at the time they are likely to retire. Some people will have other retirement sources and time-tables, and wish to defer use of some or all of them. Getting back to children, permitting deposits at birth would add at least twenty years to the compound interest period available preceding retirement, allowing the retirement fund to grow four times as large. Dropping the age and employment limits would not require more than a few sentences of an amendment, and provide maximum flexibility.
2. We also portray universal Health Savings (and Retirement) funds as potentially "a string holding together a necklace of pearls". To do that requires major legislation, going far beyond emergency stop-gaps for deadlocks. It's potentially a program for health, phased in over a century, and including the possibility of even including ACA. Since one Congress cannot bind a successor, it provides a road map through ten or more changes of political control in Washington, adding or subtracting individual programs which sometimes have little relation with each other. As a matter of fact, if an attachment is voluntary, you can have other parallel programs without attaching them, if you prefer.
By happenstance, reform could start with one "pearl" already in place. By the legislation's automatic transfer to an Individual Retirement Account at the onset of Medicare coverage, every subscriber in effect would immediately possess one of the essential ingredients of a lifetime health and retirement funding system. That even generates coherence, symbolizing prolonged longevity as a result of earlier health care. On the other hand, it implies the present configuration of Medicare is perpetual when it already has a number of features which should be changed. Therefore, it is essential to state at the outset that the string, the HRSA, intends to be kept as simple as possible so that amendment complexity is concentrated into the "pearls" themselves. After doing so, the HSA can remain versatile enough to suffice for newborns, mentally handicapped and billionaires, alike. It might provide healthcare for prisoners in custody as well as the marooned Medicare copayment supplements. Some things wouldn't work and can be dropped without upsetting the whole system. The expression is KISS -- which they tell me means keep it simple, stupid.
The basic structure is to divide health finance into two parts, one for everyday routine expenditures, and the other for bare-bones, cheap, insurance -- for people who are too sick in bed to be bothered with haggling over finances. If there is anything left over at age 65, it can be spent for retirement and serves as a life-long incentive to be frugal about health expenses. It's for everybody, not just some demographic group. If the government chooses to subsidize certain groups, then that becomes an independent topic, sharing a common framework, hanging separately from the necklace as it were. At the moment, it's one serious technical flaw is to imply total control over investment policy lies in the hands of any corporation which manages it, leading eventually to suboptimal investment performance for customers. Also, limiting management to visible fees rather than invisible profit-competition should allow plenty of room for shopping between managers.
Having established the basic framework and pointed out its present main -- but correctable -- flaws (management control of investment, and mandatory management participation in profits), we added two potential pearls to the necklace. One is the two parts (80/20) of Medicare with its finances unified, and the other is to provide health coverage for children up to the age of 25. These are both sensitive topics and may take the protracted debate to get the mechanics right. When these two programs have finally got their books balanced by deciding who pays for what, they are ready for voluntary acceptance into HSAs, and they remain eligible to be tossed out if unexpected problems surface, once we get over any notion of infallibility. Balancing the books may include subsidies, but the subsidies for poor or the handicapped must reasonably result in balanced books. It is intended to be an insurance design, not a subsidy originator. A design, not a budget; the government may subsidize as it pleases without changing the design. The government has a right, even a duty, to provide for those who cannot provide for themselves. But deficit financing is not wise: if you are going to subsidize, subsidize the pearls, not the string. This wouldn't eliminate politics, it merely shifts politics to a less dangerous level.
At that point, we now stop detailed planning and merely list seven more "pearls" which might be added on the same terms. They would be special programs for difficult situations, like prisoners in custody, physically or mentally handicapped to the point of not being self-sufficient, and aliens within our borders. We are told the aggregate of these three groups alone is thirty million people.
When it comes time to negotiate the Affordable Care Act, between twenty and forty million more are eligible to become self-financed "pearls" after the ACA finds a way to balance its books. It is not intended to subsidize other subsidies linked to programs. That's the government's job. Unfortunately, the government has tended to raise prices for people struggling to pay their bills by subsidizing other people who cannot. The consequence is even more people cannot afford their own care, threatening to sink the lifeboat for everybody. If we are to subsidize the health care of some part of the population, let the money come from defense, or agriculture, or infrastructure, not from the quality of healthcare of some other person.
To continue the list, additional pearls for the future are the accumulated debts of fifty years of deficits, and the tax deduction-supported gifts of health insurance from employers to employees. I'd like to see some resolution of the mess left behind by Maricopa Medical Society v. Arizona decision of the Supreme Court. As these problems get worked out to be self-sufficient, they become eligible to become "pearls" as long as it remains clear this proposal is not a cross-subsidy vehicle. At the moment, the ACA shows no signs of adding anything to the HRSAs except more deficits, making solutions more difficult to find. Just because we see no end to problems, shouldn't keep us from getting started. In particular, when the ACA is addressed, out goes the oxygen from the room, diverting attention from anything except expedients. That should not be necessary. All of these problems can be worked on simultaneously.
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It is now time to identify the financial maneuvers which promise partial success. It isn't true there is only one principle involved, but there is certainly one main one. Almost all of the magic of money creation in this proposal is provided by stretching out the time for income earning. A longer earning period takes advantage of the rock-solid principle of compound interest rising at the end of its investment period. To return to our oft-repeated formula, money earning 7% will double in 10 years, so 2,4, 8, 16 reaches 512x magnification in 90 years. From age 80 to 90 the money grows 128-fold., so an original investment of $100 grows from $25,600 to $51,200 between the ages of 80 and 90 or $2,560 per year for a $100 investment. That is, it's not growing at 7%; during those last 10 years, it's growing at 256%. And it's not magic, it's just math. Furthermore, it's not new. The ancient Greek Aristotle complained about the unfairness of it because he was seeing it as a debtor. So that suggests a related strategy: wherever possible, position citizens as creditors, not as debtors.
What's new about this whole thing is the extension of longevity. In Aristotle's day, it was considered remarkable to live to be forty years old. In our era, life expectancy at birth is moving from 80 toward 90. So today it's not a pipe dream, it's a realistic strategy. But stretching it out automatically comes with problems, too. There's a greater risk, fifty years of extra opportunity for someone to chisel it from you. History is replete with examples of kings who shaved gold coins, financiers who took more profit for themselves than for their investors, central banks who give you back a penny when you invested a dollar a century earlier. If you win a war, you might emerge better off; but if you lose a war you may be more like the seventy million people who died from wars in the past century, an experience which strongly favors having no wars, but otherwise doesn't seem to change things much. This risk/reward ratio strongly suggests we have neglected the necessary precautions required. So the proposals of earlier pages to balance the Medicare budget, etc., carry the risk that something or someone will come along and divert the money to other purposes. And without planning to forestall that, you have not got a workable plan.
That's the thinking underneath the dispersion of control to individual Health Savings Accounts, just as it is the reasoning behind resistance to consolidated systems of control, such as "single payer" systems as presently described by their proponents. They all just make it easier for your trusted agent to steal bigger amounts of money at one time. William Penn, the richest private landholder in recorded Western history, spent his days in debtor's prison because his steward falsely accused him of stealing the money from him. Robert Morris, the financial savior of our nation, likewise went to debtor's prison while the Governor of his state nearly sprained his hand signing over property deeds to himself. When the Federal Reserve was created in 1913, a dollar was a dollar; now it is a penny. Nobody needs to explain what "pay to play" means. So, although we need much more ingenuity in devising safeguards for savers, we need to grit our teeth and allow some people to fail to take their opportunities. Countless teenagers who might have had a comfortable retirement will instead have the opportunity to smash up their red convertible on the way home from college. We absolutely must not deprive them of this risk, out of sympathy for its consequences. There will be plenty of Huns, Goths and Vandals watching what Rome does with its advantages.
* * * *
Suffice it to say a billion dollars will turn anyone's head; Health Savings Accounts are already many times that size in aggregate. Although ownership is dispersed widely, it is only a matter of time before some stockholders organization is formed, ostensibly to protect the interests of HSA owners. There will be an eternal need to suggest tweaks in the law to adjust to new circumstances. There will be a need to monitor the performance of managers, and even to counter the power of regulators. Sneaky little laws will get thrown in the hopper, requiring alarms in the night. Someone who lost money will sue to recover it; someone will have to decide whether to settle or resist in court, ever mindful of precedents being set. Executives will demand extraordinary life-styles; someone will have to decide if their production warrants the rewards. Someone else will have to be fired for incompetence or venality, but he will find many friends to defend him. The methods of selection of the board of directors are vital issues, now and forever in the future. As much as anything, continuous publication of results ("sunlight") is vital to oversight. The directors of the oversight body should have a deep suspicion of the directors of the "pearls" and only limited pathways for promotion between the two. Every time, every single time a dereliction is discovered, the results should be published and morals are drawn. Mr. Giuliani made a name for himself by policing broken windows, and it's still a very sound principle.
There is a financial success, and then there is product quality, which is different. Organizations will undoubtedly be formed to monitor quality, and these will produce measurable monitoring results. An effort should be made to make a meaningful match between these two report cards, with comparable groups having access to each other's data. There should be observers from each discipline on the other's board, and possibly a few voting overlaps. Disparities between rankings in the two evaluations should be explored and evaluated, and at least one annual meeting should be composed of both kinds of boards, devoted to the interaction of cost and quality. This may prove particularly fruitful at moments when scientific advances cause major changes in underlying premises. On another level, dialog should be frequent between research groups like the NIH, to see if research parallels needs..
A particularly interesting comparison might result from contrasting the regions with their 20% copayment partner's performance. They should be very similar, but may not prove to be.
"Eighty years ago any one of the 'tycoons,' whether in the U.S, Imperial Germany, Edwardian England or in the France of the Third Republic, could and did by himself supply the entire capital needed by a major industry of its country. Today the wealth of America's one thousand richest people, taken together, would barely cover one week of one country's capital needs. The only true 'capitalists' in developed countries today are the wage earners through their pension funds and mutual funds." (Peter F. Drucker, The Wall Street Journal, September 29, 1987.)
In the passage displayed above, a noted authority on the American economy has concisely captured the new dimensions of capitalism in the Twentieth Century, even though his jump in logic can be disputed. It is too soon for the evolution from Nineteenth-Century tycoons into universal capitalism to have affected common parlance; redefinition took place without anyone's planning or prediction. People who describe themselves as workers and employees are slow to develop attitudes and skills appropriate to their new economic power. It is equally uncongenial for those who think of themselves as entrepreneurs and managers to accept "people's capitalism" as the present and growing future of free-enterprise America. Drucker's partitioning of the country into two classes may well be disputed, but he has an insight of some sort which warrants examination. Obsolete class rhetoric will doubtless persist through several more presidential election campaigns.
Two things fit together here. It takes a ton of money to finance a multi-trillion a year economy. It also takes a ton of money to pay for a whole country to retire from work at age 65 and then go on a twenty-year vacation. The new imperative of capitalism is that we somehow must save enough of our collective working income to supply the capital requirements of the economy, which must, in turn, employ such capital efficiently enough to pay for our old age including its inherently heavy medical costs. If we have wars we will have to pay for them too, but the main dividend of our economy does go into a national retirement nest-egg. That's why we work, and that's all we have when we are done working. Stop worrying about quick-rich stories like Mr. Boesky's concerning conspicuous consumption by overpaid yuppies on Wall Street. Forget about the occasional person who takes a year or two off in mid-career to wander around Nepal. Don't however forget to remember the poor, the disadvantaged and the shiftless, because they get old too, and are part of the molten mass. In my view, the national economy can be roughly summarized as a process in which we collectively attempt to have nearly everyone spend his last cent on the day he dies but not a day sooner, living as well as he can in the meantime. Within the scope of this description we thus all become capitalists as we strive to enjoy twenty years without working income after we retire. The only alternative is that we mustn't live so long.
Because broad-based or near-universal capitalism has evolved recently and is not entirely acknowledged, the present system has some large transitional defects. Health insurance, unfunded health insurance, is one of the main defects we will get to in a few pages. A more immediate structural defect is what is that we have not yet evolved an efficient system of aggregating the savings of a nation of little capitalists who are unsophisticated in the ways of Wall Street and want to stay that way. Not only does it cost excessively to hire investment advice, but the voting power of ownership control gets lost in the process.
In the bad old days, when J.P. Morgan and others would buy common voting stock, they bought the company, and the company certainly knew it had been bought. If all of the officers and managers of the bought company weren't soon changed, that was only because they made desperately clear they were ready to take orders about company policy. By contrast, when T. Boone Pickens today buys a similar share of the voting stock of a corporation, the hired hands appear before a congressional committee, or the legislature of Delaware, to get a law passed outlawing the "unfriendly takeover". In Morgan's day, money didn't just talk, it screamed. Today, well, money is in a fight for its life with one-man-one-vote power in the hands of elected representatives. People's capitalism has become a humbled passive investment process, although not necessarily a cheap one, or invariably profitable.
There may be some exceptions, but the middlemen in peoples capitalism have generally declined to grab the voting power which the small stockholder cannot usefully exercise. The people who run what is known as the "Institutions" are custodians of great gobs of other people money in a mutual fund, pension or insurance trusts, and hence hold enormous voting power in the election of corporate directors, officers, and auditors. For some reason institutional investors seldom vote against the management, generally preferring to sell the stock if they are dissatisfied with the way things are going in a portfolio company. Consequently, the entrenched management of major publicly held corporation can do just about as it pleases even following policy disasters. To say this is a flaw in our system is a massive understatement. Things which run by the law of gravity generally tend to go in only one direction. No one wants to see the Japanese pulverize our major corporate jewels, no one wants to see them repeatedly greenmail. Nobody loves a corporate raider.
And still, it is clear the little stockholder cannot and never will aspire to meaningful voting power in a corporation which has millions of shares and thousands of stockholders. (Footnote; When I get those expensively packages proxy cards for my pitiful holdings, I always vote along with management. My theory is it's a good thing to change watch dogs frequently, and my Quixotic vote might hurt somebody's feelings enough to notice the message it sends). The system of governance of very large corporations needs to be reformed by its insiders before consumer activists using one approach, or elected public officials using another, manage to fill the power vacuum to our national disadvantage. They might, for example, reexamine the New York Stock Exchange rule, prohibiting the listing of companies with more than one class of stock. Someone should be asked to evaluate the experience of companies like Ford which evaded the rule, or of those companies which escaped to other exchanges to avoid it.
The directions such reform might take are not the concern of this book; the present focus is on the difficulties which are created for pre-funded health insurance by the fact that corporate voting power materializes whenever major purchases of common stock are made for purely investment purposes. Unpredictable things happen no matter how the stock is voted. If the voting power in the hands of custodians is never exercised, corporate control automatically concentrates in the hands of those whose ownership is relatively minor, whether insiders or outsiders.
One does not have to be a rabid conservative to recognize that government ownership of voting control of a corporation is a form of is w form of nationalization. The Labor party in England nationalized the steel and airline industries, the Socialists in France and India nationalized the banks, Communist doctrines go to the extreme of requiring government ownership of the total "means of production". If we are imaging success in the effort to pre-fund a trillion dollars of health insurance, we have to contemplate the highly undesirable features of potential government control of the voting stock of IBM, American Telephone and Telegraph, Exxon, and Morgan Guaranty Bank. The aggregate worth of all he stock on the New York Exchange is xx xxx. A trillion dollar worth of all the stock implies voting control of quite a bit of corporate America, no matter how sincerely its managers try to avoid it. a resolutely passive investment stance would just make it cheaper for the Japanese to buy control or for that matter the Russians, if they wanted to do it.
This scary line of thought potentially leads to the conclusion that pre-funded health insurance should avoid the purchase of common stock. But that seems bizarre; the historical difference between a 3% return (bonds) and 8% return (stocks) means this voting control issue could condemn health insurance pre-funding to a pitiful fraction of its potential for reducing the costs of an essential social service. It seems imperative to seek ways to improve the long-term return, even if government-controlled pools have to be rejected. True, massive increases in the proportion of non-voting stock confer unwarranted power to the management of the corporations and their potential greenmailers, no matter who runs the passive investment pool. Go one long jump beyond that; they just cannot be permitted.
As a matter of fact, it is impossible to conceive of a permissible investment vehicle for a government-controlled fund, except government bonds. Unfortunately, when you look at what has happened to the Social Security trust funds which are totally invested in government bonds, you find an appalling thing. Buying government bonds isn't too satisfactory, either.
When sums approaching a trillion dollars are involved, even the finances of the United States Government must reckon with the law of supply and demand. If a lot of people want to buy government bonds, they push the price up as long as the supply is limited. Since government bonds are issued to pay for federal debt, increasing the supply of those bonds means increasing the national debt, so we ordinarily don't want to do that either. That is, we don't want the Treasury to issue more bonds just to provide a safe investment vehicle for funded health insurance. On the other hand, by restricting permissible investment to government bonds in huge amounts we cripple the cost reduction of health insurance, since the inevitable result of clamoring to buy bonds will be lower interest rates. Quite aside from the fact that a captive customer gets shabby treatment, it may not be in the national interest to lower interest rates. Since Government bonds are regarded as the safest possible investment, their rate is the floor under all interest rates in the country or even the world. So, lower interest rates are inflationary, even at times when it may be contrary to national policy to stimulate inflation.
What this focus on government bonds has stumbled onto is the mechanism by which modern government attempt to fine-tune the national economy, a process mostly devised by the British economist Maynard Keynes. Based on the premise that no one controls enough money to affect the market price of government bonds, the government sets the price by buying and selling to itself. This particular conflict of interest operates between the Treasury which issues the bonds, and the Federal reserves which buy them. To a certain extent, the Arabs and the Japanese have been rich enough to influence the price of US Bonds, but the largest "external" bond buyer has been the Social Security trust funds. The quasi-external quality of the trust funds is often minimized or exaggerated as it suits some momentary purpose. If more money flows into the funds from tax payments than flows out for pension checks, the trust funds are described as assisting the national deficit. However, if the future indebtedness of the funds is increased more than current revenues are, this debt is regarded as the trust funds' problem and not a matter of national accounts. All this is a cross-generational difference in point of view. My generation can only see it as one big sticky ball of wax. The Federal Reserve's regards it as a major obstacle to their effective use of Keynesian principles. One has to conclude that it would be very unfortunate to add a great big lump of health insurance funding to a government bond problem which will be convulsive enough without it.
In summary, what can we conclude about investing the proceeds of funded health insurance, if we could ever get around to funding it? We see that the creation of a new source of investment capital would be an enormous asset for the national economy, but reckless dumping of huge amounts of cash in any market at all could be disruptive. The purchase of common stock would be considerably more cost-effective than buying bonds, and in the long run, might even be safer. However, equity markets need to consider how to cope with the continuous concentration of voting control of major corporations by default, as a majority of votes would become further locked into passive custodial accounts by funded health insurance. And finally, control of funded health insurance by government agencies poses the same problem of stock voting power which is left to Wall Street to solve, the next chapter tries to consolidate these issues into a general prescription. Remember, Index fund investing is momentum investing. If everyone does it at once, it will pop the bubble.
109 Volumes
Philadephia: America's Capital, 1774-1800 The Continental Congress met in Philadelphia from 1774 to 1788. Next, the new republic had its capital here from 1790 to 1800. Thoroughly Quaker Philadelphia was in the center of the founding twenty-five years when, and where, the enduring political institutions of America emerged.
Philadelphia: Decline and Fall (1900-2060) The world's richest industrial city in 1900, was defeated and dejected by 1950. Why? Digby Baltzell blamed it on the Quakers. Others blame the Erie Canal, and Andrew Jackson, or maybe Martin van Buren. Some say the city-county consolidation of 1858. Others blame the unions. We rather favor the decline of family business and the rise of the modern corporation in its place.