There's quite a lot to passive investing if you mean running an Index fund. The rewards of this hired complexity can nevertheless be lost by carelessness in choosing an expensive middle-man. Or even by having a reliable agent who works for an organization, remorselessly devoted to its own income maximization -- in the middle. Or having a small reliable agency bought out by a corporate raider with entirely different goals from the ones you thought you selected. But if your long-term common stock index results approach 10% total return, at least you have passed the first test. As my mother repeatedly told her granddaughters: Don't marry the first man who asks you.
Asset Allocation Managing the funds of a Health Savings Account has important similarity to managing a pension or endowment fund. An important distinction: healthcare imposes random cash requirements on an HSA, compared with the steady, predictable cash requirements of an endowment fund. After the Health Savings Account has matured to a steady state, its fund balance becomes predictable, just as cash balances in a big bank eventually do. Nevertheless, the HSA is probably destined to require larger cash reserves while maturing, and the second period of the volatility after age fifty, when more serious illnesses get more frequent. On top of that, when a securities crash comes along, it may take as long as two years for the market average to stop falling, and as long as three years to recover. That's by contrast with normal ripples in the markets, where 90% of important gains or losses are made in 10% of time periods. The rest of the time the market dawdles.
If most "dips" are followed by recoveries, why not just wait it out? Here, almost all organizations have the same problem of "meeting the payroll". The uproar of being late with a payroll must be experienced to be believed. While most employees will quietly accept a short, reasonable delay, the few who are stretched by a brief interruption for any reason, can be very vocal. The financial management of any fund faces the same issue and is very reluctant to repeat it. All of them face the possibility of some sudden decline in the value of the portfolio when at first it would be general opinion it is wiser to avoid selling from the portfolio and wait for a quick recovery. Reserve portfolios are set aside for sudden cash requirements, of course, but human nature induces most people to wait and hope for better times. In more tangible terms, it is generally the business of the investment manager to cope with a lot of small waves, but only the Board of Directors can decide to liquidate the whole reserve. In for-profit situations, there is also a question of paying taxes.
Conventional advice is to maintain a portfolio of 60% stocks, 40% bonds, with the cash flow from the bonds intended to bridge the gaps. Since bonds pay less than stocks, the overall portfolio yield is lowered. If interest rates are unusually low, it may be the bond component which is itself the risk, but at least in theory, mixed assets "balance the risk." As a consequence, an 8% steady yield from an endowment or pension fund is the best performance many professionals expect, with most funds even happy to achieve 7.5%. But happiness is relative. We have just demonstrated the first step in how a 10% total return can turn into 4%. You're already down to 7.5%.
It may seem strange we shifted obstetrical costs in our proposal from cost-to-mother, to cost-to-child, but here's why it was done. In the first place, it smooths out the huge cost of large families, into an identical cost per child. Persons who prefer small families may think this favors religious preferences, but its real motive was to create insurance neutrality for people in choosing the family size. If the consequence turns out to be families like my grandmother's with thirteen children (or Ben Franklin's with eleven), the formula could, and probably would, be adjusted. At the same time, it should be pointed out this shift allows insurance to overcome the present nearly insurmountable tendency of women to delay their first child until it becomes both a medical (Down's Syndrome for example) and social (male-female employment inequality) problem. There may be other ways to accomplish this goal, but I can't think of any.
The proposal, remember, is to begin employment insurance at age 25, and to make zero to age 24 health coverage into a gift from a designated grandparent's escrow account, paid out of the grandparent's surplus accumulated during a lifetime of his last-year-of-life re-insurance. The necessary assumption is that the Affordable Care Act can do as it pleases with insurance for a worker, just so long as it neither adds nor subtracts from the child's escrow fund, but lets the balance continue to grow its compounding investment income. This is the price asked from both the Affordable Care Act and employer-based insurance, in return for eliminating the expensive part of obstetrical costs from their cost obligations.
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This clarification returns us to the medical cost curve derived from multiplying the average yearly weight provided by Dale H. Yamamoto by the lifetime dollar cost provided by insurance carriers. I must thank both these sources for their data, and my son, George IV, for performing the conversion. The resulting U-shaped curve is missing obstetrical cost from the first year of life, but largely contains it buried in the upward bulge in female costs from age 20-40. (To be fair, it also contains it in the low cost of male health insurance during the same period, if you believe family plans assume an equally-divided present responsibility between the two parents. That's the assumption we make when we draw a hypothetical line between the two during that interval. It makes no claim on precision, but for plan-design purposes, it is close enough. One must remember the way these calculations are made, results in omitting the insurance company overhead and profit. It also makes the cash payments for deductibles and copayments into an approximation. The resulting curve is in the planning ballpark, but must not be quoted as precise.
In the second graph, we dotted-in the two consequences, one of which shows the average woman probably could not afford to finance her retirement from HSA surplus, while the other shows it would become more comfortable by transferring away some obstetrical cost and compounding it. By itself, that fact is convincing this approach is a necessary one, but it may require legislative approval. For the time being, it remains the government's choice. For that combination of reasons, we offer first and last year of life re-insurance as a planning suggestion for discussion, rather than a proposal for immediate action.
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And in the third graph, we have presented a schematic of what we just said. It isn't very complicated in the schematic, but it may well be a little confusing to hear it described. Just in case it still isn't clear, the grandparent account pays all childbirth costs or about $18,000 for both childbirth and the first 25 years of the child. The mother is relieved of the childbirth part of her obstetrical costs as a gift from her parent, and this gift is paid for by compound interest. Things have mostly handled this way to keep them within the donor's account, thereby avoiding disputes about ownership. The grandparent is regarded as having earned this money and therefore controls how it is to be spent. He/she spends it this way in order to receive the last-year-of-life and retirement benefits as a consideration.
In 1965, the originators of Medicare made two mistakes, both of which seemed perfectly understandable at the time. To get the program rolling, they enrolled my parents' generation to enjoy the benefits without charge, if they were already over age 65 (my mother lived to be 103). And for the same reason, they used current revenues to pay for such older people, who had never contributed to their own costs. The system was called "pay as you go" to justify taking current revenues to pay for benefits unsupported by previous contributions. Money flowed out as fast as it was received, but Medicare never made a serious effort to catch up.
Consequently, there was no interest paid for the use of the money, but the program did get started, years before it would otherwise seem feasible. The program is now over fifty years old however, and it still isn't gathering interest on cash which doesn't get spent for decades. Furthermore, the health of the population invisibly improved so rapidly that decades were added to the lifespan of Americans, and the interest income being lost steadily increased, as well. Since everyone likes to live thirty years longer, pay as you go was considered a reasonable price to pay for it.
However, the possibility has apparently been overlooked that a transition to pre-paid insurance might only be mildly painful. And even if the transition proved to be very painful, eventually the cost savings of Medicare passed on to the subscriber, might be reduced by millions and millions. It is now time to examine whether biting this bullet could really be relatively painless any longer and whether it would save much money. The answer appears to be Yes to both questions. To begin, the arithmetic will be skipped, and the reasoning explained. Following that, the arithmetic is concentrated for those who wish to reassure themselves; it may be skipped by those who don't. If you get the reasoning straight, the math is easily checked by compound interest calculators on the Internet. If you do that, you may find the Internet calculators sometimes create some errors themselves, however, so check your fact-checking.
Medicare is partially prepaid by withholding roughly 3% of a subscriber's wages in advance, as can be seen on any pay stub. From age 25 to age 65, the money aggregates to equal about a quarter of Medicare's actual cost. Another quarter is repaid by premiums, from people actually receiving Medicare. Although the data is overwhelmingly voluminous, it can be found among the Internet reports of CMS, the Center for Medicare and Medicaid. Since patient payment revenues thus aggregate to only half of the total Medicare expenditures, the residual half is paid out of the general fund of taxes, and later borrowed to restore the fund. (Partisans might say it is laundered through the general fund before it is borrowed.) About 13% of our bonds are held by oriental foreigners, and most of the rest is loaned to American citizens. This is how Mrs. Sibelius explained things in her report on the Internet when she was in charge of it. The accumulating debt is now becoming serious, even accounting for the slang phrases used in Congress, suggesting this debt can never be repaid. Stick it to the Chinese, except 87% of it is ultimately owed to U.S. citizens. And U.S. citizens would take most of the haircut, as another saying goes if the debt were dishonored.
Now, focus on an important feature of the average Medicare cost. As a total departmental cost, it includes every person who becomes eligible for Medicare by attaining age 65. It is not exactly what the average person pays, rather, it includes the whole program including those who pay nothing. Therefore, privatizing Medicare with the same funds would not deprive the indigent of anything at all; present funding already includes them. That's one of the main attractivenesses of "single payer", defined as Medicare for everyone at any age-- it's essentially all-inclusive. Unfortunately, its deficit is all-inclusive, too. For present analysis it's a rhetorical advantage to say, any new system using the old money would be all-inclusive as well. Except for half of the increased cost causes a correspondingly increased deficit. At present, the annual deficit is about $200 billion.
It's also important to acknowledge that extended retirement benefits are an innate obligation of Medicare, and right now retirement costs aren't provided at all, except for the (older) Social Security program. Good care leads to a longer life, and we should be grateful. But longer life is expensive, and most people will find they have not saved nearly enough to make it comfortable. For this, there should be more sympathetic. Nothing like this had ever happened before, so some skeptical people cannot be entirely blamed for wanting to see some hardship before they believe the government cannot borrow its way out of it. The financial crunch of some sort is surely coming in the near future because we are recovering from a recession, a political party deadlock, and the threat of both domestic uproar and international discord, both at once. But the health care arithmetic remains pretty clear, as we will see in the next section.
At present, about half the cost of Medicare is recovered by the U.S. Treasury. Without paying any interest, the revenue immediately gets spent, and an equal amount is borrowed -- that's what we just said. So to speak, we only propose to change the mailing address of the checks, that's what we also said. Just deposit that same money (in the same amount) into your Health Savings Account, get a tax deduction for doing so, and earn compound interest on the combined amount. With a tax deduction adding 18% in value and transferring the money at age 65, it will in fact be more money than you appear to need, and it would certainly be less debt.
For the first time, it provides some retirement money "to compensate" for the extra longevity Medicare has provided. If you earn enough investment income (say, 7%), it will be enough to pay for the whole program, including indigents and disabled, so long as they are over 65 or entitled to a special Medicare disabled program, as 9 million already are. Remember, that promise includes a retirement fund. If you don't earn enough investment income, it won't cover it all but it will surely cover more than it would have, without any compound interest and tax shelter. And the investment return would probably be increased at the expense of the financial community, who will resist. Fee-only advice, rather than commissions, would add about one percent to investor returns, according to the Wall Street Journal, although lobbyists for Wall Street vigorously deny it. The proposal here is to insist both systems operate side-by-side until the difference is clear.
Although the arithmetic seems to be pretty evident, we do advise creating a contingency fund in addition, just to be safe. The contingency fund would have to be at least a hundred dollars at birth and might be as much as two hundred-fifty. That's the only extra expense for a lifetime of healthcare and retirement which actuaries estimate to cost an average of $350,000 per average lifetime, plus an equal amount for retirement, to say nothing about the hidden elimination of the government's deficit for Medicare. That's a pretty good bargain, so we suggest consideration of paying some of the resulting surpluses to a children's fund, rather than just letting it appear in estates. You can tell yourself you've helped little children while protecting yourself against contingencies. The Medicare crisis goes away, the Retirement crisis is abated, the national debt stops expanding, and a start is made on the childhood problem -- all with money you're already spending, plus a hundred or so dollars, just for safety and dignity. Read on, just in case you are good at math, and you don't believe in miracles.
By the way, it has been implied this release of money is due to inflation, and it is true the inflation assumption (for income and general expenses alike) remains about 3%. But the real success secret beyond any person's control is inherent in the mathematics of compound interest. When an investment goes much beyond thirty years in duration, the effective interest rate rises spectacularly; you can thank Medicare for that, if you wish, or perhaps Aristotle. Inflation raises your retirement cost, that is true. But it also raises your income, so at present, it's a short-term wash except for scientific advances, which are surely a long-term net improvement.
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Blog 3632(replaced);Blog 3676 (added to end); Index
Page 2, Line 18 So, its flaws just had to
page 3. line 18 not publish but "write"
page 4, line 13 has been plunging ahead
page 4 line 38 transition to it pushes
page 5 line 4 will depend upon circumstances.
page 5, line 12 that's only part
Page 6, line 1 Privatizing Medicare?
page 11 line 3 delete the whole duplicated line
page 12 linw 28 Now (add comma) focus (Now, focus)
page 13 line 4 delete "a year"
page 13 line 11 delete "than there seems to be"
page 14 line 31 a long-term net improvement
page 26 line 2 delete "act"
page 40 line 34 delete "to"
page 41 line 2 females to much the same
page 42 line 7 defining some point or other
page 42 line 15 this book as an arguable
page 42 line 30 employer's
page 42 line 40 employee), but it made a married
page 43 line 5 but the suspected unfairness
page 43 line 25 compounding, as more surplus gets generated,
page 44 line 3 but requires legislative
page 44 line 35 birth,and the premiums
page 44 line 36 of death or 104,the length of perpetuity.
page 45 line 4 unprepared public is potentially to provoke
page 46 line 8 subsequently to do so.
page 46 line 37 it is indeed advocated
page 46 line 6 need a fair opportunity
page 47 line 5 taxes, from age 25
page 47 line 4 before by Medicare
page 47 line 20 some people who recognize that a
page 48 line 15 Medicare premiums, as a
page 48 line 18 involved suggests there
page 51 line 40 perhaps even a little
page 55 line 4 has been that the members
page 56 line 20 have to expect mid-course
page 56 line 30 but they would be sufficient to
page 57 linne 30 At least, we don't have to
page 58 line 30 deposit extra tax-exempt
page 60 line 30 achieved, once Medicare
page 61 line 35 the same healthcare deduction>
PAGE 63 LINE 15 retirement fund when someone
page 63 line 37 Medicare, not sequential
page 73 line 15 published corporate tax rate
page 74 line 10 "addressed"
Current problems of financing health care, paying for indigent care, and the corollary issue of rising costs are fairly recent developments. Major changes in the health care system passage of the Medicare and Medicaid legislation, emergence of comprehensive health insurance, and tax-exempt financing of hospitals have had a profound impact in creating the situation facing this country today. The relationship of these events to the current crisis in the system and what business can do to change the situation are discussed below.
Indigent Care Before 1965
The old system of running hospitals evolved over two centuries and was based on a realistic recognition that most individuals were not generous with regard to charity. Operating a general hospital on voluntary contributions was not feasible and using and using public taxes to pay for indigent care was not popular with the electorate. But somehow the system worked by overcharging private, invoking the Robin Hood principle, and thus finding the means, however questionable, to finance this care. Further, the medical training system helped out by providing unpaid interns, residents, and nurses who delivered free care to those unable to pay.
One underlying principle made the system work. It was essential to keep down indigent medical costs or be bankrupted by these costs, but at the same time, there was the corresponding issue of providing equal indigent and private care. A significant disparity between these types of care would have made a mockery of this generosity.
Passage of Medicare/Medicaid
In 1965 the system changed and the federal government undertook to pay for indigent care. But more important, it undertook to pay for it at the prevailing middle-class standards of convenience and amenity.
While it is true that care has been extended to some previously underserved populations under these public health assistance programs, it is also a fact that since 1965 hospital rates have gone up 77 percent, which is an inflation of unit prices. Experience over the past 17 years, and particularly during more recent times of high inflation, has prompted reductions in Medicare/Medicaid benefits. As a nation, there seems to some rethinking on the financing of indigent care through taxes. Barring a return to the Robin Hood principle, society must decide exactly how it wishes to pay for such care in the future. Failure to act will lead to a regulatory response much worse than the existing system.
The use of hospital cost reimbursement has defeated efforts to hold down costs by utilization restraint. For example, under the PSRO program, if physicians succeeded in cutting blood counts in half, the result would be a doubling in price for each blood count.
Hospital utilization has, nevertheless, been decreasing since the mid-- 1970s. As utilization has gone down, in Philadelphia for example, total hospital costs to the community have escalated at double the general rate of inflation.
The number of hospital employees and their salaries have increased during the past 17 years. Improved technology and the need for more highly skilled and specialized personnel are partly to blame, but the existence of comprehensive insurance coverage to pay the bill has been an overriding factor in promoting carefree internal hospital expenditures.
Cost Shifting and Cross Subsidies
Through Blue Cross discounts, the federal government's less-than-equishare for Medicare/Medicaid payments, and arrangements of commercial insurance carriers, cost shifting and cross-subsidies have become characteristic of the way the hospital covers its costs, and more broadly, the way the entire insurance system has created the current crisis in health care financing. This situation conceals what services/procedures actually cost the hospital, what they but the individual, and what they cost the purchaser of the services.
By shifting the overhead costs, for example, patients who stay a long time usually subsidize patients who stay a short time, and patients who need laboratory work subsidize patients who don't. By using two different and unequal pricing systems, patients with commercial health insurance are made to subsidize patients Blue Cross and Medicare, and patients without any health insurance subsidize those who are insured.
Young people subsidize older people through paying the same premium but using less service. Ambulatory patients subsidize inpatients, and ambulatory care is thereby discouraged, with the result that care is provided in the more expensive setting. Through "community rating" of insurance premiums, patients in non-teaching hospitals subsidize those in teaching hospitals. By only permitting selective premium adjustments, some insurance commissioners have to it that subscribers in small groups subsidize individuals, non-group subscribers.
The income tax code extends a$27 billion exemption of health insurance fringe benefits to salaried employees that are not enjoyed by, and hence subsidized by self-employed and unemployed persons. Through coordination of benefits, the 30 million working couples in America receive only half the fringe benefits they think they are getting, so they are effectively subsidizing single-earner families.
This process extends even to the corporate stockholder level. For instance, stockholders of corporations are deprived of dividends to the extent that the company is overpaying for employee health insurance, and the customers of the company are also paying somewhat higher prices because of it. AS this affects international competitiveness, one could say that the big winners are the Japanese.
Capital Financing of Hospitals
Although this is a time of recession, many communities are constructing new wings to existing hospitals, building additional specialty units, and renovating buildings constructed only five to ten years ago.
BUilding costs are astronomical. A new 200-bed hospital will cost $70 million without cost overruns, but after 30 years of a 15 percent tax-exempt bond, the community will have paid $240 million for the structure. That is well over a million dollars per bed, most of which will be paid to banks, insurance companies, and other institutional investors. Over the 30 years, it can be conservatively estimated that the 200 beds will generate $2 billion in costs, half of which will be paid out in employee salaries. It is conservatively estimated that $200 million will be spent on administrative costs.
Hospital governance can be partially faulted for this situation. Trustees of the largest nonprofit hospital system have lost their concern with costs because society has become insulated from cost consequences by being overinsured, thereby falling victim to what is known as the "moral hazard of insurance." Since everyone is desperate to keep the government from exerting dominance over hospitals, which its financial contribution would normally entitle it to, administrators and providers have clung to the honorary trustee form of governance, for lack of a substitute. The consequence is that hospitals threaten to become employee benevolent societies, displaying a marked distaste for supervision.
Recommendations for Business
The foregoing situation increasing costs for Medicare/Medicaid, cost shifting and cross-subsidies, the moral hazard of insurance, and tax-exempt financing of hospitals present some challenges as well as opportunities for the private sector.
Although there are a number of options for business, overestimating its commitment is also a danger. In the nation's experiment with health planning, the community elected board of laymen to oversee the affairs of the local health systems agency. The laymen often quickly lost interest, and the most pressing problem often became the inability to achieve a quorum to conduct business. The original idea was that leaders in the business community would make the decisions. But in fact, the decisions were made by staff committed to perpetuating the organization, rather than advancing its mission.
Business is further cautioned against becoming involved in the minute details of the operation of hospitals and how physicians practice medicine. The medical literature includes 200,00 new articles a year: a challenge for the physician, an absurdity for the layman. Avoid being misled by so-called innovations and new trends in health service delivery. HMOs, for instance, appear to drastically reduce costs, but a more careful analysis will reveal problems of adverse risk selection.
Steps that business can take to change the system are:
* Search for ways to restore the market mechanism.
* Devise new ways to govern hospitals. Try splitting the board into a two-corporation entity. One board would be responsible for teaching, research and charity, and the endowment portfolio; the second would be responsible for running the business.
* Consider requiring that hospitals pay local property taxes; such a move might quell criticism that since the government pays half the costs of running hospitals, it should control them.
* Urge state and local governments to reassume for charity care. Because the federal government can print money, it has spent more on this item. Local and state governments would be more cautious in this regard.
* Offer employees several choices of health insurance, including plans with high deductibles and copayments.
* consider supporting a change in the tax laws to permit a health hardship exemption from tax and penalty for early withdrawals from IRAs. Such an exemption could then be used for payments of health insurance premiums.
Encourage Blue Cross to adopt higher copayments and deductibles. The intent of this is to eventually eliminate the cost reimbursement system.
Support a limitation on the tax-exempt status of employee health benefits.
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.
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!
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.
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.
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.