To summarize what was just said, we noted the evidence that a single deposit of about $55 in a Health Savings Account in 1923 would have grown to more than $300,000, today in the year 2014 because the economy achieved 10% return, not 6.5%. Therefore, with a turn of language, if the Account had invested $100 in an index fund of large-cap American corporate stock at a conservative 6.5% interest rate, it might have narrowly reached $6000 at age 50, which is re-invested on the 65th birthday, would have been valued at $325,000 at the age of 93, the conjectured longevity 50 years from now. No matter how the data is re-arranged, lifetime subsidy costs of $100 can be managed for the needy, the ingenuity of our scientists, and the vicissitudes of world finance-- within that 4% margin. We expect that subsidies of $100 at birth would be politically acceptable, and the other numbers, while stretched and rounded, could be pushed closer to 10% return. Much depends on returns to 2114 equalling the returns from 1923 to 2014, as reported by Ibbotson. At least In the past, $55 could have pre-paid a whole lifetime of medical care, at the year 2000 prices, which include annual 3% inflation. An individual can gamble with such odds, a government cannot. So one of the beauties of this proposal is the hidden incentive it contains, to make participation voluntary, and remain that way. No matter what flaws are detected and deplored, this approach would save a huge chunk of health care costs, even if they might not be stretchable enough to cover all of it.
And if something does go wrong, where does that leave us? Well, the government would have to find a way to bail us out, because the health of the public is "too big to fail" if anything is. That's why a responsible monitoring agency is essential, with a bailout provision. Congress must retain the right to revert to a bailout position, which might include the prohibition to use it without a national referendum or a national congressional election.
This illustration is, again, mainly to show the reader the enormous power of compound interest, which most people under-appreciate, as well as the additional power added by extending life expectancy by thirty years this century, and the surprising boost of passive investment income to 10% by financial transaction technology. The weakest part of these projections comes in the $300,000 estimate of lifetime healthcare costs during the last 90 years. That's because the dollar has continuously inflated a 1913 penny into a 2014 dollar, and science has continuously improved medical care while eliminating many common diseases. If we must find blame, blame Science and the Federal Reserve. The two things which make any calculation possible at all, are the steadiness of inflation and the relentless progress of medical care. For that, give credit to -- Science and the Federal Reserve.
Blue Cross of Michigan and two federal agencies put their own data through a formula which creates a hypothetical average subscriber's cost for a lifetime at today's prices. All three agencies come out to a lifetime cost estimate of around $300,000. That's not what we actually spent because so much has changed, but at such a steady rate that justifies the assumption, it will continue for the next century. So, although the calculation comes closer to approximating the next century than what was seen in the last, it really provides no method to anticipate future changes in diseases or longevity, either. Inflation and investment returns are assumed to be level, and longevity is assumed to level off. So be warned.
The best use of this data is, measured by the same formula every year, arriving at some approximation of how "overall net medical payment inflation" emerges. That is not the same as "inflation of medical prices" since it includes the net of the cost of new and older treatments and the net effect of new treatments on longevity. Therefore, this calculation usefully measures how the medical industry copes with its cost, compared with national inflation, by substituting new treatments for old ones. Unlike most consumer items, Medicine copes with its costs by getting rid of them. Sometimes it reduces costs by substituting new treatments, net of eliminating old ones. It also assumes a dollar saved by curing disease is at least as good as a dollar saved by lowering prices, and sometimes a great deal better, which no one can measure. Our proposals therefore actually depend on steadily making mid-course corrections, so we must measure them.
Our innovative revenue source, the overall rate of return to stockholders of the nation's largest corporations, has also been amazingly steady at 10% for a century. National inflation has been just as non-volatile, and over long periods has averaged 3%., perhaps the two achievements are necessary for each other. Medical payments must grow less than a steady 10%, minus 3% inflation, before any profit could be applied to paying off debt, financing the lengthening retirement of retirees, or shared with patients including rent seekers. But if the profit margin proves significantly less than 10%, we might have to borrow until lenders call a halt. No one can safely say what the two margins (7% + 3%) will be in the coming century, but at least the risks are displayed in simple numbers. Parenthetically, the steadiness of industrial results (in contrast to the apparent unsteadiness of everything else) was achieved in spite of a gigantic shift from control by family partnerships to corporations. Small businesses (less than a billion dollars annual revenue) still constitute half of the American economy, however, and huge tectonic shifts are still possible. Globalization could change the whole environment, and the world still has too many atom bombs. American Medicine can escape international upheavals in only one way -- eliminate the disease. Otherwise, the fate of our medical care will largely reflect the fate of our economy. To repeat, it is vital to monitor where we are going.
Revenue growing at 10% will relentlessly grow faster than expenses at 3%. Our monetary system is constructed on the gradations of interest rates between the private sector and the public sector. It would be unwise to switch health care to the public sector and still expect returns at private sector levels. Repayment of overseas debt does not affect actual domestic health expenditures, although it indirectly affects the value of the dollar. Without all its recognized weaknesses, a fairly safe description of present data would be that enormous savings are possible, but only to the degree, we contain last century's medical cost inflation closer to 3% than to 10%. The simplest way to retain revenue at 10% growth is by anchoring the leaders within the private sector.
How Do You Withdraw Money From Lifetime Health Insurance?
Four ways should be mentioned: Debit cards for outpatient care, Diagnosis pre-payment for hospital care, Transfers from escrow, and Gifts for specified purposes.
Special Debit Cards, from the Health Savings Account, for Outpatient care.Bank debit cards are cheaper than Credit cards, because credit cards are a loan, while the money is already in the bank for a debit card. Some pressure has to be applied to banks or they won't accept debit cards with small balances. Somehow, the banks have to be made to see that you start with a small account and build up to a big one. So it's probably fair for them to insist on some proof that you will remain with them. The easiest way to handle this issue is to make the first deposit of $3300, the maximum you are allowed to deposit in one year. That's difficult for little children and poor people, however, so there must at least be some way to have family accounts for children. You just have to shop around, that's all.
After that, all you do is pay your medical outpatient bills with the debit card, but we advise paying out of some other account is you can, so that the amount builds up more quickly to a level where the bank teller quits bothering you. Remember this: the only difference between a Health Savings Account and an ordinary IRA for practical purposes, is that medical expenses are tax-exempt from an HSA. Both of them give you a deduction for deposits, and both collect income tax-free. If for some reason you do not expect a tax deduction, don't use the HSA, use something else like an IRA. Alternatively, if you can scrape together $6000, you are completely covered from deductibles, and co-payment plans are to be avoided, so then an HSA with Catastrophic Bronze plan is your best bet. If you have a bronze plan, you probably get some money back if you file a claim form, but those rules are still in flux at this writing. The expense of filing and collecting claims forms is one of the reasons the Bronze plan is more expensive, but that's their rule at present.
1. Spend it on medical care. Specially modified benefit packages are possible.
2. Spend less, but spend the savings on something else. The program should not be permitted to do this, but Congress should do it in the general budget.
3. Borrow it, and inflate it away on the books. But inflate the borrowings at some lower rate. The customary techniques of a banana republic.
4. Fail to collect the premiums/payroll deductions.
After 1., which is the essential purpose of the whole thing, the most attractive choice is 4. because a gradual transition is needed, with incentives offered only to those who choose to participate. However, borrowing may be necessary to transfer surplus revenue to age groups in deficiency.
Spending Health Savings Accounts. Spending Less. In earlier sections of this book, we have proposed everyone have an HSA, whether existing health insurance is continued or not. It's a way to have tax-exempt savings, and a particularly good vehicle for extending the Henry Kaiser tax exemption to everyone, if only Congress would permit spending for health insurance premiums out of the Accounts. To spend money out of an account we advise a cleaned-up DRG payment for hospital inpatients, and a simple plastic debit card for everything else. Credit cards cost twice as much like debit cards, and only banks can issue credit cards. Actual experience has shown that HSA cost 30% less than payment through conventional health insurance, primarily because they do not include "service benefits" and put the patient in a position to negotiate prices or be fleeced if he doesn't. Not everybody enjoys haggling over prices, but 30% is just too much to ignore.
No Medicare, no Medicare Premiums. We assume no one wants to pay medical expenses twice, and will, therefore, drop Medicare if investment income is captured in lifetime Health Savings Accounts. The major sources of revenue for Medicare at the present time fall into three categories: half are drawn from general tax revenues, a quarter come from a 6% payroll deduction among working-age people, and another quarter are premiums from retirees on Medicare. All three payments should disappear if Medicare does, too. Therefore, the benefit of dropping Medicare will differ in type and amount, related to the age of the individual. Eliminating the payroll deduction for a working-age person would still find him paying income taxes in part for the costs of the poor, as it would for retirees with sufficient income.
Retirees would pay no Medicare premiums. Their illnesses make up 85% of Medicare cost, but at present, they only contribute a quarter of Medicare revenue. However, after the transition period, they first contribute payroll taxes without receiving benefits, and then later in life pay premiums while they get benefits, to a total contribution of 50% toward their own costs. But the prosperous ones still contribute to the sick poor through their income taxes. There might be some quirks of unfairness in this approach, but its rough outline can be seen from the size of their aggregate contributions, in this scheme. At any one time during the transition, working-age and retirees would both benefit from about the same reduction of money, but the working-age people would eventually skip payments for twice as long. Invisibly, the government subsidy of 50% of Medicare costs would also disappear as beneficiaries dropped out, so the government gets its share of a windfall, in proportion to its former contributions to it. One would hope they would pay down the foreign debt with the windfall, but it is their choice. This whole system -- of one quarter, one quarter, and a half -- roughly approximates the present sources of Medicare funding and can be adjusted if inequity is discovered. For example, people over 85 probably cost more than they contribute. For the Medicare recipients as a group, however, it seems like an equitable exchange. This brings up the subject of intra- and extra-group borrowing.
Escrow and Non-escrow. When the books balance for a whole age group, the managers of a common fund shift things around without difficulty. However, the HSA concept is that each account is individually owned, so either a part of it is shifted to a common fund, or else frozen in the individual account (escrowed) until needed. It is unnecessary to go into detail about the various alternatives available, except to say that some funds must be escrowed for long-term use and other funds are available in the current year. Quite often it will be found that cash is flowing in for deposits, sufficient to take care of most of this need for shifting, but without experience in the funds flow it would be wise to have a contingency fund. For example, the over-85 group will need to keep most of its funds liquid for current expenses, while the group 65-75 might need to keep a larger amount frozen in their accounts for the use of the over-85s. In the early transition days, this sort of thing might be frequent.
The Poor. Since Obamacare, Medicaid and every other proposal for the poor involves subsidy, so does this one. But the investment account pays 10%, the cost of the subsidy is considerably reduced. HSA makes it cheaper to pay for the poor.
Why Should I Do It? Because it will save large amounts of money for both individuals and the government, without affecting or rationing health care at all. To the retiree, in particular, he gets the same care but stops paying premiums for it. In a sense, gradual adoption of this idea actually welcomes initial reluctance by many people hanging back, to see how the first-adopters make out. Medicare is well-run, and therefore most people do not realize how much it is subsidized; even so, everyone likes a dollar for fifty cents, so there will be some overt public resistance. When this confusion is overcome, there will still be the suspicion that government will somehow absorb most of the profit, so the government must be careful of its image, particularly at first. Medicare now serves two distinct functions: to pay the bills and to protect the consumer from overcharging by providers. Providers must also exercise prudent restraint. To address this question is not entirely hypothetical, in view of the merciless application of hospital cost-shifting between inpatients and outpatients, occasioned in turn by DRG underpayment by diagnosis, for inpatients. A citizens watchdog commission is also prudent. The owners of Health Savings Accounts might be given a certain amount of power to elect representatives and negotiate what seem to be excessive charges.
We answer this particular problem in somewhat more detail by proposing a complete substitution of the ICDA coding system by SNODO coding, within revised Diagnosis Related Groupings,(if that is understandable, so far) followed by linkage of the helpless inpatient's diagnosis code to the same or similar ones for market-exposed outpatients. (Whew!) All of which is to say that DRG has been a very effective rationing tool, but it cannot persist unless it becomes related to market prices. We have had entirely enough talk of ten-dollar aspirin tablets and $900 toilet seats; we need to be talking about how those prices are arrived at. In the long run, however, medical providers are highly influenced by peer pressure so, again, mechanisms to achieve price transparency are what to strive for. These ideas are expanded in other sections of the book. An underlying theme is those market mechanisms will work best if something like the Professional Standards Review Organization (PSRO) is revived by self-interest among providers. Self-governance by peers should be its theme, ultimately enforced by fear of a revival of recent government adventures into price control. Those who resist joining should be free to take their chances on prices. Under such circumstances, it would be best to have multiple competing PSROs, for those dissatisfied with one, to transfer allegiance to another. And an appeal system, to appeal against local feuds through recourse to distant judges.
Deliberate Overfunding. Many temporary problems could be imagined, immediately simplified by collecting more money than is needed. Allowing the managers some slack eliminates the need for special insurance for epidemics, special insurance for floods and natural disasters, and the like. Listing all the potential problems would scare the wits out of everybody, but many potential problems will never arise, except the need to dispose of the extra funds. For that reason, it is important to have a legitimate alternative use for excess funds as an inducement to permit them. That might be payments for custodial care or just plain living expenses for retirement. But it must not be a surprise, or it will be wasted. Since we are next about to discuss doing essentially the same thing for everybody under 65, too, any surplus from those other programs can be used to fund deficits in Medicare. But Medicare is the end of the line, so its surpluses at death have accumulated over a lifetime, not just during the retiree health program.
The calculations in Chapter Four are intended to simplify and clarify, they are not intended to make the reader throw his hands up in despair. Nor are they intended for the unusually math-adept reader, because the numbers are rounded off, and sometimes circumstances required the use of different years of data sources. They are merely examples, to illustrate in numerical form what must necessarily be uncertain predictions of the future. When we say that women have 10% more medical costs in a lifetime than men do, we stand by the statement that women cost a little more than men, but do not expect anyone to accept that it will be precisely a 10% difference for the next sixty years. Most of the calculations involving compound income projections resulted from the use of a compound interest calculating computer program, kindly written by my oldest son, George Ross Fisher IV, who got a degree in that sort of thing from MIT. Any mistakes in using it are my own. (Those who wish to check out the matters, can use the same program on a home computer by entering WWW.Philadelphia-Reflections.com/blog/xxx.htm. Most of the underlying data come from CMS at xxxx)
Accumulating the Necessary Money for Lifetime Healthcare
Medicare.Because it's easier to explain, let's begin at the far end of the process, the day after the death of a hypothetical average person, and look backward. This proposal didn't start out as a Medicare proposal, but the accumulation of unpaid Medicare debt has become so alarming that substituting Health Savings Accounts for Medicare could fast become one relatively painless national priority that seems to have no other solution, whether painless or not. In addition, most factual community health data comes from Medicare, so the reader quickly gets acquainted with the concepts by starting there. And so, while the Medicare situation is fraught with political obstacles, we might have to risk it. While the debt overhang from earlier years is so threatening that Health Savings Accounts cannot be confidently promised to rescue Medicare by itself, perhaps the Savings Account idea could at least put a stop to going deeper into debt. Even a stopgap would have to get started pretty soon, but there is still a chance it could appreciably reduce the indebtedness after the recession is over.
At present, Catastrophic coverage is required for the HSA to receive income tax exemption, but the linked Catastrophic insurance is itself not tax-exempt. The lack of a tax exemption for Catastrophic coverage adds about 30% to the cost of an HSA. The tax exemption itself is less than that but is magnified by investing the savings. To extend HSA into the over-65 age group, therefore, requires beginning the HSA before age 65, and after that age requires lifetime Catastrophic insurance for an actuarial average duration of 18 years, using after-tax premiums. Obviously, making the Catastrophic policy tax-exempt would considerably reduce the cost of switching Medicare recipients to Health Savings Accounts, and so we heartily recommend it. The loss of revenue to the Treasury would be overwhelmingly exceeded by the value of eliminating the foreign debt load.
Proposal: Congress should remove the prohibition of paying the premiums of Catastrophic coverage linked to Health Savings Accounts, and rescind the termination of Health Savings Account enrollments at age 65, as the Law reads today.
Until people on Medicare are permitted the option to switch to Health Savings Accounts, and possibly as long as Catastrophic health insurance is treated unfavorably for the tax exemption of Catastrophic Health Insurance, we conceptually split lifetime HSA into two parts. (Single-premium exchange for Medicare, in return for forgiveness of premiums and rebate of payroll taxes, is linked, but treated separately). In the meantime, it is important to remember not to count the $80,000 single-premium twice as a cost. Most subscribers would want to pre-pay the discounted Medicare single premium (of $80,000) by making a small addition to their HSA at an earlier age and holding it in escrow gathering tax-exempt income until needed. If pre-payment begins at an early age, Medicare escrow cash costs could be quite modest (as little as $205 a year, starting at age 25 @10% per year). Even when we show all the costs, excluding double payments but adding 18 years of Catastrophic insurance premiums, using an HSA at conservative rates like 4% would reduce effective Medicare cost by 75%. Greater returns would, of course, make it far cheaper than that. To pay down the existing debt back to 1965, would require access to data on how much the remaining debt really amounts to. At present, it is at least growing rapidly by addition of 50% of annual Medicare costs; and an unknown amount by compounding from earlier years, minus whatever might have expired or been paid off. Realistically, the amount of debt service is probably going to depend on our national ability to pay it down, regardless of its written terms. The same is indeed likely to be true of subsidies for the poor. Ultimately, both of these payment decisions are political, limited by the ability to pay. Because of the long time periods, the present surprisingly modest interest rates could convert this impending disaster into at least a sustainable cost. The outcome of these intersections is that the terms and benefits largely become a matter of political choices.
Replacing Medicare With Something Better. When Health Savings Accounts were first devised, it never seemed likely that Medicare might be supplanted. However, Medicare has grown both highly popular and severely under-funded. The rules should be modified to permit someone who has health insurance through an employer to develop a Health Savings Account which the funds but does not use while he is of working age. The funds would then build up, enabling him to buy out of Medicare on his 65th birthday or thereabout, with a single-premium exchange with Medicare, at present prices exchanging about $100,000 funded by the forgiveness of Medicare premiums and some portion of payroll deductions from the past, which he has already paid. The subscriber would also have to purchase Catastrophic coverage, which we would hope Congress would accord the same tax advantage as is given to employed people. If this approach proved popular, it might supply extra funds for loaning to HSA subscribers in the outlier category. While there is no thought of phasing out Medicare against the subscribers' will, Congress would certainly be relieved to have subscribers drop out of a program which must now be 50% subsidized.
Proposal: The present closing age for HSA enrollments at the onset of Medicare should be extended a few years older. And single-premium buy-outs of Medicare coverage, including the possible return of payroll deductions where indicated, should be permitted as an option.
Single-premium Medicare. Congress can certainly change that, especially during the transition period, at least anyone under age 65 could start an account tomorrow and fund it up to date. Hypothetically, if anyone could live to his 65th birthday without spending any of the accounts, a prudent investor would have accumulated $132,000 in pure deposits on his 65th birthday. He only needs $80,000 to fund Medicare as a single-payment at age 65, however, so he can afford to get sick a little. If he starts depositing into the account later than age 25, he has already paid for Medicare somewhat, with payroll taxes. That could be considered partial payment toward reduction of the Medicare debt. Please hold your questions, until we finish outlining the plan.
When Health Savings Accounts were first devised, it never seemed likely that Medicare might be supplanted. However, Medicare has grown both highly popular and severely under-funded. The rules should be modified to permit someone who has health insurance through an employer to develop a Health Savings Account which the funds but does not use while he is of working age. The funds would then build up, enabling him to buy out of Medicare on his 65th birthday or thereabout, with a single-premium exchange with Medicare, at present prices exchanging about $100,000 funded by the forgiveness of Medicare premiums and some portion of payroll deductions from the past. He would have to purchase Catastrophic coverage. If this approach proved popular, it might supply extra funds for loaning to HSA subscribers in the outlier category. While there is no thought of phasing out Medicare against the subscribers' will, Congress would certainly be relieved to have subscribers drop out of a program which must be 50% subsidized.
Proposal: The present closing age for HSA enrollments at the onset of Medicare should be extended a few years older. And single-premium buy-outs of Medicare coverage, including the possible return of payroll deductions where indicated, should be permitted as an option.
can certainly change that, especially during the transition period, at least anyone under age 65 could start an account tomorrow and fund it up to date. Hypothetically, if anyone could live to his 65th birthday without spending any of the accounts, a prudent investor would have accumulated $132,000 in pure deposits on his 65th birthday. He only needs $80,000 to fund Medicare as a single-payment at age 65, however, so he can afford to get sick a little. If he starts later than age 25, he has already paid for Medicare somewhat, with payroll taxes. That could be considered payment toward reduction of the Medicare debt. Please hold your questions, until we finish outlining the plan.
If someone makes a single deposit of $80,000 on his/her 65th birthday, there will accumulate $190,000 in the account over 18 years, the present life expectancy if he spends nothing for health and invests at 5%; and $190,000 is what the average person costs Medicare in a lifetime. Since the average person spends $190,000 during 18 years on Medicare, enough money will accumulate in Medicare to pay its expenses, and after some shifting-around, this should make Medicare solvent, in the sense that at least the debt isn't getting bigger because of him. Furthermore, index funds should be returning 10-12% over the long haul, so there should be some firm discussions with the intermediaries about some degree of dis-intermediation. Please don't do the arithmetic and discover that only $40,000 is needed. That seems plausible, but that's wrong because the costs remain the same , and previously the government has been borrowing half the money from foreigners. In effect, the subscribers have been paying the government in fifty-cent dollars. There has been an exchange of one form of revenue for another, so the required revenue actually does demand $80,000 for a single deposit stripped of payroll deductions and perhaps premiums. An end would put to further borrowing, but the previous debt remains to be paid. I have no way of knowing how much that amounts to, but it is lots. All government bonds are general obligations, mixed together, and access to Medicare reports back to 1965 is not easily available. What we can more confidently predict is the limit that young working people can afford to put aside for the sole purpose of paying off the Medicare debts of an earlier generation. If there are other proposals for paying off this foreign debt, they have not been widely voiced. And the debt is still rapidly growing.
They would have to set aside an average of $850 per year (from age 25 to 64) to achieve $247,000 on the 65th birthday, assuming a 5% compound investment income and relatively little sickness. This might seem like an adequate average, but occasional individuals with chronic illnesses would easily exceed it in health expenditures. It is not easy to estimate the size and frequency of such occurrence in the future, so someone must be designated to watch this balance and institute mid-course adjustments. As an example, simple heart transplants costing $200,000 are already being discussed. To some unknown extent, the cap on out-of-pocket expenses would have to be adjusted to pass these cost over-runs indirectly through the Catastrophic insurance. Insurance does greatly facilitate sharing of outlier expenses, but usually requires a time lag whenever new ones appear.
It does not require much political experience to know that taxpayers greatly resent paying debts that benefitted earlier generations. They complain, but complaining does not pay off the debts of the past. To double required deposits in order to pay off past debts, as well as using forgiveness of payroll deductions and premiums, would require an additional $120,000 per year escrow, for each year's debt accumulation. At present, roughly $ 5300 per beneficiary, per year, is being borrowed, and there are roughly twice as many current beneficiaries as people in the tax-paying group, but only 18 years, as compared with 40 years as a prospective beneficiary. So that comes to liquidating roughly $1300 a year of debt to balance the two populations or $2600 a year to gain a year. That's for whatever the debt happens to be, which surely someone can calculate. To accomplish it, one would have to project an average of % income return. That's definitely the outer limit of what is possible, and it probably over-reaches a little. Therefore, to be safe, one would have to assume some other sources of income, a change in the demographic patterns, or an adjustment with the creditor. Assuming inflation will increase expenses equally with inflation seems possible. And it also seems about as likely that medical expenses will go down, as that they go up. You would have to be pretty lucky for all these factors to fall in line over an 80-year lifetime. So, although Medical
It is this calculation, however rough, which has made me change my mind. It was my original supposition that multi-year premium investment would only apply up to age 65, and that would be followed by Medicare. In other words, it should only be implemented as a less expensive substitute for the Affordable Care Act. It seemed to me the average politician would be very reluctant to agitate retirees by proposing a plan to eliminate Medicare. They would feel threatened, the opposing party would fan the flames of their fears, and the result would be a high likelihood of undermining the whole idea for any age group, for many years. Better to take the safer route of avoiding Medicare, and confining the proposal to working people, where its economics are overwhelmingly favorable.
But when the calculations show how close this proposal under optimistic projections would come to failure, and when nothing remotely close to it has been proposed by anyone, the opportunity runs the risk of passing us by. So, I changed my mind. The moment of opportunity is too fleeting, and the consequences of missing it entirely are too close, to worry about the political disadvantage of doing the right thing. The transition to a pre-funded lifetime system will take a long time to get mature, and the political obstacle course preceding it is a daunting one.
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So we guess the average life expectancy where things will eventually flatten out will then be about 91. (Be careful, most life expectancy figures are for life expectancy at birth.) But you would have to be lucky in everything: a very favorable investment climate for the right ten-year period, plus a favorable health situation which avoided expensive illnesses just at the age when they would begin to threaten. Using a lower goal of $60,000 and a lower interest rate of 7% is considerably easier to achieve, but the limitation which might be reached first is the $3300 yearly contribution rate, and someone might be forced to pay all medical expenses out of pocket in order to make the investment fund stretch. The individual who came up short would still be considerably ahead, but we are using a precise match of revenue and expense, to simplify the examples. Someone who sells his business at age 63 might have the cash, but still, have trouble because of the $3300 per year limit. It seems pointless to squeeze through a narrow window, and much better if the window were enlarged to permit lump-sum deposits up to a $ 132,000-lifetime limit. With that sort of cushion, plus a stretch of reasonably good health at the right time of life, it would become considerably safer to take the risks. At age 65, a lifetime of health costs is already in the past, but the curve of health expenses starts to curve up at age 50, at a time when college expenses for children may be persisting, and the house isn't quite paid for. It seems a pity to cripple a good idea with pointless contribution limits that almost stretch far enough, but leave people fearful. If Congress develops a serious interest in lifetime insurance, the yearly contribution limit should be revisited.
The simplified goal is, therefore, to accumulate $60,000 in savings by the 65th birthday, remembering that savings get a lot harder when earned income stops. With the current law, you would have to start maximum annual depositing of $3300 by your 50th birthday, to reach $60,000 by age 65, and you would still need generous internal compounding to make it. But notice how easily $100-200 a year would also get you there, starting at age 25 (see below) and less optimistic investment income returns until age 65. Many more frugal people might skin by with looser rules; It could rather easily be subsidized for poor people and hardship cases. If you are going to cover lifetime health costs instead of just Medicare, many more will need $80,000 to do it and have something left to share with the less fortunate. But to repeat once again, that still compares very favorably with the $325,000 which is often cited as a lifetime cost.
Starting with the Medicare example. Notice that forty years of maximum contributions would amount to far more than the necessary $40-80,000 by age 65. We haven't forgotten that the individual is at risk for other illnesses in the meantime, so in effect what we need is an
individual escrow fund for lifetime funding intended (at first) only to replace Medicare coverage. (We are examining lifetime coverage, piece by piece, trying to accommodate an extended transition period.) Depending on a lot of factors, that goal could cost as little as $100 a year deposited for forty years, or as much as the full $1000 per year. It all depends on what income you receive on the deposits in the interval. In a moment, we will show that 10% return is not impossible, but it is also true that a contribution of $1000 per year would not seem tragic, compared with the present cost of health insurance (now averaging over $6000 a year). I have unrelated doubts about the current $325,000 estimate of average lifetime health costs, but that is what is commonly stated. For the moment, consider these numbers as providing a ballpark worksheet for multi-year funding, using an example familiar to everyone, but not necessarily easy to understand after one quick reading.
The Cost of Pre-funding Medicare. Rates of 10% compound income return would reduce the required contribution to $100 per year from age 25 to 65, but if the income were only 2% would require $700 contributed per year, and at 5% would require $300 per year. Remember, we are here only talking of funding Medicare, as a tangible national example, Obviously, a higher return would provide affordability to many more people than lesser returns. Let's take the issues separately, but don't take these preliminary numbers too literally. They are mainly intended to alert the reader to the enormous power of compound interest. Let's go forward with some equally amazing investment discoveries which are more recent, and vindicated less by logic than empirical results.
Proposal: Instead of the present annual limit of contributions to Health Savings Accounts of $3300 per year, Congress should permit a lifetime limit of $132,000, with an annual limit sufficient to bring an account up to what it would have been if $3300 annually began at age 25.
If someone makes a single deposit of $80,000 on his/her 65th birthday, there will accumulate $190,000 in the account over 18 years, the present life expectancy if he spends nothing for health and invests at 5%; and $190,000 is what the average person costs Medicare in a lifetime. Since the average person spends $190,000 during 18 years on Medicare, enough money will accumulate in Medicare to pay its expenses, and after some shifting-around, this should make Medicare solvent, in the sense that at least the debt isn't getting bigger because of him. Furthermore, index funds should be returning 10-12% over the long haul, so there should be some firm discussions with the intermediaries about some degree of dis-intermediation. Please don't do the arithmetic and discover that only $40,000 is needed. That seems plausible, but that's wrong because the costs remain the same , and previously the government has been borrowing half the money from foreigners. In effect, the subscribers have been paying the government in fifty-cent dollars. There has been an exchange of one form of revenue for another, so the required revenue actually does demand $80,000 for a single deposit stripped of payroll deductions and perhaps premiums. An end would put to further borrowing, but the previous debt remains to be paid. I have no way of knowing how much that amounts to, but it is lots. All government bonds are general obligations, mixed together, and access to Medicare reports back to 1965 is not easily available. What we can more confidently predict is the limit that young working people can afford to put aside for the sole purpose of paying off the Medicare debts of an earlier generation. If there are other proposals for paying off this foreign debt, they have not been widely voiced. And the debt is still rapidly growing.
They would have to set aside an average of $850 per year (from age 25 to 64) to achieve $247,000 on the 65th birthday, assuming a 5% compound investment income and relatively little sickness. This might seem like an adequate average, but occasional individuals with chronic illnesses would easily exceed it in health expenditures. It is not easy to estimate the size and frequency of such occurrence in the future, so someone must be designated to watch this balance and institute mid-course adjustments. As an example, simple heart transplants costing $200,000 are already being discussed. To some unknown extent, the cap on out-of-pocket expenses would have to be adjusted to pass these cost over-runs indirectly through the Catastrophic insurance. Insurance does greatly facilitate sharing of outlier expenses, but usually requires a time lag whenever new ones appear.
It does not require much political experience to know that taxpayers greatly resent paying debts that benefitted earlier generations. They complain, but complaining does not pay off the debts of the past. To double required deposits in order to pay off past debts, as well as using forgiveness of payroll deductions and premiums, would require an additional $120,000 per year escrow, for each year's debt accumulation. At present, roughly $ 5300 per beneficiary, per year, is being borrowed, and there are roughly twice as many current beneficiaries as people in the tax-paying group, but only 18 years, as compared with 40 years as a prospective beneficiary. So that comes to liquidating roughly $1300 a year of debt to balance the two populations or $2600 a year to gain a year. That's for whatever the debt happens to be, which surely someone can calculate. To accomplish it, one would have to project an average of % income return. That's definitely the outer limit of what is possible, and it probably over-reaches a little. Therefore, to be safe, one would have to assume some other sources of income, a change in the demographic patterns, or an adjustment with the creditor. Assuming inflation will increase expenses equally with inflation seems possible. And it also seems about as likely that medical expenses will go down, as that they go up. You would have to be pretty lucky for all these factors to fall in line over an 80-year lifetime. So, although Medical
It is this calculation, however rough, which has made me change my mind. It was my original supposition that multi-year premium investment would only apply up to age 65, and that would be followed by Medicare. In other words, it should only be implemented as a less expensive substitute for the Affordable Care Act. It seemed to me the average politician would be very reluctant to agitate retirees by proposing a plan to eliminate Medicare. They would feel threatened, the opposing party would fan the flames of their fears, and the result would be a high likelihood of undermining the whole idea for any age group, for many years. Better to take the safer route of avoiding Medicare, and confining the proposal to working people, where its economics are overwhelmingly favorable.
But when the calculations show how close this proposal under optimistic projections would come to failure, and when nothing remotely close to it has been proposed by anyone, the opportunity runs the risk of passing us by. So, I changed my mind. The moment of opportunity is too fleeting, and the consequences of missing it entirely are too close, to worry about the political disadvantage of doing the right thing. The transition to a pre-funded lifetime system will take a long time to get mature, and the political obstacle course preceding it is a daunting one.
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So we guess the average life expectancy where things will eventually flatten out will then be about 91. (Be careful, most life expectancy figures are for life expectancy at birth.) But you would have to be lucky in everything: a very favorable investment climate for the right ten-year period, plus a favorable health situation which avoided expensive illnesses just at the age when they would begin to threaten. Using a lower goal of $80,000 and a lower interest rate of 7% is considerably easier to achieve, but the limitation which might be reached first is the $3300 yearly contribution rate, and someone might be forced to pay all medical expenses out of pocket in order to make the investment fund stretch. The individual who came up short would still be considerably ahead, but we are using a precise match of revenue and expense, to simplify the examples. Someone who sells his business at age 63 might have the cash, but still, have trouble because of the $3300 per year limit. It seems pointless to squeeze through a narrow window, and much better if the window were enlarged to permit lump-sum deposits up to a $ 132,000-lifetime limit. With that sort of cushion, plus a stretch of reasonably good health at the right time of life, it would become considerably safer to take the risks. At age 65, a lifetime of health costs is already in the past, but the curve of health expenses starts to curve up at age 50, at a time when college expenses for children may be persisting, and the house isn't quite paid for. It seems a pity to cripple a good idea with pointless contribution limits that almost stretch far enough, but leave people fearful. If Congress develops a serious interest in lifetime insurance, the yearly contribution limit should be revisited.
The simplified goal is, therefore, to accumulate $80,000 in savings by the 65th birthday, remembering that savings get a lot harder when earned income stops. With the current law, you would have to start maximum annual depositing of $3300 by your 50th birthday, to reach $80,000 by age 65, and you would still need generous internal compounding to make it. But notice how easily $100-200 a year would also get you there, starting at age 25 (see below) and less optimistic investment income returns until age 65. Many more frugal people might skin by with looser rules; It could rather easily be subsidized for poor people and hardship cases. If you are going to cover lifetime health costs instead of just Medicare, many more will need $80,000 to do it and have something left to share with the less fortunate. But to repeat once again, that still compares very favorably with the $325,000 which is often cited as a lifetime cost.
Starting with the Medicare example. Notice that forty years of maximum contributions would amount to far more than the necessary $40-80,000 by age 65. We haven't forgotten that the individual is at risk for other illnesses in the meantime, so in effect what we need is an
individual escrow fund for lifetime funding intended (at first) only to replace Medicare coverage. (We are examining lifetime coverage, piece by piece, trying to accommodate an extended transition period.) Depending on a lot of factors, that goal could cost as little as $100 a year deposited for forty years, or as much as the full $1000 per year. It all depends on what income you receive on the deposits in the interval. In a moment, we will show that 10% return is not impossible, but it is also true that a contribution of $1000 per year would not seem tragic, compared with the present cost of health insurance (now averaging over $6000 a year). I have unrelated doubts about the current $325,000 estimate of average lifetime health costs, but that is what is commonly stated. For the moment, consider these numbers as providing a ballpark worksheet for multi-year funding, using an example familiar to everyone, but not necessarily easy to understand after one quick reading.
The Cost of Pre-funding Medicare. Rates of 10% compound income return would reduce the required contribution to $100 per year from age 25 to 65, but if the income were only 2% would require $700 contributed per year, and at 5% would require $300 per year. Remember, we are here only talking of funding Medicare, as a tangible national example, Obviously, a higher return would provide affordability to many more people than lesser returns. Let's take the issues separately, but don't take these preliminary numbers too literally. They are mainly intended to alert the reader to the enormous power of compound interest. Let's go forward with some equally amazing investment discoveries which are more recent, and vindicated less by logic than empirical results.
The transition is greatly eased by the premiums and payroll deductions, which are largely age-distributed, and can, therefore, be forgiven in a graduated manner for late-comers to the program. Most cost-redistribution of high-cost cases should be handled through the catastrophic insurance, which is well suited for invisible and tax-free redistribution. Because of hospital cost-shifting, inpatients are temporarily overpriced but are quickly becoming underpriced as a result of gaming the DRG to shift costs to outpatients. This will in time affect the relative costs of Catastrophic and Health Savings Accounts and should be carefully monitored for mid-course adjustments. This changing horizon of cost shifting almost demands the creation of a special department to keep track of it.
Proposal: Congress should create and fund a permanent Health Savings Account Agency. It should have members representing subscribers and providers of these instruments, with the power to hold hearings and make recommendations about technical changes. It should meet jointly with the Senate Finance Committee and the Health Subcommittee of Ways and Means periodically. It should be involved with the appropriate Executive Branch department, to review current activity, detect changing trends, and recommend changes in regulations and laws related to the subject. On a temporary basis, it should oversee inter-cohort and outlier loans, leading to recommendations about the size and scope of this activity.
Cost Sharing with Frugality.At present costs, statisticians estimate future healthcare costs of about $325,000 (in year 2000 dollars) for the average lifetime. We could discuss the weaknesses of that estimate, but even though it's breathtaking, it's the best guess available. Women experience about 10% higher lifetime health costs than men. Roughly speaking, how much the average individual somehow has to accumulate, eventually must equal what he spends by the time of death. The dying individual himself has little interest in what is left unpaid at his death, so Society must do it for him, in order to survive as a Society. At this point, we, unfortunately, must also work around one of the great advantages of having separate accounts.
On the one hand, individual accounts to create an incentive to spend wisely, but it is also true that pooled insurance accounts make cost-sharing easier, almost invisible, and tax-free. Cost sharing induces reckless spending of other people's money, individual accounts induce frugality with your own money. Therefore, linking Health Savings Accounts with Catastrophic insurance provides a way to pool heavy outlier expenses, while the incentive for careful money management remains in the outpatient costs most commonly employed (together with a special bank debit card) to pay outpatient costs. Such expenses are much more suitable for bargain-hunting anyway because dreadfully sick people in a hospital are in no position to bargain or resist.
But a cautionary reminder: linking individual accounts to frugality through the outpatients, as well as linking heedless spending to insurance through inpatients -- induces hospital administration to game the system you have devised. There's no doubt we have created a system which can be gamed by shifting medical care to the outpatient area, but we must expect the DRG to be attacked, in order to reverse the incentives, which run in the hundreds of billions of dollars. A well-informed monitoring system simply must be created and funded, if we ever expect the decision to hospitalize patients to rest on whether the patient needs to lie down, instead of on what kind of payment system we happen to fancy.
Standard Deviation within and between age cohorts.Furthermore, there is a distinction between a mismatch of revenue to expenses caused by chance within one age group and a mismatch between two age cohorts. To put it another way, somebody has to pay off these debts, and surely we must have a plan about who should pay them when revenue is not present in the account. Borrowing between subscribers within the same age cohort should pay modest interest rates, but borrowing between different cohorts for things characteristic of the age level (pregnancy, for example) should pay none. Unfortunately, people may abuse such opportunities, and interest must then be charged. Until the frequency of such things becomes better established, this function of loan banking policy should be part of the function of the oversight body. When its limits become clearer, it might be delegated to a bank, or even privatized, but the policy should be monitored by specialists who understand what is happening "on the ground". While it is unnecessary to predict the last dime to be spent on the last day of life, incentives should be understood by the managing organization, separating routine cash shortages from likely abusive ones. And looking at all such activity as potentially caused by payment design. Much of this sort of thing can be minimized by encouraging people to over-deposit in their accounts, possibly paying some medical bills with after-tax money in order to build the fund up. Such incentives must be contrived if they do not appear spontaneously. User groups can be very helpful in such situations. People over 65 (that is, those on Medicare) spend at least half of that $ 325,000-lifetime cash turnover, but just what should be counted as intentional overspending, can be a matter of argument.
Proposal: Current law permits an individual to deposit $3300 per year in a Health Savings Account, starting at age 25, and ending when Medicare coverage appears. Probably that amount is more than most young people can afford so it would help if the rules were relaxed to roll-over that entitlement to later years, spreading the entire $132,000 over the forty-year time period at the discretion of the subscriber.
This is the last anecdote, I promise you. It has to do with Ireland, the Emerald Isle, in 2000. In an effort to attract corporations to move there, the Irish Republic lowered its corporate income tax to 12.5%, an unheard-of low rate. To Irish delight, corporations in Sweden, Scotland, Germany and many other nations, promptly moved to Ireland to enjoy the low taxes. Since Ireland is mostly rural, there was a migration of Irish workers from the country to the city, causing a housing shortage in Dublin. A taxi driver, in passing a little Dublin shack, was pleased to tell foreign visitors the shack had just sold for a million dollars. That, in turn, set off a building boom, bringing construction workers to Dublin, and causing a shortage of mortgages, leading to boom-time rates. Irish bankers were delighted that little banks could be so top-heavy with imported mortgage money. The little Irish banks became overextended, and promptly collapsed, taking the stock market with them.
The moral of this little Irish tale is clear: lowering corporate taxes will definitely attract businesses to relocate to your shores, but if you lower them too much, too fast, it can cause a disaster. Some people conclude from this you should never lower corporate taxes; other people conclude you should lower taxes, but do it carefully and slowly. In the American case at present, it is tempting to try it to stimulate the economy, but we owe a powerful moral debt to the Europeans, who are in bad economic condition. If only we could devise a way to punish our enemies but not our friends, it would seem perfect. Selecting certain manufacturers but skipping others would do the trick nicely. By the way, our federal corporate tax is 35%. That's the highest in the developed world, so our hands are tied -- we're sorry, but we just have to do it to keep our own corporations from moving to Ireland. Other nations, like Japan and Switzerland, would be sure to notice we have this power, even if we don't use it against them. Yet. We hold a powerful international weapon, providing we use it sparingly, but gracefully.
And our own corporations? Well, that's the whole point. We would like them to take the pressure off health insurance, either by allowing other health insurance to be tax-exempt or by telling their lobbyists to look the other way while we remove Henry Kaiser's little gimmick. There's even a compromise, for those who admire bi-partisanship. Lower the tax exemption for existing corporations, but extend them to other companies and people in general. We're not looking to lose or gain revenue, we are looking for equal treatment under the law. And finally, the best way of all would only require one sentence. Just amend the Health Savings Account Law to permit the premiums for mandatory Catastrophic high deductible to be paid out of the account. Since the Accounts are tax-exempt, the reinsurance premiums would be, too. The level playing field for health insurance is restored in an instant. Only after the inequality resistance is removed, can you consider lowering the exemption.
Well, fine, what about corporate taxes? Since I am a single-issue voter, it isn't in my interest to declare a position on unrelated issues. But I stay within my medical mandate if I point out one thing about the politics of this. You don't have to be a magician to guess some corporations would like to have a tax reduction, because a tax reduction is a money in the bank. Other corporations might persist in the party line that it serves our interest to leave things alone. So, the leadership might just have to stand by, while a newly elected hothead makes a name for himself by introducing a bill to eliminate corporate taxes, entirely. Just what would the consequences be?
A tax deduction of 35% is a tidy sum, all right, but many states have a 10% tax, so it's really 45%. But look at what happens when you give your employees health insurance. It's a business expense, so a $10,000 health insurance policy only costs the company $5500. And then, remember the first chapter of this book. Every employee gets a payroll deduction of 2.9%, up to $117,000 of salary. That's another $3000, per employee. Some companies have hundreds of thousands of employees. And if you've got high-priced employees over $200,000 in salary, it's another $3800, but notice this: there's no top limit to the taxable salary, so if you've got a $10 million president, he's generating a $380,000 deduction for the company. Many companies positively love expensive health insurance, which includes extremely dubious Flexible Savings Accounts with a use-it-or-lose-it feature, leading to prescription sunglasses toward the end of December if the employe hasn't used it. All of those other deductions on a pay stub except the income tax withholding are probably eligible for tax deductions, too. It isn't too hard to imagine a resourceful accountant who could make the whole donation of health insurance a free gift, when you remember all employees are getting a tax deduction of several thousand dollars, too. The higher the premium the better, which isn't at all a good thing for market prices for the rest of us. The only thing which limits more and more deductible items is the company runs out of taxes to deduct from. Who wants lower corporate taxes? Not us, think a lot of companies.
And then, there's Greece. We can't lower corporate taxes more than 10% at a time, for fear of bankrupting Greece and sending the financial world into a tailspin. So even the most rabid populist can be persuaded to limit the size and pace of the deductions. Therefore, we have some other things on our wish-list while we wait to watch how low corporate tax can safely go. That being the case, there are some other things on the wish-list while we watch what gradual corporate tax reduction can do. I would like to see every Flexible Spending Account roll over its end of year surplus into a Health Savings Account. That would immediately create several million new HSAs, meanwhile getting some good for the money. I'm really serious about Health Savings Accounts. Everybody ought to have one, so remove the prohibition on having more than one health policy. What we mean to prohibit is taking two tax deductions, so say so, and let people have as many accounts as they want. This is particularly important if you want to reap compound interest for newborns for an extra 26 years, but there are probably lots of retirees who are healthy and want to store up their benefits for later, but now have nowhere to put them. Of course, we should allow everyone to have both an Obamacare policy and a Health Savings Account, with the proviso you can't take a double tax deduction. Not everyone will do it, and of those who do, not everyone will use both. But as long as they don't game the system, why not? It's a lot easier to defend freedom of choice than prohibitions.
The Affordable Care Act was announced as mandating health insurance for everyone, but about thirty million people were specifically excluded. The healthcare problems of seven million prison inmates, eight million unemployable, and eleven million illegal immigrants were too specialized to be included in a program which hoped to be one-size fits all. Quite properly, such special outliers would be better handled by special programs designed for their special needs.
The Affordable Care Act (ACA) is now central to Administration attention, and Medicare may be deemed too hot to handle in an election campaign. Nevertheless, we elected here to discuss Medicare but not the ACA. Retirement, childhood, and how to unify complete the list--pretty much all that's left surrounding, but excluding the ACA, election or no election. That emphasizes what had been evaded or neglected, and avoids direct confrontation with the ACA, preparing for the day when that big gorilla is either confirmed or abandoned. It's obviously too expensive, and it remains to be seen whether it can be fixed, or must be abandoned. In our alternative scheme, all of the lifetime healthcare would be financially connected to a single lifetime Health Savings Account, one account per person, but the delivery systems would remain semi-autonomous. ACA could surely live in peace with the HRSAs, and could even peacefully adopt the HSA approach. That would save money, but the questions left are whether it would save enough to be worth the trouble, and whether politics will allow it. Like the European Union, it's surely easier to describe than to accomplish.
Retirement as a Medical Issue. The news is precarious for retirement funding. We begin with the far end of life, where most health cost and all retirement cost concentrates. While retirement is parallel in time to Medicare, we begin to recognize increased longevity as an outcome of better health. If one is to help pay for the other, they must, in the Medicare case, draw their funds from the same pool. That's Medicare, which most people don't want to change, but is the first thing which must change. Because unchanged it costs too much to leave anything for retirement.
Although the Industrial Revolution brought many lifestyle improvements in the past two centuries, it also brought turmoil. The idea of leisure time may once have been a reward for the upper 1%, but actually, most of the population never dreamed of any leisure time. The novels of the "Lost Generation" after the first World War often revolved around the discovery of unfamiliar leisure pursuits by members of social classes newly learning about such things. The moral, then and now, seems to be that leisure is no bed of roses.
We must assign a reasonable definition to a "decent" retirement, provide for a marginal one, and leave the rest to our own sources of wealth.
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The cultural response seems to be that leisure was best reserved for retirement, although the younger generation sometimes rebelled, wanting some of it sooner. In any event, Medicare surely extended retirement longevity. (Overextended it, if you believe it will be impossible to pay for.) After all, retirement is a continuous cost, while illness is episodic. There are ways of calculating costs which depict retirement as five times as expensive as healthcare. But Medicare cost averages thirteen thousand dollars a year and rising. That's a pretty meager retirement, and when you discover Medicare is 50% borrowed, you question how many people could retire on $26,000 a year per person, on public sector revenues. If you see retirement as a couple of old folks, you wonder where they would get $52,000 a year, for thirty years. Add Medicare to retirement, and you begin to get absolutely impossible numbers. There seems no possible way to handle this except to provide for subsistence retirement, plus Medicare, and let everyone find some way to get whatever extra he needs, or defines as "decent". And that defines retirement cost as equal to medical costs when both costs could rise appreciably. The Health Savings Account method of accomplishing this is to put retirement at the end of the financial line, funded by the residuals of the other pearls on the string. You keep what's left. Another way is to retire later, or best of all, find some remunerative way to fill your time and use your experience.
Medicare As a Financial Issue. Medicare is about half paid-for, half borrowed, but it's really totally under water. According to Mrs. Sibelius, about half of Medicare expenditures are supported by the general fund or general taxation. The general fund is in deficit, however, providing some fairness to the description of Medicare as a fund borrowed from the Chinese, although China and Japan combined only purchase 13% of ten-year Treasury bonds. In the event of Medicare default, the main creditor victims will be U.S. citizens. The purchasers may change, but the deficit looks to be permanent. Until deficits are paid off, it will remain true that Medicare provides a dollar of care for fifty cents. That sounds wonderful until it suddenly sounds terrible. Medicare is bleeding money. If you want to know how brutal our government can get, read the section later on, about the Diagnosis Related Groups.
About half of the Medicare deficit is paid as you go, about another half is borrowed; only a quarter of the budget is current revenue from the beneficiary age group.
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An accountant might say, Medicare's cash revenue is roughly divided between premiums paid by the beneficiaries, and pre-paid as a payroll tax of 3% on workers not yet old enough for benefits. (About half of this wage tax comes directly from the employee, another half from the employer. We skip over the technicalities that some parts of the program are tied to one fund, other parts to another, and also some are subject to higher income tax). About a quarter of Medicare is paid in advance on a "pay-as-you-go" basis, which is to say some people pay current costs of other people -- they are definitely not saved in anticipation of the contributors becoming beneficiaries, as the term "Trust Fund" implies.
A second quarter is indeed paid and spent by current beneficiaries as Medicare premiums. That is, about half of the deficit is paying as you go, another half is borrowed from foreigners; only half of the deficit is matched by current revenue from the beneficiary age group. Nevertheless, the payers of pay-as-you-go are about thirty years younger than the spenders of it. If we put the youngsters' cash to work for thirty years, what interest rate would it take to grow one dollar into three? The answer is about five to seven percent. For quicker understanding, a few unfamiliar tools are needed:
First and Last Years of Life Re-Insurance By far the best proposal for refinancing Medicare, however, is to anticipate the way science is going to re-design costs. In the long, long, run, there should be very little medical cost left, except for the first and last years of life. We have no idea how long it will take, but that's the direction things are almost sure to be going.
So, phase in a restructuring of funding for both children and elderly first, and then add in the rest of a lifespan, step by step. That way, you first fund an obligation you are always sure to have. Be sure to do it in such a way that maximizes the investment income at compound interest. This might be a project under construction for decades, but its first step would be to begin funding for the Last Four Years of Life, which happens to be an early proposal in refinancing Medicare. Since the reader may be unprepared for the topic, it is considered in a free-standing way, in the next section.
Pay at the time, or pre-pay in advance?> At first, it might seem frugal to have people pay for what they spend; let them pay for what it costs, when you know who ran up the cost. But in the case of birth and death, it's going to be 100%, and the amount of it is a lottery. By far the more important issue is the compound interest you earn by paying in advance. Using the rule of thumb that money at 7% will double in ten years, a life expectancy of 90 should double 9 times from birth to death. That is, a dollar at birth is worth $512 at death.
What's more, 50% of Medicare is reported to be spent in the last four years of someone's life. That's likely to represent terminal care, but it doesn't matter. If you prepay those four years, the rest of Medicare has its cost cut in half. In those two simple statements is found the nut of paying for half of Medicare for $100 -- ninety years from now. It's up to actuaries and accountants to find the "sweet spot", of the most revenue enhancement for the shortest time of investment.
The book before you is not a list of dooms and glooms, it turns into a proposal. A proposal to preserve a functioning society by regarding child, parent, and grandparent as different stages of the same person's life, with united interest in the same goal. The same goal, even for a newborn, is a comfortable retirement. While it speaks exclusively to paying for healthcare, the same principles apply to any useful but expensive commodity. That is, as much as possible, individuals subsidizing themselves at different ages rather than members of three different classes of strangers. We build upon the idea of a Health Savings Account, one account per person throughout one lifetime, as a financial way to emphasize the underlying social point. If you spend too much too early, you won't have much left for later. That sounds far less obvious when it appears within separate compartments, with separate sources of funding. Separate sources have their own budgets coming first in their minds. They compete with each other for the same money, if they can.
This unification proposal -- Pearls on a String -- is voluntary, you don't have to do it, or even part of it, but in some ways, that's another advantage. True, there is no escaping the use of insurance for unexpected catastrophes, but really, only an insurance salesman would argue for unlimited insurance for everyone, all the time. Only someone who knows very little about insurance would believe insurance is a way of printing money for the customer. Compulsory also means uniform, government-issue. Voluntary, by contrast, isn't a one-size-fits-all commitment and doesn't dump 340 million subscribers onto inadequately tested systems, all at once.
Whether voluntary or mandatory, however, some facts are just part of life. Almost completely, the working generation must subsidize its older and younger generations, but it would do it better with a focus on the same individual at different ages, instead of by whole categories of strangers. For a final twist, we unexpectedly propose to empower solutions by leveraging a new problem we scarcely noticed we had (prolonged longevity and retirement). It isn't a trick; in retrospect, everything looks as though it might have been predicted.
Three New Potentials. Curiously, the Health Savings Account had to be tested before it could be fully understood even by its originators. A bit of history may help explain the delay. The basic concept of Health Savings Accounts was developed in 1981 by John McClaughry and me, while John was Senior Policy Advisor in the Reagan White House. Derived from the IRA concept developed by Senator Bill Roth of Delaware, it started as a Christmas Savings Account, to save up for the approaching deductible of (high-deductible) Catastrophic health insurance -- which was to be linked to it. So from its beginning, there were two linked features: (1) high-deductible health insurance, and (2) a medical variant of an Individual Retirement Account (IRA). For those unfamiliar with insurance jargon, a high "front-end" deductible policy connotes the insurance company only ensures that part of a medical bill which is greater than the stated deductible amount.
Since this automatically means the higher the deductible, the lower the annual insurance premium; high deductible policies are the cheapest you can buy. When the Affordable Care Act was passed, all health insurance was required to have a "high" deductible, so the HSA idea then seemed moot. But a high deductible by itself isn't enough. Without the savings account attached to it, the client can't easily separate risk protection from pre-payment, or for that matter inpatient costs from outpatient ones. Ideally, the level of the chosen deductible is the result of tension between a high level to please the insurance company, and a low level to attract the customer. Call it luck or call it planning, a high deductible separates inpatient from outpatient, market prices versus fixed ones, optional costs from unavoidable ones, prevention from treatment, and risk protection from pre-payment. Out of these segregations, remarkable things can be achieved. The one danger is that the deductible might fail to change with circumstances. The divisions are set by the market balance between customer and provider and are rough ones. If either side succeeds in freezing the deductible, its underlying significance could disappear.
The higher the deductible, the lower the yearly insurance premium.
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After experience in action, a totally new realization dawned that -- once the two parts became semi-independent -- the real deductible just becomes the unpaid portion of it. The unpaid portion of the deductible is now situated in the account, ultimately becoming zero -- but now the insurance premium no longer rises as the remaining deductible declines. Not at first but eventually, the HSA emerges looking like "first-dollar coverage" for the same low price as high-deductible insurance. The truth is, you have two insurance policies, one owned by the insurance company, and the deductible, which is self-insured, owned by yourself.
You can be as frivolous or as frugal as you please, within the self-insured deductible. The insurance could care less which it is. A great many people have no medical expenses for a whole year, so they get to keep all of it. Someone else could spend it all. Another way of saying this is, saving for the deductible has shifted into the customer's own hands without shifting any extra burden onto an insurance company. A mandatory expense now transforms into part of his disposable income. Frivolous (ie small) expenses are self-insured; necessary ones (ie expensive ones) are insurance-insured. It wasn't exactly the deductible that saved money, it was the new-found ability to exclude non-essential expenses if you chose to.
A second realization emerges from the tendency of non-insurance HSA managers to use debit cards for medical reimbursement, instead of insurance claims forms. (This freedom may well be a consequence of concentrating frivolous expenses into the deductible.) Although in the absence of strict scrutiny there might well be more temptation to cheat, a debit-card system depends on the client to howl if he suspects his money is being mis-spent. Otherwise, it will be lost. (When you spend a third party's money, there's less concern than in spending your own.) A decline of policing cost might even be said to expose a lack of overall effectiveness of the third-party approach to policing of claims. Since it is obviously more costly to police than not to police, that particular hidden cost of using third parties only emerges after it gets eliminated. (This same reasoning applies to a diagnosis-based payment for helpless hospital inpatients, a related issue which is now segregated into the insurance compartment of HSAs, but crippled by the crudeness of its DRG coding system.)
The foregoing describes two potentials, broader coverage, and less administrative cost, but an even more gratifying development might be a decline in elective claims, despite the reduced cost-containment effort. This is harder to prove, but highly likely. At first, this likely saving seemed attributable to the ("adverse") selection of unusually frugal applicants. But over time, a more likely incentive emerged: added provisions of the HSA act permitted any surplus remaining at age 65 to be turned into an Individual Retirement Account. That is, an incentive was created to save health money for retirement, by substituting personal responsibility for insurance company vigilance. All in all, it would not be a bad outcome. So far as I know, it is the only form of health insurance which has this feature, which every one of them ought to use, by means of attaching their "bead" to the "string". All other health insurance returns a surplus to lowering the costs for others; that only works if you never change companies, and even then, the temptation of management to skim it is undeniable.
The second implication of this third zinger in the system took even longer to sink in because nobody wanted to believe it. It suggested our path might never lead us out of the financial hole we were in. Not eventually, but never. The situation was this: As improved health care spread among the elderly, the elderly lived longer. Gradually and grudgingly, it was acknowledged
extended longevity was a hidden cost of Medicare, unanticipated perhaps, but universal. Its pain first started to hurt beyond the insurance boundary, accounting for the delay in recognition of the link. There was Social Security, of course, left in the dust of thirty years of longevity added since 1900. Increased longevity was first discovered as destroying the attractiveness of defined-benefit retirements. But as it became acknowledged that good health and longer longevity were two manifestations of the same effort, the doubled cost began to be seen as insupportable. What's worse, the future cost of retirement is even harder to specify that the future cost of health care, because everyone has his own definition of a "decent" retirement. Underfunded retirement is an even stronger incentive to watch your pennies than a specified one because there is absolutely no one, not even that demonized one percent of rich folks, who can be certain there will be enough money left at the end, to last out his lifetime. Wasn't that combined incentive enough to get everybody's attention?
HSAs are the only health insurance with the incentive to save for retirement whatever you don't spend for healthcare.
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The Driving Force. For the purposes of this book, the power of that unfunded retirement incentive was the HSA's most important new insight. Almost anybody could tell at a glance the high cost of Medicare was what stopped "single payer" in its tracks, what paralyzed Congress on healthcare, and defied solutions from any other direction. Medicare was the "third rail" of politics -- touch it and you're dead. But with a retirement entitlement looming behind it almost making Medicare costs seem laughable, it was a new ball game. Once retirement begins, retirement savings get steadily depleted, whereas serious health costs are usually episodic. Both begin at the same time.
Six conclusions emerge:
1. The Health Savings Account, as is, is quite adequate (if funded, of course) to cover healthcare costs in replacement of existing health insurance. It's surely cheaper, although possibly not as much as the 30% reported in early trials. There are several reasons why that should always remain the case, although it does require more management by the customer. It is entirely suitable for intermittent use as employers and government programs change.
2. The HSA already contains the mechanism of the customer funding up to its present $3400 yearly limit, with annual cost of living adjustments but excluding the cost of the attached health insurance, gathering investment income for decades, and turning it over at age 65 as an IRA retirement fund. In honor of this feature, it is proposed to rename HSA to HRSA (Health, and Retirement, Savings Account.) As such, it would supplement any other retirement source but could stand alone. Its main flaw is easily corrected; the law limits coverage to employed people. No children, no supplements after age 65, but that would be simple to fix. There is a political risk in allowing the annual deposit limits to be at the mercy of changing political administrations.
3. New means of investment, such as passive investment of total market index funds, seem as safe as most investments now offered. Cheaper ways to increase effective returns should be explored, particularly in dividing returns between HSA management and their customers. I suggest published "fee-only" arrangements would give the public a chance to shop around. Later on, ways might be explored to balance voting power in health companies against the medical prices reflected in the price of their stock. Demonstration projects might be in order. Present owners of HSAs will probably be shocked to hear the total market has averaged 11% returns during the Obama eight years; how many HSAs paid customers more than 3%?
4. With minor legal adjustments, the HSA could serve as the investment conduit for: surplus generated by Medicare, a proposed Childhood Transfer System, an end of life reinsurance system (to be described), and any other health program which changes its proposals to transfer surpluses to retirement, as an incentive to become a frugal shopper. For the time being, however, it is intended to remain entirely independent of the Affordable Care Act until politics clarify.
5. The ultimate goal is to construct a lifetime framework for HSAa, to serve as a financial vehicle for connecting all health plans around a common investment and retirement framework. It might easily include such things as bounties for below-average health expenditures and rewards for superior performance of other sorts.
6. The longer-term goal is to re-arrange pieces of this network to increase investment returns, starting with Medicare (see below), Last Four Years of Life Reinsurance and First Twenty-five Years Gift Transfers, with the rest of life added, accordion-style. These terms should become clearer after later discussion.
In the existing environment, third-party reimbursement of healthcare now stands in the road of everybody's retirement, by being disjointed. That's not to suggest unifying whole programs, an overwhelming task, but merely to unify their transfers and their retirement termination, as well as the age and employment limitations of individual pieces. So long as left-overs ultimately belong to the individual, and the separate pieces are all available for compound interest along the way, the affiliations can be quite loose. On the other hand, if further program integration seems cost-effective, nothing stands in its way.
Medicare's financing problems might even become a symbol the problem was not just a lobbying benefit to be defended blindly by its current beneficiaries. Increased retirement cost was, in short, an overlooked cost of health care all along, and anyone who stood in the way of coordinating things has misjudged the ultimate necessities. Standing closest to retirement, Medicare is in fact the very first program you must change. But you better do it very carefully. And by the way, you better do it pretty soon.
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.