Philadelphia Reflections

Ideal Universal Health Insurance on the Accordion Model

Let's compress the basic idea to simple end-of-life funding, to show how much can be made of the two basics. And then using the accordion model, expand the basic ideas to five, in order to cover the health expenses of an entire average lifetime. And eventually, expand the patient contributions to match. If the parents or grandparents of a newborn child deposit $2000 in a Health Savings Account at the time of the child's birth, using 7% return as the projected lifetime average investment return for life in an index fund of the entire American stock market, and do not disturb the account for a life expectancy of 80 years, there should be $512,000 in the account at the baby's death. That is the extreme limit of optimism, generating far more income than is likely to be needed. Beyond this limit, overcoming initial obstacles of a zero-interest environment, the uncertainties of inflation and war, resistance by competitive insurance and political alternatives, and other risks and alternatives -- make the whole project unlikely to succeed. That sort of defines the general limits of the idea's initial feasibility as extending from a low investment of about $10 to an upper limit of $2000; more is possible, but this is enough. It uses two ideas (the Health Savings Account and the Last-Year of Life Escrow) to show that there is surely enough money generated to cover the cost of eliminating the last year of life cost of Medicare. With that sum in escrow, a calculation should also be possible to estimate how much Medicare premiums might be reduced for the owner of that escrow, acting as the ultimate goal of everyone involved. There are of course some people who would want a solid gold casket for their own funeral, so there probably must be some "service benefit" features to the program, but in general, it is envisioned as an indemnity, leaving the issue of price control undefined for the present. Taken all together, a package can be assembled within the rule of reason to show how much a lump-sum advance payment would reduce Medicare premiums as an incentive for the average person to enter into it. Naturally, if you wait to enter into the agreement late you will need to deposit more money, but that figure is easily derived from looking at the average net value of four or five index funds at the time you finally make up your mind to take a chance on the idea. No doubt, beginning contributions at the age of twenty is more realistic than having a grandparent donate at birth, but it becomes too complicated to establish detailed premiums right now. If you wait until you are twenty, you will need to deposit approximately $8000 to catch up; or only deposit $2000 and be satisfied with a final balance of $128,000. The longer you wait, the harder it gets, and no doubt the proponents of "pay as you go" will object to it. But that's exactly why individual options are preferable. You can start with one program and switch to the other, but it becomes more expensive if you wait. Those who recognized a bargain earlier are rewarded for their risk.

Now, $512,000 is probably more money than is necessary in the idealized, no-problem example. So, let's see what it would take to fund the projected lifetime healthcare costs in their entirety, no illnesses, no stock market crashes, no fees or taxes. The amount projected is surely enough to cover that and leaves some room for illnesses and administrative overhead, but it's getting closer to the bone. At the very least, you would have to subtract the premiums for a $5000-deductible catastrophic health insurance policy, guaranteed renewable, of course. That's needed to pay the retrospective cost of having been born, well-baby visits and all that, so it must have a premium somewhat higher than the quoted one. And there probably ought to be a surcharge for re-insurance, in case the deductible is invaded more than once. Remember, the assumption made is that you will remain in perfect health, which is definitely not the average experience. So, it probably must be conceded that you will also carry routine healthcare insurance for maintenance during your working years, or else pay for your working-life healthcare out of pocket. Out-of-pocket may actually be better, in order to support an active marketplace to set prices, because providers must always be suspected of exploiting a heavily insured environment. On the other hand, let's not be completely naive about the inner workings of life insurance. A lot of its profits are derived from subscribers who drop their policies and never file a claim. Let's go over this, once more:

Liberalization of the Health Savings Account.To start with, let's begin voluntarily, and let the success of the first-responders encourage the timid. There are surely several thousand new parents (or more likely, grandparents) each year who know a good deal when they see it and could afford to pre-fund health insurance for their newborn children for the rest of their lives. (Class warriors will snort to hear this, but it is a basic fact of risk-taking that well-to-do people are about the only ones who can afford to take the untried risks of trying something new.) Starting at birth adds a couple of doublings, and reduces the lifetime net cost remarkably; middle-class people have to hang back because a loss means more to them. Portrayed as an estate tax deduction, it would seem an attractive generation-skipping way to transfer income to the next generation and to grandchildren who would be thereby relieved of the obligation to support the middle generation. Ask your lawyer to explain it to you, it's a good deal.

Do not put a limit on contributions to a Health Savings Account for the children; what's the point of limiting contributions when withdrawals are going to be limited to actual health expenditures? Surplus funding would only be lost and is therefore self-policing. (Eventually, any surpluses in the account should flow into a reinsurance fund for those who exhaust their deductible more than once.) Your accountant can explain that one to you. After the first year, non-participating members of the child's age cohort can catch up by contributing, not the same amount, but the average amount to which the fund has grown in the meantime.

The contributions themselves should be invested in index funds for the whole U.S. stock market, so if stocks have gone down the latecomers have a chance at a bargain, if the index has risen, it shows what a good idea it has proven to be. Essentially, it is an investment in U.S. common stock, which in all but occasional years can easily prove itself. As explained later, the fund will have to maintain a certain investment in U.S. Treasury bonds in order to pay claims, but the extent of this will depend on what the benefits include.

From this basic investment must be subtracted the cost of a catastrophic health insurance policy for the child, with a deductible not less than $5000, net of inflation, to be purchased with the dividends of the fund (premiums for the catastrophic policy are waived until the dividend income will cover them). Essentially, this insurance policy is the source of advance funding for the last year of life escrow. By shifting catastrophic premiums to later years, it is also retrospective funding for the first year of life.

Last Year-of Life Escrow. The issue of trusting anyone, even our own government, with appreciable amounts of money for eighty years is solved in the following way: The funding has been described; it is placed in an index fund and remains there until the beneficiary dies, theoretically eighty years later. The investment performance is therefore widely available on a daily basis. Meanwhile, the average annual cost of the last year of life is available from Medicare. Meanwhile, the average life expectancy of the age cohort is available from the life insurance industry; the average yearly investment return is published by the index mutual fund industry. A year after the death of the beneficiary, the fund transfers the average cost of the last year of life to Medicare and publishes the investment results and theoretical results of alternatives to the cohort. What to do with any surpluses remaining in the fund need not be fully described at this point, but it is envisioned that surpluses remaining after the death benefit is paid to Medicare will go toward the first year of life, followed by other years if additional surpluses appear. On the other hand, reducing the cost of Medicare for the last year of life would enable a reduction of the premium costs for other years, so perhaps it would be better to pay off the existing debts of Medicare.

The immediate purpose of the steps described is to reduce the cost of Medicare. If it does not cover the complete cost of the last year of life, it at least reduces it significantly at little administrative cost. Since lifetime medical costs ordinarily reach a peak during the last year, there is a potential for virtuous cyclic increases to include more of Medicare costs than the last year alone, but this is not promised. If it reduces Medicare costs significantly, donors of the fund enjoy lower Medicare premiums than otherwise. Numerous alternative proposals are available, as described in later sections, and it is not useful to start unnecessary quarrels about such contingencies at this stage of the debate.

Commentary This proposal combines features of first-year and last-year insurance, resting on a framework of Health Savings Accounts, with the funding incentive of generation-skipping tax avoidance to provide seed capital. With adjustments based on revenue experience, it can be designed to remove about two-thirds of lifetime medical costs from future federal budgets, but it intends to leave undisturbed the comparatively routine health costs of the working population. Although it addresses the majority of costs, at present it affects only two years of the average lifetime and does so by indirect reimbursement.

Problems Needing Attention. Seventy years of health insurance have demonstrated that any provider system will readjust to any generous source of funds by attempting to make it even more generous. It is a theory of mandatory universal coverage that eliminating other funding sources will result in the elimination of cost-shifting, but unfortunately, it will not. State and federal governments compete to shift costs to any easy revenue source, and both the suppliers and the management of healthcare institutions will unceasingly seek to increase their share of the revenue from a compliant source of it. In retrospect, it is extraordinary that we ever thought otherwise. Therefore, this proposal seeks to provide easy income to the health system, but it will surely fail if it relaxes its vigilance. Therefore, the absolute minimum requirement is to lodge investigative power at both the federal and state levels, to be certain that only market-based prices (or relative values) are paid, and that indirect mark-ups are reasonable. It seems advisable to retain a small portion of healthcare costs with the consumer so that rebates and surcharges coming from the main fund will serve to remind the public of its need for vigilance.

Secondly, if cost controls do become efficient, incursions into the quality of care must soon be looked for. Professional self-regulation is one defense, consumer vigilance is another. Both approaches suffer when they are undermined by careerism, of which the plaintiff bar is an outstanding example. The whole matter needs re-examination, and probably would be improved by establishing greater direct tension between these three groups with the greatest conflicts of professional interest. At the moment, they all need more term limits if rotation within professional silos is not feasible. The Constitutional Convention of 1787 would be a good model for working out the proper balances between interested parties; they should be given six months to work it out, but not a day longer.

Originally published: Tuesday, July 23, 2013; most-recently modified: Tuesday, May 21, 2019