Philadelphia Reflections

Grand Strategy: Semi-Insured Health Insurance

Employer-based health insurance. Although improved health care has added moderately to working years of life, a lot of people hate to work, whereas to other minds, thirty years of improved longevity mostly result in a thirty-year vacation after the end of productive careers. The famous American work ethic is not universally celebrated. Pensions and savings sometimes only partially anticipate the cost of enjoying this health windfall, which unfortunately competes with yet another unexpected cost, the steadily increasing expense of dying. These changes were both rapid and unexpected, so confusion is inevitable.

There is still another way of describing this readjustment to a wonderful scientific windfall: Most sick people are now either too old to work or else too young to work, even before they get sick. Health costs therefore relentlessly concentrate toward the first year of life and the last year of life. The strategy we developed of hiding the health costs of the young and the old within the health costs of the worker class confronts the new reality: middle-aged people have many fewer health costs, themselves. That leaves less room to hide the costs of the sickly young and the sickly old, which all along have been buried within the premiums of workers' health insurance. Let's face a fact: Those who are neither near the first year nor the last year, must somehow pay for those who are -- because there is nobody else.

Hiding the health costs of the young and the old within the health costs of the worker class confronts the new reality: middle-aged people have many fewer health costs, themselves.

What does this have to do with employer-based insurance? In the 1920s a rough acknowledgment was made that healthy working people must obviously support sick people who can't work. So it was devised that basing insurance on employee groups (if their dependents were included) might make a good start toward a national solution. Employer-based health insurance was a brilliant improvisation, but as life expectancy continued to lengthen, the gap between retirement and death also relentlessly widened. In 1943, discriminatory tax deduction slipped in, via Henry Kaiser, badly injuring the atmosphere of fairness for employer-based health insurance. Federal Medicare for the elderly was devised in 1965, and state Medicaid for the poor. They helped but didn't entirely cover the gaps either, and we are coming to learn how much we had to borrow to pay for it.

So now we have the Affordable Health Care Act, commonly called Obamacare. It remains to be seen whether even Obamacare can be made to stretch, because thirty years is a long time between retirement and the last year of life, and fifty years a long time to wait to judge results. With wars, globalization of industry and depressions to contend with, the task is hard, perhaps too hard. Unfortunately, having passed a law containing the Affordable Care Act mandates, we must try to do it in 2014, and do it in a rather utopian way for everybody at once. For what amounts to a level "community" premium for everyone, we must make no allowance for differing costs and pre-existing conditions, economic or medical. Many of these wounds are self-inflicted, costing the program many sympathizers who might have endorsed the same goals at a slower pace.

We Had a Secret Plan. It might as well be mentioned that Americans once nursed a secret plan for all this. We consented to spend incredible amounts of money on medical research for eliminating the disease. In fact, we made a pretty good try, considering we never officially admitted it was our goal. If there is no disease, there will be no medical costs to worry about, right? Directly confronted, eliminating acute disease would unfortunately still leave those first and last years to be paid for. There was just no escaping it, everyone has to be born, everyone has to die. And while substantially eliminating disease among the young and middle-aged is an important economic stimulant, it also lengthened life expectancy by almost thirty years in a single century. Those who managed to prosper were indeed rewarded with a thirty-year vacation, but some of the windfalls had to be set aside for those whose luck was bad, destined to spend thirty years in the shadows. It was a big, bold gamble, and in an American sense, we won it. Never acknowledging it was a goal, no one could say we lost it.

Americans will help others if they can, but first, they must be convinced that others cannot pull them down.

We are now engaged in a great upheaval described as insurance reform, to test whether a great nation which secretly believes it can do anything, can satisfy both those who believe it has attempted too much, and those fearful it will fail by aiming too low. Arguments abound. One description of victory would be this: we must abandon the essentially European idea of rich and poor as permanent classes of society. In its place, we should reaffirm the traditional Whig position that rich and poor are largely two or three, or four, stages of every American's life. In Lincoln's view, we all arrived as poor immigrants, gradually worked our way upward in society, usually taking several generations to reach the top. No more than a handful of born aristocrats ever immigrated to America. In a revised version of the same epic poem, all infants are poor, adolescents are always confused, and gradually we become self-sufficient members of society; eventually, we all die. Whigism refuses to see us as members of tribes, some eternally rich, some eternally poor; Whigs mainly hope that Liberty and personal responsibility will be sufficient to preserve the more perfect union. In Lincoln's case, it was a close call, but we made it, even then.

Obviously, people with income must support the disabled, since there is no one else to do it; equally obviously, the nation has not evolved to the point where it can be done by having one angry tribe tax another. Instead, what is needed is to organize some sort of insurance pool in which younger people contribute for their own individual future, recognizing frankly that people will chiefly fear the system cannot keep its fingers off the money to give it back eighty years later. That's really all that is essential, since many models have tested the insurance market, and watched eyes glaze over with the details.

Young people must subsidize sick old people, all right, but the only old person you surely enjoy subsidizing is yourself. For the moment, forget about the difficult transitions, about which 2500 pages of the law were written and will prove to be too little. The challenge to the country is whether we collectively have the courage to stake our lifetime earnings on the proposition that the average person can save enough of average lifetime earnings to pay for average lifetime medical costs, and still have enough left for a comfortable life. If he can't, this scheme is not going to work, because even if he can, the scheme might still fail. A thousand folksy mottos teach us that Americans will help others if they can, but first, they must be convinced that others cannot pull them down.

The Law of Compounded Interest. There's a seldom mentioned advantage to individually owned and selected insurance-like pooling of lifetime health costs. If insurance premiums are pooled, stored, and invested by professionals, they will gather investment income, or compound interest in quantities which always surprise a newcomer. To wit: money at 10% will double in seven years. Or, stretched over long time periods, the owner can withdraw 4% a year, forever, and still have as much as he started with. Within ages, 25 to 75 exists an opportunity for five doublings at 7% or 3,200%. Hidden in this is another incentive: if you only spend half as much money on healthcare as average, you can eke out another doubling, making it 6,400%. Transforming medical insurance from term insurance to a "whole life" insurance model carries the potential for vastly diminishing the lifetime cost to the average subscriber, but that opportunity probably did not exist a century ago. We may say we sacrifice this new opportunity because we do not quite believe it, but in fact, we mostly do not trust any government to give it back, eighty years later.

"Whole life" insurance model carries a potential for vastly diminishing the lifetime cost to the average subscriber which did not exist a century ago.

This paper, therefore, urges a voluntary approach, individually owned and individually selected, primarily because it seems safer to go a little slower than we could if we just followed a command. Anything which includes the word "mandatory" also forbids the testing of alternatives. At least theoretically, alternative approaches are forbidden forever, with the implication that nothing better will ever be possible. At the barest minimum, the Affordable Care Act must be amended to encourage the testing of new ideas by Congress and by state governments. Another similarly hampering word to avoid, is "perpetual", but it seems more conciliatory to avoid the word "insurance" and to outline the nature of this proposal as a non-insurance savings mechanism limited to lifetime health expenditures. To a framework of five proposals, about a dozen other features are later described but held in reserve, waiting to be added slowly as the system can absorb them. This is neither an Executive Branch initiative nor an insurance company product. It is a national strategy, which starts with individual Health Savings Accounts and builds on that foundation. It adds a high-deductible health insurance policy, preferably without co-payments. It strips down the benefits offered by the HSA to the first and last years of life, to prove the concept safely, and to pay for transition costs. After that, it should expand like an accordion to cover as much as it can afford. Beyond that point, we can argue some more, but we are aiming for maximum elimination of complication and subsidy, not because they are necessarily bad, but because they should in time be unnecessary.

Originally published: Tuesday, July 30, 2013; most-recently modified: Tuesday, May 21, 2019