Philadelphia Reflections

Pre-Paid Death Benefits

There's an old joke about a small town with an ordinance that "Fire hydrants must be painted before each fire." Similarly, it is at first a little confusing about how pre-paid health insurance could pay for the health care costs of someone's last year of life. Necessarily, such a proposal implies the existence of a second mechanism for paying for the costs as they arise, but getting paid back for them later.

Right now, that primary insurer is Medicare. The vast majority of people who die will be covered by Medicare when they do so. So, let Medicare pay the bills, and let the Health Savings Account pay Medicare back. And looking backward, when the Health Savings Account reaches a certain amount, reduce the premiums and payroll deductions for the individual. The overall payment cycle thus means the individual only pays for his care once, with compound investment income contributing the bulk of it. The final intention is to start with the goal of paying for the last year of life, and expanding the number of years like an accordion if you have been lucky and contributed a lot toward the fund, early in life, and not depleted the fund with illness. I'm no actuary, but as a physician, I can tell you that if you have a lot of major illnesses, you will probably have a foreshortened future.

The individual's Health Savings Account is a long-term investor in longevity, paying Medicare back when the last-year costs are known, and receiving a reduction in payroll taxes or Part B premiums in the meantime.

In this example, it is Medicare, universally available for at least Part A (hospital costs), which is imagined as the transfer agent. However, it also ought to work with patient self-insurance, paying for out-of-pocket costs like deductibles and copayments, or with coinsurance, or Major Medical, or any other verifiable source of health payment. Because of such contingencies, it is better to keep track of actual expenses which reimburse individual expenses outside the Health Savings Accounts. Payments through the HSA account should certainly count if they fell within the last year of life, but safeguards would have to be created to discourage gaming the tax deduction. However, we are envisaging transfer payments only at death, so this might not prove to be the problem it seems.

There is no doubt that transferring to Medicare the nationwide average last-year-of life costs as a lump sum (rather than true itemized individual costs), would greatly simplify the accounting, and perhaps Medicare could devise a way to reimburse self-insurance contributions and other participating payers. The trouble with passing it all through Medicare is that it gives the Medicare administration an opportunity to make the rules, which other payers would immediately complain about. Itemizing also has the advantage of putting pressure on the process of billing, which for mysterious reasons now takes six months or more.

In the meantime, the money has to be set aside in some sort of "lockbox" or escrow fund. Individual records must be maintained because it is anticipated the existence of this pre-funded last-year escrow fund provides continuing authorization for reducing payroll taxes and Part B/D premiums by 4%, the amount of the future reduction of Medicare beneficiary costs in our example. Because it is anticipated that the last-year escrow system might eventually accommodate accordion-like extensions of itself, it should be careful not to take early short-cuts which would hamper that evolution. Eventually, the annual Medicare deficit should be reduced by at least 4% fewer costs in our example. Going all the way to 100% of costs is imaginable, but unwise to implement quickly without some experience to act as a guide.

Originally published: Wednesday, August 28, 2013; most-recently modified: Friday, May 31, 2019