Philadelphia Reflections

Lifetime Health Coverage, Summarized in Advance

We propose the development of a lifetime health insurance product, for the main purpose of gathering investment income on the insurance premiums. It reduces the cost of health care by adding that new revenue source, which at the moment is simply lost. The longer compound interest is allowed to work, the more income will be produced, to the point where it can be imagined that this income source would more than cover the cost of health care. For the most part, it would really only cover a portion of the cost, but a very large one. If things are cheaper, more people can afford them, so the problems of the uninsured are eased. This system would take many years to make the transition to wide-spread coverage, so many features of the Affordable Care Act might be temporarily useful. Many people who resist Obamacare are unable to see an end to it. As a transition, Obamacare would become a success if some other program is a success, first.

First, the law requires two things to be purchased at once: an investment account, and catastrophic health insurance. Deposits into the Account are tax-exempt. Withdrawals are restricted to health costs, not including the premiums of the catastrophic insurance, but the internal investment income on the deposits compounds tax-free. The framers of the enabling act apparently did not anticipate that many or most children would, under Obamacare, already have mandatory coverage on their parent's policies up to age 26, under their parents' policies, so the overlap is a little ambiguous. Apparently, however, there is no limitation to single health policy, so dual policies appear to be allowed. As long as the law requires money to be withdrawn from an Account only for health expenses, many people during the transition will find they already have health insurance, but not enough money in the account to cover the required minimum deductible. Unless they can make a deposit and see it grow, they will never be able to start an account. So, especially for children, the required deductible should match the amount in the account, not the other way around. It scarcely matters which it is, except the child rarely has control over the parent's policy, so the law should be amended to allow an HSA to be created without catastrophic coverage, until such time as some flexible minimum deductible is reached, even if it is necessary to prevent all withdrawals until the minimum is reached.

Perhaps this issue could be addressed for children with a single-payment deposit. It seems a great pity to prevent lifetime accounts which could be made for a nominal single payment, simply because the parent has a low-deductible policy and cannot or will not change it. Alternatively, it is an equal pity to require a child to have two other health insurance policies, when the reality is the healthiness of such children seldom requires even one policy. Since lifetime health coverage is within reach for a single payment of less than a thousand dollars, it is much easier to envision subsidies for the poor of that amount. Lifetime average health expenditures in the range of $300,000 are largely made up of inflation costs which reduce a dollar to the value of a penny, over an ensuing century. There are few ways for the poor to escape inflation, but this would be one of them.

That gets us to age 26 when employer-based insurance makes an appearance. Or makes a disappearance, replaced by Obamacare; we must wait to see what happens. Present law permits a deposit of a maximum of $3300 in the accounts, until retirement at age 65, when Medicare takes over. That could result in a deposit of $128,700 at age 65, which with 7% compound income within the account would amount to $610,000 total in the account, but an unknown amount subtracted for exceeding the insurance deductible. Since additional deposits are not permitted to people receiving Medicare benefits, $610, 000 will have to last for the duration of life expectancy, calculated to be age 90 by then. Assuming the same 7% return on investment, that amount is short of the $3 million single payment deposit which would be required (at age 65) to pay for average health costs to the end of that life at 2014 prices. And probably not nearly what year 3004 prices might become.

To achieve that, 10% compounded income would be necessary, both to reach the end of life, and to augment those deposits of $3300 yearly to $4.5 million, the point where they and their investment income would meet the need. Although Ibbotson's curve encourages the hope that 10% return might persist for a century, there is little doubt that long periods of 1% income would bankrupt the system, resulting in only $156,000 gross before illness expenses at age 65, and unguessable effects on medical costs after that. Large numbers of people would not even be able to afford annual $3300 deposits into their Accounts. But there are two ways out of this trap.

In the first place, no one claimed that 99% of future medical costs must be met by this approach. The claim is only that large amounts would be "found money", not found at present; don't be greedy, since not a penny of this money is being utilized at present. And secondly, it would be manifestly unfair for Medicare to continue to collect payroll taxes from one age group, and Medicare premiums from another, if the plan is for this individual to bear his own costs. Accordingly, these payments could partly be waived, and partly deposited directly into the Accounts rather than into the U.S. Treasury. The Treasury itself would be amply compensated by putting an end to the present 50% subsidy of Medicare costs by the taxpayer, assisted of course by foreign loans, mostly Chinese. There is a political risk, of course, that opposition politicians would encourage the elderly to believe that Medicare is about to be taken away from them. Almost everyone enjoys getting a dollar for fifty cents and is suspicious of claims that, otherwise, they will get a penny for a dollar. It would thus seem better timing to begin at the other end of the age spectrum, building up a constituency for compound interest, the Ibbotson curves, and Health Savings Accounts, and meanwhile waiting for competitive proposals to flop. It would take six months of intensive publicity to convince people who don't want to believe it, that Medicare is 50% taxpayer subsidized. It would take another six months to iron out all the unsuspected technical flaws in the proposal.

And it would take time to create a bipartisan think-tank, to collect the necessary data and make the necessary calculations. Perhaps some philanthropists will offer to do it privately, saving us from the criticisms of agencies like the Federal Reserve, which are accused of being less "independent" than they claim to be. The first step would be to put it somewhere other than Washington DC since there is no need to be seen as close to those who threaten your independence. The divergence between costs and revenues must be monitored and adjusted to; sudden changes in direction must be responded to.

Originally published: Thursday, April 03, 2014; most-recently modified: Tuesday, April 30, 2019