Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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Healthcare Reform:Saving For a Rainy Day
Lifetime Health Savings Accounts

Some Ruminations About the Far Future.

George Washington soon learned he couldn't defend the country without taxes, so in time the Constitutional Convention lodged firm control over taxes in Congress. If we must have taxes, the people must control them. Except for defense, Congress has ever since been cautious about imposing taxes. Reducing taxes is quite in accord with this attitude, except net reduction of taxes, after raising them first, maybe a little tricky.

Net reduction of taxes is an important argument in favor of tax subsidies for Health Savings Accounts, using them as incentives to healthy people to "tax" themselves while they remain young and healthy. Investing the money internally, the subscribers can meanwhile protect it for their own use when they inevitably grow old and sickly. If interest greater than the rate of inflation is paid, the money returned should exceed the money invested. Investing the money tax-free further helps the process. If people get back more than they contributed, they recognize it as frugal, saving for a rainy day, and so on. Lifetime Health Savings Accounts were designed as a way to enhance this thinking, and are described in Chapter Two. Over thirty years have elapsed since John McClaughry and I met in Ronald Reagan's Executive Office Building in Washington, but there has been a continuing search for ways to strengthen personal savings for health while avoiding temptations to tax our grandchildren, or to make money out of harmless neighbors. Many of the financial novelties naturally derive from models in the financial and insurance industries. This book in largely a result of such thinking.o

But the biggest advance of all has nevertheless come from medical scientists, who reduced the cost of diseases by eliminating one darned disease after another, and meanwhile increased the earning power of compound interest -- by lengthening the life span. We thus luckily encountered a "sweet spot", where conventional interest rates of 6% or better take a sharp turn upward, while 3% of inflation still remains fairly constant. My friends warn me it must yet be shown we have lengthened life enough, or reduced the disease burden, enough to carry all of the medical care. That may well be true, but we seem close enough to justify giving it a trial as a partial solution. Before the debt gets any bigger, that is, and class antagonisms get any worse.

While Health Savings Accounts continue to seem superior to the Affordable Care proposals, you can seldom be quite sure about details until both have been given a fair trial. The word "mandatory" is, therefore, better avoided at the beginning, and awarded only after it has been earned. As a different sort of example, the ERISA (Employee Retirement Income Security Act of 1974) had been years in the making but eventually came out pretty well. In spite of initial misgivings, ERISA got along with the Constitution and its Tenth Amendment, and the McCarran Ferguson Act which depends on them. We had the Supreme Court's assurance the Constitution is not a suicide pact. So with this general line of thinking, and still grumbling about the way the Affordable Care Act was enacted, I had decided to hold off and watch. The 1974 strategy devised in ERISA, by the way, turned out to be fundamentally sound. The law was hundreds of pages long, but its premise was simple. It was to establish pensions and healthcare plans as freestanding companies, substantially independent of the employer who started and paid for them. Having got the central idea right, other issues eventually fell into place. Perhaps something like that could emerge from Obamacare.

Nevertheless, growing costs are ominous for a law proclaiming it intends to make healthcare Affordable. After several years of tinkering, this program stops looking like mere mission-creep and starts to look like faulty reasoning, maybe even the wrong diagnosis. While waiting for the Obama Administration to demonstrate how the Act's present deficiencies could justify rising medical prices and greatly increased regulation, I brushed up seven or eight possible improvements to Health Savings Accounts, just in case. They had been germinating during the decades after Bill Archer, of the House Ways and Means Committee, got Health Savings Accounts enacted. However, my proposed new amendments wouldn't change the issues enough to cause me to write a hostile book. More recently, some newer variations grabbed me: Health Savings Accounts might become lifetime insurance, and thereby save considerably more money, without the fuss Obamacare was causing. Furthermore, in 2007 the nation immediately stumbled into an unrelated financial tangle, almost as bad as the Great Depression of the 1930s. A depression might lower prices, but if it provoked accelerating deflation, we could be cooked. And thirdly, the mistake of the Diagnosis Related Groups was such a simple one, failure to understand it might not be a complete description. Seen in their best light, unrecognized mistakes were about to disrupt a functioning system, while simple solutions were sometimes ignored. Maybe the problem was trying to spend our way out of extravagance, made worse by massive transfers from the private sector to the public one -- actually, just the opposite of what Keynes proposed. And finally, individually owned and thus portable policies, always held the potential for a small compound investment income. But the recent thirty-year extension of average life expectancy is what really changed the rules. The potential for much greater revenue from compound interest made an appearance, simply waiting for the recession to clear, and to be given a chance to prove itself with normal interest rates.

Cost is the main problem. The Affordable Care Act might be making the wrong diagnosis, even though it used the right name. Employer-based insurance did create pre-existing conditions, and job-lock; losing your job did mean losing your health insurance, and often it was a hard choice. If employer-basing caused the problem, why didn't the business community fix it? Is the only possible solution to pass laws against pre-existing conditions and job lock? Maybe, even probably, a better approach was to break, soften, or change the link between health insurance and the employer. Sever that linkage, and the other problems just go away; perhaps less drastic modification could even achieve the same result. ERISA had discovered such a new concept, forty years earlier. Employers might well bristle at the obvious ingratitude, but real causes were creeping up on them unawares. Generations of patronizing legislators had found it easier to raise taxes on the big, bad corporations, than on poor little you and me. Employers had always received a tax deduction for giving away health insurance to employees, but now, aggregate corporate double taxation made it approach fifty percent of corporate revenue. Nobody gives away fifty percent of his income graciously; for its part, the Government thought it couldn't afford to lose such a large source of tax revenue. Big business prefers to avoid the subject, while big government tends to mislabel things. It's mainly a difference in style.

Another issue: the approaching retirement of baby-boomers slowly revealed that Medicare, wonderful old Medicare with nothing whatever wrong with it, had been heavily subsidized by the U.S. Treasury, which was now paying its 50 percent subsidy out of borrowing from foreign countries, notably Communist China. Medicare's companion, Medicaid, subsidized by an elaborate scheme of hospital cost-shifting, transferred most of its losses back to Medicare. And, guess what, the Affordable Care Act transferred 15 million uninsured people into Medicaid. By this time, Medicaid had become hopelessly underfunded and poorly managed, and 15 million angry people were about to find out what they had been dumped into. Other maneuvers affecting the employees of big business are delayed a year or two, so we may not discover what they amount to, until after the next election, four or even five years after enactment. Meanwhile, the Federal Reserve "solved" the problem of mortgage-backed securities by buying three trillion dollars worth of them. That may not seem to have anything to do with Obamacare, except it pretty well crowds out any hope of buying our way lose of this new trouble. And it sure underlined our central problem. There was nothing all that bad about the quality of a fee-for-service healthcare system which gave everybody thirty extra years of life in one century. Two extra years of life expectancy even emerged in the past four calendar years, in fact. Our problem is lack of money. Lack of money, big-time, and Obamacare was going to cost even more. Health Savings Accounts, new style, emerged from all this confusion as a possible rescue for the cost problem. All this, helped me decide to write this book.

There are some who persuasively argue our even bigger problem is Constitutional. Perhaps because I'm a doctor rather than a lawyer, I don't consider the Constitution to be our problem, I consider it to be Mr. Obama's problem. Because the 1787 Constitutional Convention was convened to unite thirteen sovereign colonies into a single nation -- and splitting it into more pieces wasn't on anybody's mind at all -- they reached a compromise, brokered by two Pennsylvanians, John Dickinson, and Benjamin Franklin. The small states wanted unity for defense, but they also wanted to retain control of their local commerce. They knew very well big states would control commerce in a unified national government unless something fundamental was done to prevent it. Speaking in modern terms, a uniform new health insurance system risks being designed to please big cities who mostly want to hold prices down and wakes up. Sparsely settled regions want -- or need -- to be able to raise prices, here and there, when shortages appear, of neurosurgeons or something like that. The full algorithm is: price controls always cause shortages, so shortages are only cured by paying a higher price. Eventually the Constitution was engineered to give power over all commerce to the several states; otherwise, the small states declared there would be no unified nation.

That's how we got a Federal government with only a few limited powers, reserving anything else to the states. Absolutely everything else was to be a power of the states, except to the degree the Civil War caused us to reconsider some details (which Franklin Roosevelt's Supreme Court-packing enlarged). So, that's why the 1787 Constitution effectively lodged health insurance regulation (among many other things) in the fifty states. Furthermore, The Constitution in the later form of the 1945 McCarran Ferguson Act thereby definitively insulates health insurance from federal regulation, reinforcing the point in a very explicit Tenth Amendment. This may regrettably create difficulties for interstate businesses, and for people who get new jobs in new states. Many states have too small a population to support the actuarial needs of more than one health insurance company, thus creating monopolies in many states and consequent resentment of monopoly behavior. So, work it out. But don't give us a uniform national health system.

There, in a nutshell, you have a brief restatement of the Constitution's commerce issue in the language of the Original Intent point of view. The Constitution as a living document is all very well, but there must be some limits to stretching its plain language; otherwise, it becomes hard to understand what in the world people are talking about.

City dwellers have trouble imagining anyone in favor of either higher prices or lower wages, let alone negotiable prices as the central bulwark of a different way of life. The Civil War toned it down a little, but if it is nothing else, our system is tough-minded and realistic, doesn't surrender easily. The U.S. Supreme Court may soon make the Constitution and its central compromises into the central issue of the day, or they may wiggle and squirm out of it. But as long as they keep squirming, cost containment will remain the central commotion of the Affordable Care controversy. In certain parts of the country, price controls are seen as just one step before shortages appear. That's not entirely unsophisticated. As we will see when we come to it, lifetime Health Savings Accounts could materially reduce the sting of the cost issue, and thus made the final decision for me to write this book. The Constitutional issue, possibly, lurks for another day.

The case in point. On the particular Constitutional point, I would comment whole-life insurance companies in the past seem mainly to have addressed the Federal-State issue by obtaining multiple licenses to sell their products, state by state. Which might bring the Constitutional issue right back, because most insurance companies in practice attempt to be compatible with the largest states, just as John Dickinson predicted they would. In effect, the smaller states are forced to accept whatever regulations the big states have chosen first, or else they might have to do without some new product. Whole-life insurance seems rather less subject to the problem of conflicting regulations because that industry inadvertently acquired another trump card. Life insurance mostly uses bonds in its portfolio, matching fixed income with fixed liability. That's a noble thought, but the additional practicality has surely occurred to insurers that state governments issue a lot of bonds, and insurance companies are major customers for bonds.

Lifetime HSAs could solve the problem of differing state regulations by allowing the individual subscriber to select a managing organization domiciled in "foreign" states, and thus indirectly if the individual chooses, select a different home state for its regulatory climate. After all, the nation has changed in two centuries from a culture of farming in the same local region most of your life, to one where it seems normal to change home states almost yearly. Businesses tied to local laws like insurance, do not move easily. The consequence for lifetime Health Savings Accounts might be a niche market for health insurance in small or sparsely settled states, or others which reject specific California or New York State regulations. Paradoxically, California presently has over a million HSA subscribers, so we must not underestimate the ingenuity of necessary workarounds. Eventually, local pressure mounts to change local regulation, doubtless balanced by the attractiveness of acquiring disaffected customers from out-of-state. All of this could be accelerated by internet direct billing. Consequently, to avert this, we propose:

Proposal 6: Companies which manage health insurance products, particularly Health Savings Accounts, should be permitted to select the state in which they are domiciled, but must, therefore, accept the domicile-state's regulation of corporations. Such licensed corporations may sell direct billing products into any other state; but products sold in another state must mainly conform to the regulations of the state in which the particular insurance operates, even to the point of disregarding any conflicting regulations by the state of corporate domicile.

Comment: Fifty years ago, the main function of any State Insurance Commissioner was to assure the continued solvency of insurance companies, so insurance would be available when the customers needed it. In the past few decades, however, many insurance commissioners with populist leanings have viewed themselves as protectors of the public against price gouging. That is, they adopt the big-city, big-state, point of view. One Insurance Commissioner attitude might thus insist on high premiums, Commissioners with another attitude might reward low premiums. Insurance companies should, therefore, welcome laws which make it easier to switch the state of domicile, since the attitudes of insurance commissioners can change very quickly.

Comment: Lifetime insurance was pressed forward by discovering the investment world's computer-driven innovations might make lifetime coverage far easier, less chance, and considerably more financially attractive, than coverage in self-contained annual slices. It is common knowledge in insurance circles that most term life insurance would be unprofitable, except so many people drop their policies. Therefore the attitudes of different states are not completely predictable. Some states are more aggressive than others in adopting new technology, for example.

Changes in Future Cost Volatility. At an advanced age, illnesses are more severe and more sudden. Right now, increasing longevity also mostly affects elderly people who live longer toward the end of life, by widening the interval between the last two major illnesses. You can never be entirely sure that will continue to be the case because medical care and its science constantly evolve. Furthermore, the cost of care often has more to do with the patent status of a drug or device, than with its manufacturing cost, sometimes turning a cheap illness into an expensive one.

One thing you can be sure of, restructuring health insurance in the way to be suggested in Chapter Two, would result in a general reduction of health insurance markup, by exposing local insurance to the more nationwide competition. Health costs themselves might skyrocket, or they might largely disappear, but in any event, will probably end up cheaper than by using other payment methods. No doubt critics will find large numbers of nits to pick since states retain the right to design idiosyncratic regulations, but new regulations would remain semi-optional for residents to the extent some neighboring state disagreed with them. No matter what else turns up, it will be pretty hard to match the cost variation from national marketing, demonstrated by ten minutes of internet cruising. In fact, the great obstacles to an effective system in the past, like "job lock" and "pre-existing conditions", present no obstacle at all to lifetime HSA within an HSA regulatory framework. Many problems would stand exposed as artificial creations of linking health insurance to employers, at least as long as health insurance remains modeled on term life insurance. Just change to a more natural system tested for a century as whole-life insurance, and such technical problems might simply vanish. Even slow adoption, based on public wariness about a new idea, has its advantages.

Although prediction of future sea change is uncertain, a brief review suggests future healthcare financing could very well become highly volatile, in both frequency and costliness. Therefore, spreading the risk with insurance gets more attractive to age groups unable to recover from major financial setbacks. Planners would do well to consider such things as last-year-of life insurance, or some other layer of special reinsurance. Immediately, such ideas raise the question of multiple coverages, with multiple tax exemptions providing room for gaming the system. No doubt, this was the thinking behind imposing regulations prohibiting multiple coverages with HSA, and probably eventually ACA as well. There must be a better way to handle this dilemma than forbidding multiple coverages. Multiple coverages are very apt to be exactly what we will need to encourage. Since living too long and dying too soon are mutually exclusive, consideration should be given to placing tax-deductibility at the time of service, and permitting deductions for the one that actually happens to you. It is thus possible to envision having four or five different coverages, but only one tax deduction. Since the purpose is to spread the risk, we might even go to the extreme of limiting the number of policies that charge premiums, into the one that actually happens to you, but paid out of a common pool. Planners with a more conventional background might well snort at such ideas. Until, of course, they themselves need a life-saving drug costing ten thousand dollars an injection for an extremely rare condition, under a patent which will expire in a year.

So, Let's Get Started with Pilot Experiments in the Willing States. The original idea of modestly improving the original Health Savings Accounts, continues to stand on its own two feet. It's what I would point to right away if you feel unsuited to the Affordable Care Act, or even to ERISA plans. Right now, anybody under 65 (who does not have, or whose spouse does not have) other government health insurance, including Veteran's benefits can enroll in an HSA, and any insurance company can offer a product containing minor variations of the idea, within the limits of the law. A number of Internet sites list sponsors for HSAs. For ease of understanding, we present this idea as if we had two proposals, term and whole life.

Actually, the term-insurance version is the only one which is currently legal, whereas the whole-life variety remains only a proposal. It seems necessary to regard the whole HSA topic as one proposal for immediate use, and a second proposal as a goal for future migration. In fact, almost 12 million people already are subscribers to the term variety, having deposited a total of nearly 23 billion dollars in them. The internet contains brief summaries of their policy variations. At this early stage of development, it is only possible to conjecture that small and sparsely populated states will probably develop more liberal regulations, while bigger and more densely populated states will probably develop bigger and more sophisticated sponsoring organizations. Anyone of the fifty states, however, might someday change its regulations to make itself attractive as a "home state", and at present, it is possible to transfer allegiance.

Unfortunately, current regulations exclude members or dependents of government health insurance programs including veterans' benefits, from depositing new funds in HSAs. It's easy to see why loopholes might allow an individual to get multiple tax exemptions in an unintended way. But loopholes are a two-way street. The early subscribers tend to be younger, averaging about 40 years of age, and probably of better than average health because it would probably require a horizon of two or three years to build up the size of an account to the point where an individual feels adequately protected. That's a result of a $3300 annual contribution limit, and a scarcity of variants of affordable high-deductible catastrophic coverage. This is one instance where "the lower the deductible, the higher the premium" puts the subscriber at risk for the first few years. And that, rather than loophole-seeking, is the reason early adopters are younger, healthier and wealthier; the regulations give them an incentive to be. Let's stop saying, "My way or the highway." If there is a reasonable fear of double tax exemption, the regulation ought to state its real purpose. Otherwise, "Let a hundred flowers bloom", regardless of oriental origins, is a better flag to fly. If a national goal is to get more people to have health insurance, we should be hesitant to impose impediments on it.

Originally published: Wednesday, September 17, 2014; most-recently modified: Sunday, July 21, 2019