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The accuracy of predicting future longevity, future health costs, and future stock markets -- is individually very low, so aggregated numbers can be (at least) equally misleading. However, they are the best available guides to the future. The purpose of deriving them (Mostly from CCS data) is to surmise whether it is safe to proceed with a trial of concepts. While the differences are great their direction is nevertheless pretty clear: Substituting the HSA would surely save a great deal of money, compared with Obamacare or Medicare. Why not substitute it for both Obamacare and Medicare? Transition costs are not estimated, and no doubt would be considerable, even if one plan replaced several others. Overall HSA cost is inversely related to investment income; three levels of income are presented, but a conservative conclusion is argued.
In short: HSA could just about replace both ASA plus Medicare, with a long transition period. But one must be more hesitant to suggest they can stretch to reducing accumulated Medicare debts from past spending. My guess is preventing more international debts is all we can promise. Someone else must figure out how to pay the existing debts. Why include Medicare, then, if predictions are sketchy? Two main reasons: my opinion is that funding Medicare is a worse problem than insuring younger people; it is not fixed, nothing else can be successfully fixed.
Second, it is such a political third rail of politics to talk of revising Medicare that someone with nothing personal to lose, like myself, must start the discussion. Some other funding source must probably be found to eliminate the existing Medicare debt, but there's not much risk of needing the money very soon. I am also a little apprehensive about the decline of existing Treasury bonds when interest rates rise because so many of them have been issued to cope with the recession. Any appreciable reduction of Medicare costs could accelerate a rise in bond interest rates, which would send the market price of existing bonds downward. Therefore, even a move in the right direction must include a reverse button, and be coordinated with the Federal Reserve. It is most unfortunate that Medicare is both more serious and more manageable, while at the same time it is so politically dangerous.
Paying to Replace Medicare and Debts with Health Savings Accounts. At least, savings to the consumer for the combined ASA and Medicare replacement would be returned to the subscriber as payroll-deductions and premiums-eliminated, (i.e., About half of the Medicare cost.) Savings from replacing Obamacare would be even greater, but from my viewpoint, such savings would all be poured into rescuing Medicare. That's ironic because it is the reverse of what the elderly are fearing. Even Obamacare advocates should welcome the elimination of Medicare because its losses are dragging everything else down. Unfortunately, this is not well understood by the public, who love Medicare. (Everybody loves to get a dollar for fifty cents.) Somebody has to say this can't last, and I guess I'm it.
To be confident Medicare's costs plus its debts would actually be manageable, the average subscriber would have to contribute about $1600 a year for 40 years to an escrow fund at 6% annual income. That's to achieve a total of $246,000 on his 65th birthday, paying his ordinary health debts from 25 to 65 with the other $1700 of his allowed Health Savings Account deposits, to pay average medical expenses for age 25-65. In my opinion, it can't be done.
You might subsidize poor people in the name of fairness, but this is how much you have to find, somewhere, to pay present costs. You might try raising the annual limits for deposits into Health Savings Accounts, but this would prove futile if too few people could afford to pay it. If you please, health expenses would then have to be cut enough to pay for the subsidies, unless the subsidies are cut to pay the health expenses. With that and a continuation of 6% return as long as the paying subscribers live and the fund remains solvent, we might make it. It is my hope that using private markets rather than Treasury rates, pay down of the debt can be accomplished with higher interest rates, but it is uncertain even this can be done. High rates like that are only likely to appear if inflation starts to gallop, or some other cataclysm intervenes, with the following result: the virtual value of the Medicare debt erodes, and the creditors lose much of their loan in real value. Some individuals might be able to manage their cost, but it's very hard to believe it could be an average performance for the whole nation. This is not an easy problem, and it becomes impossible if disillusioned Democrats block it.
And yet, the nation has already made it official it is going to spend nearly twice that amount, while only getting Obamacare in return. If the President is right about his side of it, then getting Medicare free in addition, is do-able by this Lifetime Health Savings Account alternative. If not, then both have to be scaled back. Big business is about the only hope, using a cut in corporate taxes as bait. This would be a big step since if they don't pay corporate taxes, they don't need a tax exemption for healthcare; they already have cut their tax bill.
Present law permits $3300 annual HSA deposits to age 65, or $132,000. With only 6% compounded interest income included to reduce the cost, Health Savings Accounts could only have a net lifetime out-of-pocket cost of $58,000, no matter what healthcare expenses are actually incurred. By my estimation, this is only half of enough. Sometime in the future, inflation will force this limit to be raised, and it should be linked to some external inflation measure like the Cost of Living Index, although a healthcare cost of living index would be closer to what is needed. Inclusion of tax exemption for the premium of catastrophic high-deductible policy which is required by law, would not only be more equitable but perhaps could provide both a superior COLA and an external measure of average Catastrophic premiums for marketplace judgments. It is probably undesirable to create an arbitrage opportunity between taxable and after-tax choices with infrequent, steep-step, changes in the deposit limits, so these limits should somehow be adjusted annually. Annual limits should be supplanted with lifetime limits whenever the account is depleted below a certain fraction of the buy-out price, which should be maintained and upgraded for this purpose. Since expenditures are limited to healthcare, a liberalization of this catch-up limit is urged.
There is thus room to spare, here, as well as for increasing 6% return in the direction toward 10%. Since the investment scene is in flux, more experience may be necessary for better guidelines. Depending on the interest rate actually achieved, and the choice between maximum allowable, or less out-of-pocket, lifetime Health Savings Accounts could cost somewhere between 58 and 132 thousand dollars, lifetime total average, in the year 2014 dollars. The Medicare escrow part of that would be $10,000, and Catastrophic coverage for 58 years of Medicare life expectancy would add $58,000. The deposit costs for the Obamacare years 25-65 would themselves total $10,000, and estimated Catastrophic insurance would add $16,000, to a total lifetime cost of $26,000. If contributions are raised, there's room for it under the $3300 yearly limit. The hard question is whether we could get $3300 on average for forty years, and I'm not sure we can. Please note: HSA deposit costs should remain linked to the 40 working years 25-65, but investment income would be realized over the entire 58 years. For the purpose of extending interest income, HSA coverage could be extended another 40 years, but this would mostly be an illusion. Real wealth is only generated during the working years. Depositing extra money in an HSA is not entirely a bad thing, because if you deposit more than you need for medical care, you will get the excess back, multiplied by tax-free investing. However, if people can't afford to do it, they won't. Obviously, the same cannot be said of buying too much insurance, where the insurance company profits from those who drop their policies..
Compared With the Affordable Care Act. Now, compare: the cheapest bronze Obamacare cost (covering 60% of healthcare, age 26 to 65) is $288,000, accumulated and paid for over a 40-year span. Adding Medicare adds $95,400, made up of $23,800 of payroll deductions, $23,800 of premium collections, and $47,700 of debt, accumulated over 18 years, paid for over 40 working years. Obamacare followed by Medicare is what we are officially destined to get. Total average lifetime costs are thus projected to be $383,300, plus the 40% estimate of uncovered ACA costs under the Bronze plan. Considering different inflation assumptions and rounding errors, that's pretty close to the $325, 000 which was calculated by Michigan Blue Cross and confirmed by federal agencies, for year 2000. To repeat, this is what we will get unless it is changed. Restating the calculations in words, healthcare is, therefore, being treated as if it were entirely self-funded, generating no losses but also generating no income on the sequestered premiums. The hidden restatement would be: the present and projected healthcare system is running at a loss, it generates no net income on what ought to be very large reserves, and nothing is being done to make it break even, to say nothing of generating income.
This outcome makes me absolutely confident we can do better. The lifetime Health Savings Account would create immense savings, which by rough calculations would be somewhat less confidently stated to be savings of $190,000, in year 2014 dollars, per lifetime. Multiply that number times 340 million citizens, and you get a result in the trillions of dollars. It's pretty staggering to confess that even this much improvement may not be enough.
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Lifetime Health Savings Account (68 yrs.)............vs................Medicare alone.
..............$80,000 single payment(40 yr. deposit of $850 =$32,000 cost, 68 yrs.@4% cmp. Interest)..*(+$18,000)
..............$160,000 single p. plus existing-debt service (40 yr. annual deposit of $1700=$68,000 cost, 68 yrs.@4% cmp. Interest)*(+$18,000)..
..............$150,000 both + subsidy (40 yr. annual deposit of $1600=$32,000 cost, 68 yrs.@4% cmp. Interest)*(+$18,000)..
..............$246,000 stretching (40 yr. deposit of $1600=$64,000 cost, 68 yrs.@6% cmp. Interest)*(+$18,000)..
..............$706,000 workplace insurance (40 yr. deposit of $3300=$132,000 cost, 68 yrs.@10% cmp. Interest)*(+$18,000)..
..............*$18,000 (Catastrophic Insurance, est. @$1000/yr for 18 extra years)
--->Total Extra Cost per Individual including Catastrophic for 18 yrs. estimate: $98,000 (18-118,000)<---
--->Present Medicare Pre-payment Costs: $196,200 plus 196,200 in debt.<---
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Yearly Personal Expense for Forty Years, Age 25-64 (HSA vs. Obamacare) | |
|---|---|
| Health Savings Account Deposits | |
| @ 10%.....$65 per year (plus $1000 for Catastrophic coverage.) | Lifetime Cash:$2600 plus $58,000=$60,600|
| @6%......$400 per year (plus $1000 for Catastrophic coverage.) | Lifetime Cash:$1600 plus $58,000=$76,600|
| @ 2%......$2200 per year (plus $1000 for Catastrophic coverage.) | Lifetime Cash:$88,000 plus $58,000=$146,000|
| ....$3300(Maximum Legal Limit)............ | Lifetime Cash:$132,000 plus $58,000=$190,000|
| Affordable Care Act "Bronze" Premiums: $5500-$7200 (for 60% coverage of Healthcare costs)Lifetime Cash:$220,000-$288,000 |
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@10%...............@6%...................@2% ..|||||...............Payroll tax...................Premiums......................Debt............
$45.................$250.00..................$1400...........|||||||............$1320......................$2640 (x18yrs).............$2725 (x18yrs.).............
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Total Cost per Individual including Catastrophic for 68 yrs. estimate: $127,500.Total Cost if health insurance were tax deductible including Catastrophic for 68 yrs. estimate: $88,800.
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Limit per Individual, Exclusively used for Medicare Pre-payment: ($3300/yr x40= $132,000, realizing $1,460,000 at age 65 @10%.)............................
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Multi-year Health Savings Account (40 yrs.)............vs..............60% of Affordable Care alone.
...............$56,000 (1800-58,000)............................$288,000
....................($83/mo)...................................................
Total Cost per Individual, median estimate.
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Multi-year Medicare Escrow Deposits (40 yrs.)............vs..............80% of Affordable Care alone.
...............$80,000............................$288,000
Multi-year Medicare Escrow Deposits (40 yrs.)............vs..............60% of Affordable Care alone ("Bronze").
...............$80,000.($850/yr @4%, 150/yr @10%, contributing from age 25-65 ). ..........................$288,000
Estimated $18,000 Catastrophic Coverage Escrow (18 yrs.), escrow released at age 65
...............$ 8000 ($200/yr @4%, $40/yr @10%, contributing from age 25-65)
Total Medicare Escrow Cost per Individual, median estimate: $89,600 ($1050/yr @4% investment income, $190/yr @10%)
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Lifetime HSA plus Medicare............vs................Affordable Care plus Medicare
.........$120,000 (1800-58,000)............................$484,000 plus 196,000 in debt.
................($166/mo}.......................................................................... Total Savings per Individual, median estimate: $190,000
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All costs assuming age 25 to start depositing. Transition costs at later ages are not calculated. ---------------------------------------------------------------------------------------------------------------------------------------
Originally published: Wednesday, September 17, 2014; most-recently modified: Friday, May 31, 2019