Philadelphia Reflections: Commentary on Chapter Four: Replacing Medicare With Something Better

Commentary on Chapter Four: Replacing Medicare With Something Better

The calculations in Chapter Four are intended to simplify and clarify, they are not intended to make the reader throw his hands up in despair. Nor are they intended for the unusually math-adept reader, because the numbers are rounded off, and sometimes circumstances required the use of different years of data sources. They are merely examples, to illustrate in numerical form what must necessarily be uncertain predictions of the future. When we say that women have 10% more medical costs in a lifetime than men do, we stand by the statement that women cost a little more than men, but do not expect anyone to accept that it will be precisely a 10% difference for the next sixty years. Most of the calculations involving compound income projections resulted from the use of a compound interest calculating computer program, kindly written by my oldest son, George Ross Fisher IV, who got a degree in that sort of thing from MIT. Any mistakes in using it are my own. (Those who wish to check out the matters, can use the same program on a home computer by entering WWW.Philadelphia-Reflections.com/blog/xxx.htm. Most of the underlying data come from CMS at xxxx)

Accumulating the Necessary Money for Lifetime Healthcare

Medicare.Because it's easier to explain, let's begin at the far end of the process, the day after the death of a hypothetical average person, and look backward. This proposal didn't start out as a Medicare proposal, but the accumulation of unpaid Medicare debt has become so alarming that substituting Health Savings Accounts for Medicare could fast become one relatively painless national priority that seems to have no other solution, whether painless or not. In addition, most factual community health data comes from Medicare, so the reader quickly gets acquainted with the concepts by starting there. And so, while the Medicare situation is fraught with political obstacles, we might have to risk it. While the debt overhang from earlier years is so threatening that Health Savings Accounts cannot be confidently promised to rescue Medicare by itself, perhaps the Savings Account idea could at least put a stop to going deeper into debt. Even a stopgap would have to get started pretty soon, but there is still a chance it could appreciably reduce the indebtedness after the recession is over.

At present, Catastrophic coverage is required for the HSA to receive income tax exemption, but the linked Catastrophic insurance is itself not tax-exempt. The lack of a tax exemption for Catastrophic coverage adds about 30% to the cost of an HSA. The tax exemption itself is less than that but is magnified by investing the savings. To extend HSA into the over-65 age group, therefore, requires beginning the HSA before age 65, and after that age requires lifetime Catastrophic insurance for an actuarial average duration of 18 years, using after-tax premiums. Obviously, making the Catastrophic policy tax-exempt would considerably reduce the cost of switching Medicare recipients to Health Savings Accounts, and so we heartily recommend it. The loss of revenue to the Treasury would be overwhelmingly exceeded by the value of eliminating the foreign debt load.

Proposal: Congress should remove the prohibition of paying the premiums of Catastrophic coverage linked to Health Savings Accounts, and rescind the termination of Health Savings Account enrollments at age 65, as the Law reads today.

Until people on Medicare are permitted the option to switch to Health Savings Accounts, and possibly as long as Catastrophic health insurance is treated unfavorably for the tax exemption of Catastrophic Health Insurance, we conceptually split lifetime HSA into two parts. (Single-premium exchange for Medicare, in return for forgiveness of premiums and rebate of payroll taxes, is linked, but treated separately). In the meantime, it is important to remember not to count the $80,000 single-premium twice as a cost. Most subscribers would want to pre-pay the discounted Medicare single premium (of $80,000) by making a small addition to their HSA at an earlier age and holding it in escrow gathering tax-exempt income until needed. If pre-payment begins at an early age, Medicare escrow cash costs could be quite modest (as little as $205 a year, starting at age 25 @10% per year). Even when we show all the costs, excluding double payments but adding 18 years of Catastrophic insurance premiums, using an HSA at conservative rates like 4% would reduce effective Medicare cost by 75%. Greater returns would, of course, make it far cheaper than that. To pay down the existing debt back to 1965, would require access to data on how much the remaining debt really amounts to. At present, it is at least growing rapidly by addition of 50% of annual Medicare costs; and an unknown amount by compounding from earlier years, minus whatever might have expired or been paid off. Realistically, the amount of debt service is probably going to depend on our national ability to pay it down, regardless of its written terms. The same is indeed likely to be true of subsidies for the poor. Ultimately, both of these payment decisions are political, limited by the ability to pay. Because of the long time periods, the present surprisingly modest interest rates could convert this impending disaster into at least a sustainable cost. The outcome of these intersections is that the terms and benefits largely become a matter of political choices.

Replacing Medicare With Something Better. When Health Savings Accounts were first devised, it never seemed likely that Medicare might be supplanted. However, Medicare has grown both highly popular and severely under-funded. The rules should be modified to permit someone who has health insurance through an employer to develop a Health Savings Account which the funds but does not use while he is of working age. The funds would then build up, enabling him to buy out of Medicare on his 65th birthday or thereabout, with a single-premium exchange with Medicare, at present prices exchanging about $100,000 funded by the forgiveness of Medicare premiums and some portion of payroll deductions from the past, which he has already paid. The subscriber would also have to purchase Catastrophic coverage, which we would hope Congress would accord the same tax advantage as is given to employed people. If this approach proved popular, it might supply extra funds for loaning to HSA subscribers in the outlier category. While there is no thought of phasing out Medicare against the subscribers' will, Congress would certainly be relieved to have subscribers drop out of a program which must now be 50% subsidized.

Proposal: The present closing age for HSA enrollments at the onset of Medicare should be extended a few years older. And single-premium buy-outs of Medicare coverage, including the possible return of payroll deductions where indicated, should be permitted as an option.

Single-premium Medicare. Congress can certainly change that, especially during the transition period, at least anyone under age 65 could start an account tomorrow and fund it up to date. Hypothetically, if anyone could live to his 65th birthday without spending any of the accounts, a prudent investor would have accumulated $132,000 in pure deposits on his 65th birthday. He only needs $80,000 to fund Medicare as a single-payment at age 65, however, so he can afford to get sick a little. If he starts depositing into the account later than age 25, he has already paid for Medicare somewhat, with payroll taxes. That could be considered partial payment toward reduction of the Medicare debt. Please hold your questions, until we finish outlining the plan.

When Health Savings Accounts were first devised, it never seemed likely that Medicare might be supplanted. However, Medicare has grown both highly popular and severely under-funded. The rules should be modified to permit someone who has health insurance through an employer to develop a Health Savings Account which the funds but does not use while he is of working age. The funds would then build up, enabling him to buy out of Medicare on his 65th birthday or thereabout, with a single-premium exchange with Medicare, at present prices exchanging about $100,000 funded by the forgiveness of Medicare premiums and some portion of payroll deductions from the past. He would have to purchase Catastrophic coverage. If this approach proved popular, it might supply extra funds for loaning to HSA subscribers in the outlier category. While there is no thought of phasing out Medicare against the subscribers' will, Congress would certainly be relieved to have subscribers drop out of a program which must be 50% subsidized.

can certainly change that, especially during the transition period, at least anyone under age 65 could start an account tomorrow and fund it up to date. Hypothetically, if anyone could live to his 65th birthday without spending any of the accounts, a prudent investor would have accumulated $132,000 in pure deposits on his 65th birthday. He only needs $80,000 to fund Medicare as a single-payment at age 65, however, so he can afford to get sick a little. If he starts later than age 25, he has already paid for Medicare somewhat, with payroll taxes. That could be considered payment toward reduction of the Medicare debt. Please hold your questions, until we finish outlining the plan.

If someone makes a single deposit of $80,000 on his/her 65th birthday, there will accumulate $190,000 in the account over 18 years, the present life expectancy if he spends nothing for health and invests at 5%; and $190,000 is what the average person costs Medicare in a lifetime. Since the average person spends $190,000 during 18 years on Medicare, enough money will accumulate in Medicare to pay its expenses, and after some shifting-around, this should make Medicare solvent, in the sense that at least the debt isn't getting bigger because of him. Furthermore, index funds should be returning 10-12% over the long haul, so there should be some firm discussions with the intermediaries about some degree of dis-intermediation. Please don't do the arithmetic and discover that only $40,000 is needed. That seems plausible, but that's wrong because the costs remain the same , and previously the government has been borrowing half the money from foreigners. In effect, the subscribers have been paying the government in fifty-cent dollars. There has been an exchange of one form of revenue for another, so the required revenue actually does demand $80,000 for a single deposit stripped of payroll deductions and perhaps premiums. An end would put to further borrowing, but the previous debt remains to be paid. I have no way of knowing how much that amounts to, but it is lots. All government bonds are general obligations, mixed together, and access to Medicare reports back to 1965 is not easily available. What we can more confidently predict is the limit that young working people can afford to put aside for the sole purpose of paying off the Medicare debts of an earlier generation. If there are other proposals for paying off this foreign debt, they have not been widely voiced. And the debt is still rapidly growing.

They would have to set aside an average of $850 per year (from age 25 to 64) to achieve $247,000 on the 65th birthday, assuming a 5% compound investment income and relatively little sickness. This might seem like an adequate average, but occasional individuals with chronic illnesses would easily exceed it in health expenditures. It is not easy to estimate the size and frequency of such occurrence in the future, so someone must be designated to watch this balance and institute mid-course adjustments. As an example, simple heart transplants costing $200,000 are already being discussed. To some unknown extent, the cap on out-of-pocket expenses would have to be adjusted to pass these cost over-runs indirectly through the Catastrophic insurance. Insurance does greatly facilitate sharing of outlier expenses, but usually requires a time lag whenever new ones appear.

It does not require much political experience to know that taxpayers greatly resent paying debts that benefitted earlier generations. They complain, but complaining does not pay off the debts of the past. To double required deposits in order to pay off past debts, as well as using forgiveness of payroll deductions and premiums, would require an additional $120,000 per year escrow, for each year's debt accumulation. At present, roughly $ 5300 per beneficiary, per year, is being borrowed, and there are roughly twice as many current beneficiaries as people in the tax-paying group, but only 18 years, as compared with 40 years as a prospective beneficiary. So that comes to liquidating roughly $1300 a year of debt to balance the two populations or $2600 a year to gain a year. That's for whatever the debt happens to be, which surely someone can calculate. To accomplish it, one would have to project an average of % income return. That's definitely the outer limit of what is possible, and it probably over-reaches a little. Therefore, to be safe, one would have to assume some other sources of income, a change in the demographic patterns, or an adjustment with the creditor. Assuming inflation will increase expenses equally with inflation seems possible. And it also seems about as likely that medical expenses will go down, as that they go up. You would have to be pretty lucky for all these factors to fall in line over an 80-year lifetime. So, although Medical

It is this calculation, however rough, which has made me change my mind. It was my original supposition that multi-year premium investment would only apply up to age 65, and that would be followed by Medicare. In other words, it should only be implemented as a less expensive substitute for the Affordable Care Act. It seemed to me the average politician would be very reluctant to agitate retirees by proposing a plan to eliminate Medicare. They would feel threatened, the opposing party would fan the flames of their fears, and the result would be a high likelihood of undermining the whole idea for any age group, for many years. Better to take the safer route of avoiding Medicare, and confining the proposal to working people, where its economics are overwhelmingly favorable.

But when the calculations show how close this proposal under optimistic projections would come to failure, and when nothing remotely close to it has been proposed by anyone, the opportunity runs the risk of passing us by. So, I changed my mind. The moment of opportunity is too fleeting, and the consequences of missing it entirely are too close, to worry about the political disadvantage of doing the right thing. The transition to a pre-funded lifetime system will take a long time to get mature, and the political obstacle course preceding it is a daunting one.

========================================>/p> So we guess the average life expectancy where things will eventually flatten out will then be about 91. (Be careful, most life expectancy figures are for life expectancy at birth.) But you would have to be lucky in everything: a very favorable investment climate for the right ten-year period, plus a favorable health situation which avoided expensive illnesses just at the age when they would begin to threaten. Using a lower goal of $60,000 and a lower interest rate of 7% is considerably easier to achieve, but the limitation which might be reached first is the $3300 yearly contribution rate, and someone might be forced to pay all medical expenses out of pocket in order to make the investment fund stretch. The individual who came up short would still be considerably ahead, but we are using a precise match of revenue and expense, to simplify the examples. Someone who sells his business at age 63 might have the cash, but still, have trouble because of the $3300 per year limit. It seems pointless to squeeze through a narrow window, and much better if the window were enlarged to permit lump-sum deposits up to a $ 132,000-lifetime limit. With that sort of cushion, plus a stretch of reasonably good health at the right time of life, it would become considerably safer to take the risks. At age 65, a lifetime of health costs is already in the past, but the curve of health expenses starts to curve up at age 50, at a time when college expenses for children may be persisting, and the house isn't quite paid for. It seems a pity to cripple a good idea with pointless contribution limits that almost stretch far enough, but leave people fearful. If Congress develops a serious interest in lifetime insurance, the yearly contribution limit should be revisited.

The simplified goal is, therefore, to accumulate $60,000 in savings by the 65th birthday, remembering that savings get a lot harder when earned income stops. With the current law, you would have to start maximum annual depositing of $3300 by your 50th birthday, to reach $60,000 by age 65, and you would still need generous internal compounding to make it. But notice how easily $100-200 a year would also get you there, starting at age 25 (see below) and less optimistic investment income returns until age 65. Many more frugal people might skin by with looser rules; It could rather easily be subsidized for poor people and hardship cases. If you are going to cover lifetime health costs instead of just Medicare, many more will need $80,000 to do it and have something left to share with the less fortunate. But to repeat once again, that still compares very favorably with the $325,000 which is often cited as a lifetime cost.

Starting with the Medicare example. Notice that forty years of maximum contributions would amount to far more than the necessary $40-80,000 by age 65. We haven't forgotten that the individual is at risk for other illnesses in the meantime, so in effect what we need is an individual escrow fund for lifetime funding intended (at first) only to replace Medicare coverage. (We are examining lifetime coverage, piece by piece, trying to accommodate an extended transition period.) Depending on a lot of factors, that goal could cost as little as $100 a year deposited for forty years, or as much as the full $1000 per year. It all depends on what income you receive on the deposits in the interval. In a moment, we will show that 10% return is not impossible, but it is also true that a contribution of $1000 per year would not seem tragic, compared with the present cost of health insurance (now averaging over $6000 a year). I have unrelated doubts about the current $325,000 estimate of average lifetime health costs, but that is what is commonly stated. For the moment, consider these numbers as providing a ballpark worksheet for multi-year funding, using an example familiar to everyone, but not necessarily easy to understand after one quick reading.

The Cost of Pre-funding Medicare. Rates of 10% compound income return would reduce the required contribution to $100 per year from age 25 to 65, but if the income were only 2% would require $700 contributed per year, and at 5% would require $300 per year. Remember, we are here only talking of funding Medicare, as a tangible national example, Obviously, a higher return would provide affordability to many more people than lesser returns. Let's take the issues separately, but don't take these preliminary numbers too literally. They are mainly intended to alert the reader to the enormous power of compound interest. Let's go forward with some equally amazing investment discoveries which are more recent, and vindicated less by logic than empirical results.

Proposal: Instead of the present annual limit of contributions to Health Savings Accounts of $3300 per year, Congress should permit a lifetime limit of $132,000, with an annual limit sufficient to bring an account up to what it would have been if $3300 annually began at age 25.

========================================>/p> So we guess the average life expectancy where things will eventually flatten out will then be about 91. (Be careful, most life expectancy figures are for life expectancy at birth.) But you would have to be lucky in everything: a very favorable investment climate for the right ten-year period, plus a favorable health situation which avoided expensive illnesses just at the age when they would begin to threaten. Using a lower goal of $80,000 and a lower interest rate of 7% is considerably easier to achieve, but the limitation which might be reached first is the $3300 yearly contribution rate, and someone might be forced to pay all medical expenses out of pocket in order to make the investment fund stretch. The individual who came up short would still be considerably ahead, but we are using a precise match of revenue and expense, to simplify the examples. Someone who sells his business at age 63 might have the cash, but still, have trouble because of the $3300 per year limit. It seems pointless to squeeze through a narrow window, and much better if the window were enlarged to permit lump-sum deposits up to a $ 132,000-lifetime limit. With that sort of cushion, plus a stretch of reasonably good health at the right time of life, it would become considerably safer to take the risks. At age 65, a lifetime of health costs is already in the past, but the curve of health expenses starts to curve up at age 50, at a time when college expenses for children may be persisting, and the house isn't quite paid for. It seems a pity to cripple a good idea with pointless contribution limits that almost stretch far enough, but leave people fearful. If Congress develops a serious interest in lifetime insurance, the yearly contribution limit should be revisited.

The simplified goal is, therefore, to accumulate $80,000 in savings by the 65th birthday, remembering that savings get a lot harder when earned income stops. With the current law, you would have to start maximum annual depositing of $3300 by your 50th birthday, to reach $80,000 by age 65, and you would still need generous internal compounding to make it. But notice how easily $100-200 a year would also get you there, starting at age 25 (see below) and less optimistic investment income returns until age 65. Many more frugal people might skin by with looser rules; It could rather easily be subsidized for poor people and hardship cases. If you are going to cover lifetime health costs instead of just Medicare, many more will need $80,000 to do it and have something left to share with the less fortunate. But to repeat once again, that still compares very favorably with the $325,000 which is often cited as a lifetime cost.

The transition is greatly eased by the premiums and payroll deductions, which are largely age-distributed, and can, therefore, be forgiven in a graduated manner for late-comers to the program. Most cost-redistribution of high-cost cases should be handled through the catastrophic insurance, which is well suited for invisible and tax-free redistribution. Because of hospital cost-shifting, inpatients are temporarily overpriced but are quickly becoming underpriced as a result of gaming the DRG to shift costs to outpatients. This will in time affect the relative costs of Catastrophic and Health Savings Accounts and should be carefully monitored for mid-course adjustments. This changing horizon of cost shifting almost demands the creation of a special department to keep track of it.

Proposal: Congress should create and fund a permanent Health Savings Account Agency. It should have members representing subscribers and providers of these instruments, with the power to hold hearings and make recommendations about technical changes. It should meet jointly with the Senate Finance Committee and the Health Subcommittee of Ways and Means periodically. It should be involved with the appropriate Executive Branch department, to review current activity, detect changing trends, and recommend changes in regulations and laws related to the subject. On a temporary basis, it should oversee inter-cohort and outlier loans, leading to recommendations about the size and scope of this activity.

Cost Sharing with Frugality.At present costs, statisticians estimate future healthcare costs of about $325,000 (in year 2000 dollars) for the average lifetime. We could discuss the weaknesses of that estimate, but even though it's breathtaking, it's the best guess available. Women experience about 10% higher lifetime health costs than men. Roughly speaking, how much the average individual somehow has to accumulate, eventually must equal what he spends by the time of death. The dying individual himself has little interest in what is left unpaid at his death, so Society must do it for him, in order to survive as a Society. At this point, we, unfortunately, must also work around one of the great advantages of having separate accounts.
On the one hand, individual accounts to create an incentive to spend wisely, but it is also true that pooled insurance accounts make cost-sharing easier, almost invisible, and tax-free. Cost sharing induces reckless spending of other people's money, individual accounts induce frugality with your own money. Therefore, linking Health Savings Accounts with Catastrophic insurance provides a way to pool heavy outlier expenses, while the incentive for careful money management remains in the outpatient costs most commonly employed (together with a special bank debit card) to pay outpatient costs. Such expenses are much more suitable for bargain-hunting anyway because dreadfully sick people in a hospital are in no position to bargain or resist.
But a cautionary reminder: linking individual accounts to frugality through the outpatients, as well as linking heedless spending to insurance through inpatients -- induces hospital administration to game the system you have devised. There's no doubt we have created a system which can be gamed by shifting medical care to the outpatient area, but we must expect the DRG to be attacked, in order to reverse the incentives, which run in the hundreds of billions of dollars. A well-informed monitoring system simply must be created and funded, if we ever expect the decision to hospitalize patients to rest on whether the patient needs to lie down, instead of on what kind of payment system we happen to fancy.

Standard Deviation within and between age cohorts.Furthermore, there is a distinction between a mismatch of revenue to expenses caused by chance within one age group and a mismatch between two age cohorts. To put it another way, somebody has to pay off these debts, and surely we must have a plan about who should pay them when revenue is not present in the account. Borrowing between subscribers within the same age cohort should pay modest interest rates, but borrowing between different cohorts for things characteristic of the age level (pregnancy, for example) should pay none. Unfortunately, people may abuse such opportunities, and interest must then be charged. Until the frequency of such things becomes better established, this function of loan banking policy should be part of the function of the oversight body. When its limits become clearer, it might be delegated to a bank, or even privatized, but the policy should be monitored by specialists who understand what is happening "on the ground". While it is unnecessary to predict the last dime to be spent on the last day of life, incentives should be understood by the managing organization, separating routine cash shortages from likely abusive ones. And looking at all such activity as potentially caused by payment design. Much of this sort of thing can be minimized by encouraging people to over-deposit in their accounts, possibly paying some medical bills with after-tax money in order to build the fund up. Such incentives must be contrived if they do not appear spontaneously. User groups can be very helpful in such situations. People over 65 (that is, those on Medicare) spend at least half of that $ 325,000-lifetime cash turnover, but just what should be counted as intentional overspending, can be a matter of argument.

Proposal: Current law permits an individual to deposit $3300 per year in a Health Savings Account, starting at age 25, and ending when Medicare coverage appears. Probably that amount is more than most young people can afford so it would help if the rules were relaxed to roll-over that entitlement to later years, spreading the entire $132,000 over the forty-year time period at the discretion of the subscriber.

Originally published: Wednesday, September 24, 2014; most-recently modified: Wednesday, May 15, 2019