Philadelphia Reflections

A Change in Direction

For whatever reasons, much of the Affordable Care Act is still shrouded in mystery. After three years, an employer-based system is still predominant, and it remains unclear where a big business wants it to go, or perhaps what makes business reluctant to go ahead. It is even conceivable big business just wants a vacation from healthcare costs, hoping to go back to the old system of supporting the healthcare system by recirculating tax deductions. Once an economic recovery restores profits enough to generate corporate taxes, it will once again be worth saving them by giving away health insurance and taking a tax deduction. Otherwise, it is hard to see what value there is, in a year's respite. Under the circumstances, it begins to seem time to look at some new proposal, neither sponsored by an opposition party nor motivated by antagonism to the Administration initiative. Let's reverse its emphasis, testing how much it is true the financing system now drives the health system, not the other way around.

Both big business and big insurance have been remarkably silent about their goals and wishes for the medical system, while quite obviously agitating for some sort of change by way of government, and quite obviously leaving their own agendas off the visible negotiating table. Let's illuminate the situation, with the medical system speaking out about how employers, insurance, and investment should change while leaving the medical system alone until we better understand the finances which are driving it. The proposed way to go about all this is to harness Health Savings Accounts, with its two different ways of paying for healthcare (cash and insurance), with two-time frames for the public to explore (annual and lifetime), and passive investment of unused premiums versus concealed borrowing. So yes, it's technical, and necessarily it's been simplified. Two important features, multi-year insurance and passive investing, are outlined in this book. But one theme runs throughout: the customers, individually, should have choices. Nothing should be mandatory, everything possible should be left for individual customers to select.

Don't take on too much at once. Health Savings Accounts have grown to over 12 million clients, so it isn't feasible to do more than repair a few loopholes, and let it grow. The next logical step is to get rid of "first-dollar coverage". Not by eliminating insurance, but by making high-deductible the normal standard for health insurance. If we must make something mandatory, it ought to be ensuring big risks before insuring small ones. Catastrophic indemnity insurance is a well-established, known quantity; it's not likely to need pilot studies to avoid crashes. It doesn't need government nurturing; it needs big insurance companies to see the writing on the wall. So let's get along with it, without any mandatory coverage rules. If the old system of employer-based and tax-warped coverage can get its act together, that's fine. Because as I see it, the main danger in Catastrophic coverage is it will penetrate the market too quickly; let people have a level playing field to watch the game unfold. When we have two viable competitive systems, the customers can decide between them, and both will emerge healthier.

An observation seems justified. In a system as large as American healthcare, changes should be piecemeal and flexible; win-win is strongly preferred to zero-sum. Sticking to finance for the moment, we slowly learn to avoid zero-sum approaches, while strongly applauding aggressive competitors. Napoleon conquered Europe, and Genghis Khan conquered Asia by smashing opposition, but it isn't an American taste. Since everyone would prefer saving for when he needs that money for himself, (compared with being taxed to support someone else's healthcare), let's see how far and how fast we can arrange that. The recent extension of life expectancy creates a long period between healthy youth and decrepit old age. About 20% of those born in the lowest quintile of income, will eventually die in the highest quintile. That's a good start, but the process can't go much faster just because someone beats on the table with his shoe.

Nevertheless, a larger proportion of people could save a small amount of money when they are young, and by advantageous investing in a tax-sheltered account, accumulate enough money to support their healthcare costs while old. Some people will never be self-supporting, of course, but the idea is to shrink the size of the dependent population as much as we can. We can at least try it out, on paper so to speak. And if it produces good numbers, perhaps we are ready for pilot projects. That ought to be the next step in our long-term plan to reform the health system without attacking it -- switching from one-year term insurance, to multi-year whole-life insurance. The underlying insurance principle is called "guaranteed re-issue". We aren't ready for that yet, but we are ready to call in the experts in whole-life life insurance and ask for their guidance while setting up information gathering systems to navigate the reefs and shoals. The exercise does seem feasible and is partially explored in the rest of this book. Meanwhile, medical science is steadily reducing the pool of acute illness and lengthening the average longevity. Actuaries are my best friends in the whole world, but I think they are wrong about one prediction. Like retirement planners, both professions assume future taxes and future health costs are going to go up. But I am willing to predict, net of inflation, they will go down as longevity increases. Just wait until you see an enthusiastic medical profession attack the problem of chronic care costs. The nature of retirement living must change. Both things will change because of changes in the nature of investing and finance, the lowering of transaction costs, and the effect it has on the economy. Because: investing is based on perceptions, and a general disappearance of the acute disease will certainly re-direct perceptions of what is important.

Over thirty years have elapsed since John McClaughry and I met in the Executive Office Building in Washington, but a search for ways to strengthen personal savings for health marches on, trying to avoid temptations to shift taxes to our grandchildren, or make money out of innocent neighbors. Most of the financial novelties to achieve better income return originated with financial innovators and the insurance industry. But the central engine of advance has come from medical scientists, who reduced the cost of diseases by eliminating some darned disease or another, greatly increasing the earning power of compound interest -- by lengthening the life span. My friends warn me it must yet be shown we have lengthened life enough or reduced the disease burden, enough. That's surely true, but I feel we are close enough to justify giving it a shot. Before debt gets any bigger, that is, and class antagonisms get any worse.

While Health Savings Accounts continue to seem superior to the Obama proposals, there is room for other ideas. For 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 misgivings, ERISA got along with the Constitution. And we had the Supreme Court's assurance the Constitution is not a suicide pact. So, still grumbling about the way the Affordable Care Act was enacted, I eventually stopped waiting to describe an alternative. The long-ago 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 and strong. It was to establish pensions and healthcare plans as freestanding corporations, more or less independent of the employer who started and paid for them. Having got the central idea right, almost everything else fell into place. Perhaps something like that can emerge from Obamacare, but its clock is running out.

Originally published: Tuesday, November 04, 2014; most-recently modified: Sunday, July 21, 2019